(Kitco News) – The United States and Europe have enough gold to return to the classic 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 next year, Better Money: Gold, Fiat, or Bitcoin? He spoke with David Lin, presenter and producer at Kitco News.
Different types of gold standard
White explained that there were three types of gold standard in the history of the United States: the classic pre-World War I gold standard, the interwar gold standard, and the Bretton Woods system after World War II. He pointed out 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-regulatory system,” White said. [World War I], all major nations have abandoned the gold standard, with the partial exception of the United States, and have not really resumed it the old way. In the interwar period, you had a very chaotic mix of some countries going, others in [the gold standard]…and so this is no one’s idea of a self-functioning gold standard.”
The Bretton Woods system pegged major currencies to the US dollar, which itself was pegged to gold at $35 an ounce. White called Bretton Woods a “very attenuated gold standard.”
Under the classic gold standard, by contrast, White said “money would flow in and out of the country and it was not centrally controlled. It would come in if there was greater demand. It would come out if there was less demand or if there was more gold production.”
Keynesian economists generally believe that in a recession the central bank should “print money” to save the economy. In particular, central bankers have championed loose monetary policy in response to COVID-19 lockdowns.
Since the currency is pegged to gold as part of 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 limit money printing… In terms of the pandemic, as long as you have a banking system that can issue more debt denominated and redeemable in gold, then they will when there is greater demand for the part of the public hoarding money.”
He added that central banks are not necessary in such a system. “[One] One of the great attractions of a gold standard is that it can rely on market forces. We don’t need a central bank. We don’t need any type of central planner in the money balance market or in the financial markets.”
Is there enough gold?
A classic gold standard requires that every dollar in circulation be backed by gold. Some analysts say a return to the gold standard is impossible because there is not enough gold.
White hesitated. “I think a fractional gold system will work,” he said. “That worked in the days of the classic gold standard. Banks didn’t have 100% reserve requirements…And yet prudence dictated that they held enough gold to meet the redemption demands that were made to them.”
White went on to say that the United States and Europe had 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’s certainly no voice for it,” he said. “… But the banking system [under a gold standard] could look a lot like it does today. Ordinary users of checking and paper money accounts would operate in much the same way. It is certainly compatible with all the latest technology in payments, online payments, telephone payments. These can all be denominated in gold securities.”
For White’s thoughts on a Bitcoin standard, as well as his thoughts on inflation, watch the video above.
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