The potential return to the gold standard

The gold standard refers to a monetary system wherein a country's currency, such as the US dollar, is directly linked to a fixed quantity of gold. This means that the US dollar can be exchanged for a predetermined amount of gold, which necessitates the government to hold a certain amount of gold to back the currency.

The gold standard was widely used in the past but abandoned by most countries during the Great Depression of the 1930s.

Using gold as currency has been popular throughout history due to its rarity, malleability, and non-corrosive properties. If the US were to return to the gold standard, it would result in stability, as the value of the currency would be linked to a physical commodity. This would prevent the government from manipulating the currency and reduce inflation and market instability. Furthermore, the limited supply of gold would make the amount of currency in circulation more predictable, making it easier for companies and investors to plan their financial resources. Lastly, a return to the gold standard could increase confidence in the US dollar, making it a more reliable store of value.

However, there are also potential drawbacks to returning to the gold standard. The limited supply of gold could lead to a shortage of funds during periods of economic expansion, which could impede growth. Additionally, the gold standard would make it difficult for the government to respond to economic shocks since it cannot print more money or adjust interest rates to stimulate the economy. The high cost of building a stock of gold and ongoing expenses, such as securing and storing gold, are also significant concerns.

I believe that the US is unlikely to return to the gold standard in the near future. It has been operating under a fiat monetary system since 1971, where the currency's value is based on trust in the government and economy, rather than any physical commodity. The amount of gold reserves currently held by the US is insufficient to fully support the money supply, and returning to the gold standard could restrict the Federal Reserve's ability to use monetary policy to stabilise the economy and limit the ability of the US to engage in international trade, as the value of the dollar would be directly linked to the price of gold.

The author is a board member of Jordan Deposit Insurance Corporation.