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Larry White Explains How The U.S. And Europe Could Return To A Gold Standard

return to gold standard
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EDITOR'S NOTE: 

A golden opportunity: The US and Europe have enough yellow metal to return to the gold standard, according to Larry White, an economics professor at George Mason University. But the question is whether these countries would want to do such a thing.

 

What’s the advantage? It’s economically feasible, as the production and distribution of dollars and euros would be limited and regulated by the among of gold the countries hold. Fiscal and monetary discipline would be imposed.

 

And the disadvantage? It would be “politically” unfavorable for the same reasons above. Countries can’t print money at will, since the production of dollars and euros would be limited and regulated by the among of gold the countries hold. It would put an end to spending beyond monetary means. 

 

Go on: It would also put an end to central banks, as a gold standard would render most monetary policy irrelevant. 

Our thought bubble: A fractional reserve gold standard would certainly impose favorable fiscal discipline on governments, but it would take a catastrophic economic event for most Americans to realize the disadvantages of a pure fiat system. Most Americans don’t even understand the nature of inflation let alone the role that central banks play in the economy.

Source: Kitco News

The United States and Europe have enough gold to return to the classical gold standard, said Lawrence (Larry) White, professor of economics at George Mason University. He further explained that the gold standard can work in today's world.

White is an expert on the gold standard and free banking. He has a new book out next year, Better Money: Gold, Fiat, or Bitcoin? He spoke with David Lin, Anchor and Producer at Kitco News.

Different types of gold standard

White explained that there were three types of gold standard in U.S. history: the classical gold standard before WWI, the Interwar Gold Standard, and the post-WWII Bretton Woods system. He remarked that while the classical gold standard was self-regulating, stable, and did not require a central bank, the latter two regimes had problems maintaining the peg to gold.

"[The classical gold standard] was a self-regulating system," said White. "During [World War I], all the major nations went off the gold standard with the partial exception of the U.S., and didn't' really resume it in the old-fashioned way. In the interwar period, you had a very chaotic mix of some countries going on, some countries going off [the gold standard]… and so that's not anybody's idea of an automatically functioning gold standard."

The Bretton Woods system pegged major currencies to the U.S. dollar, which was itself pegged to gold at $35 per ounce. White called Bretton Woods a "very attenuated gold standard."

Under the classical gold standard, by contrast, White said that "money would flow in and out of the country and it wasn't being centrally controlled. It would flow in if there was a bigger demand. It would flow out if there was less demand or if there was more production of gold."

Monetary Policy

Keynesian economists generally believe that during a recession, the central bank should ‘print money' to save the economy. In particular, central bankers have defended loose monetary policy in response to COVID-19 lockdowns.

Since money is tied to gold under a gold standard, central banks would be unable to print money during a recession.

White responded to these concerns, "The point of [a gold standard] is to constrain money-printing… In terms of the pandemic, as long as you have a banking system that's able to issue more liabilities denominated in and redeemable for gold, then they will do that when there's a greater demand on the part of the public to hoard money."

He added that central banks are not necessary in such a system. "[One] of the great attractions of a gold standard is it can work through market forces. We don't need a central bank. We don't need any kind of central planner in the market for money balances or in financial markets."

Is there enough gold?

A classical gold standard requires every dollar in circulation to be backed by gold. Some analysts claim that a return to the gold standard is impossible, since there is not enough gold.

White demurred. "I think a fractional gold system will work," he said. "It worked in the classical gold standard period. Banks did not have 100 percent reserve requirements… And yet prudence dictated that they hold enough gold to actually meet the redemption demands that are made on them."

White went on to say that the United States and Europe have enough gold reserves to return to the gold standard.

However, he cautioned that while the gold standard is economically feasible, it may not be politically practical.

"I'm not sure it's politically feasible, there certainly aren't the votes for it," he said. "… But the banking system [under a gold standard] could look very much like it does today. The ordinary users of money chequing accounts and paper currency would function very much the same way. It's certainly consistent with all the latest technologies in payments, online payments, phone payments. Those can all be denominated in claims to gold."

To find out White's thoughts on a Bitcoin Standard, as well as his thoughts on inflation, watch the above video.

Follow David Lin on Twitter: @davidlin_TV

Follow Kitco News on Twitter: @KitcoNewsNOW

By Kitco News

For Kitco News

Originally published on Kitco News.

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