Returning to a Gold Standard System: Why and How?

By Gonzalo Schwarz
by Nathan Lewis
The answer to Why? is: because gold-linked stable money is superior to manipulated funny money.The answer to How? has two subsections. The first is: How to maintain a gold standard system? The second is: How to transition to a gold standard system?The answer to “how to maintain a gold standard system” is to understand the process of supply adjustment. This is really not that difficult, but I can see that people have struggled with it for decades, with little apparent progress. A hundred years ago, people knew how to do this – at least the ones that needed to know knew — so it appears that this knowledge has been largely forgotten.Obviously, you don’t want your gold standard system to blow up in your face – which is what would certainly happen if you left it to today’s typical central banker. The key to this is to begin, conceptually, with the simplest functional system, the “making change” system I have outlined in the past. This system is really too simple for many situations today, but if you can’t figure out the easiest example, how are you going to move on to the more complicated processes? That now leaves us with the question: “how do we transition to a gold standard system?” This has happened many times historically. The United States transitioned from a devalued/floating currency to a gold standard in 1789 and 1879, and arguably, in a smaller way, in 1816, 1920, 1934 and 1951. This is not something we haven’t done before. We’ve done this before. Every other country has its own history of going on and off gold. It happens all the time. It’s not that mysterious. I summarized this historical record as having three basic patterns. One is to return to some pre-devaluation parity. This is what the United States did after the Civil War and what Britain did after the Napoleonic Wars and the First World War. The second is to stabilize the currency around its prevailing value. This is what France did after the First World War, and what Japan did after World War II. The last is to introduce a whole new currency. This is, arguably, what the United States did in 1789, replacing the Continental Dollar, and what Germany did in 1923, with the rentenmark replacing the devalued paper mark. Obviously, we aren’t going to return to a pre-devaluation parity today in the U.S. The last gold parity was at $35/oz., in 1971. We won’t return even to the $350/oz. average of the 1980s and 1990s. Also, there is no need at this time to introduce a whole new currency. This is normally done after the prior currency was so abused that it is best consigned to the trash heap of history, along with the cruzeiros, pengos, and zaires...
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