Trump and the gold standard

What is the gold standard?

What is the gold standard and how does it work? Simply put, the gold standard is a monetary system in which the value of the country’s currency is directly linked to the yellow metal. Countries that use the gold standard set a fixed price at which gold can be bought and sold to determine the value of the national currency.

For exampleif the US returned to the gold standard and set the price of gold at $ 500 an ounce, the value of the dollar would be 1/500 ounces of gold. This will ensure reliable price stability.

Due to the introduction of the gold standard, transactions no longer have to be made with heavy gold bars or gold coins. The gold standard also boosts the confidence needed for successful global trade – the idea is that paper currency has value that is tied to something real.

The purpose of this type of monetary policy is to prevent inflation as well as deflation, as well as to promote a stable monetary environment.

When was the gold standard introduced?

The gold standard was first introduced in Germany in 1871, and by 1900 it was used by most developed countries, including the United States.

The system remained popular for decades, and governments around the world worked together to make it successful, but when World War I broke out, it became difficult to maintain. Changing political alliances, rising debt and other factors have led to a widespread lack of confidence in the gold standard.

When was the gold standard replaced and how was it replaced?

The gold standard holiday began with the end of World War II. At this time, leading Western powers met to develop Bretton Woods Agreementwhich eventually became the basis for world currency markets by 1971.

The Brittany Woods Agreement was based on the United Nations Monetary and Financial Conference held in Brittany Woods, New Hampshire, in July 1944. Under the deal, the currency was pegged to the price of gold, and the U.S. dollar was treated as a reserve currency. to the price of gold. This meant that all national currencies were valued against the US dollar as it became the dominant reserve currency.

Despite the courageous efforts of the governments of the time, the Bretton Woods Agreement led to the overvaluation of the US dollar, which raised concerns about exchange rates and their relationship to the price of gold.

Until 1971, President Richard Nixon called for a temporary suspension of the dollar’s convertibility. Then the countries were free to choose any exchange agreement except the value of gold. In 1973, foreign governments allowed currencies to float; this put an end to Bretton Woods, and the gold standard was supplanted.

From the 1970s to the present day, most countries have used the fiat money system, which is money issued by the government and not backed by goods. The value of money is determined by supply and demand for paper money, as well as supply and demand for other goods and services in the economy. Prices for these goods and services, including gold and silvermay vary depending on market conditions.

What did Trump say about the gold standard?

While this may not be well known, Trump has long been a fan of gold. In fact, like Sean Williams of Motley Fool noted, Trump has been interested in gold since at least the 1970s, when private ownership of gold bars became legal again. It is reported that he invested in gold aggressively while buying precious metal for about $ 185 and sells for $ 780 to $ 790.

Since then, Trump has particularly praised the gold standard. In an a frequently cited GQ 2015 interview covering topics ranging from marijuana to men’s muffins, Trump said: “Returning the gold standard would be very difficult, but, boy, it would be great. We would have a standard on which to base our money. “

У separate interview from the same year, he said, “We used to have a very, very solid country because it was based on the gold standard.”

According to Danny Vinique of Politico, ”(Trump) has surrounded himself with a number of advisers who hold extreme, even marginal, views on monetary policy. … At least six … spoke in favor of the gold standard. ” Shelton and Allison mentioned above are just some of them. Among others – Ben Carson and David Malpas. The last two – Rebecca and Robert Mercer – after all distanced themselves from Trump, but had a strong influence on him before that.

Stressing Trump’s unusual support for the international gold standard, Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics, told the news publication: “Nothing seems to have happened since the Great Depression.” US Federal Reserveadded, “You must return to Herbert Hoover.”

Politics also quotes libertarian expert Ron Paulanother supporter of the gold standard, said: “We are in a better position than ever in my life when it comes to major changes in the monetary system and talk about gold.”

In addition to the campaign held by Trump, he is the author of newsletters Jay Taylor noted what its tariffs and Iranian sanctions could be motivated by an attempt to reduce the trade deficit and actually return the dollar to US land. Taylor argued that Trump’s money supply efforts would be more effective if the gold standard was restored.

What will it take to return to the gold standard?

Trump’s four years as president have passed without a return to the gold standard, and the consensus seems to be that it is unlikely that this event will happen. For the most part, even the most ardent supporters of the gold standard recognize that returning to it can create problems.

As Williams of Motley Fool’s explains, by and large economists agree that moving to a lower version of the gold standard in 1933 was “a big reason why the U.S. came out of the Great Depression,” and a return would be a mistake.

But if the future president still decided to go through with it, what would it take? According to Kimberly Amadeo of Balance, because of trade, money supply and the world economy, the rest of the world would have to go back also to the gold standard. Why? Because otherwise, countries that use the U.S. dollar could stand idly by and ask to exchange their dollars for gold – including debtors like China and Japan, to whom the U.S. owes much of its multi-trillion-dollar public debt.

It wouldn’t be a big deal if it weren’t for the fact that the U.S. doesn’t have enough gold in its reserves to get it all back. Thus, for the US President to unilaterally return the country to the gold standard, the country would have to replenish its gold reserves in advance exponentially.

In addition, David Seiler of Money Morning suggested that a return to the gold standard will require that the price of gold be much higher than it is now. “West Shore Group chief global strategist Jim Ricards has estimated that the price of gold will jump to $ 10,000 an ounce,” he said.

This means that the US dollar will “devalue sharply”, which will cause inflation, and because world trade depends on the US dollar as a reserve currency, trade will “stop”. Conversely, a return to the gold standard and maintaining a low price of gold will lead to deflation.

What would happen if the US returned to the gold standard?

A return to the gold standard will have a huge impact on the US economy.

On the one hand, it would make it impossible for the Fed to offer fiscal incentives. After all, if the U.S. had enough gold reserves to exchange for dollars as needed, the Fed’s ability to print paper currency would be incredibly limited.

Proponents believe this may be the perfect way to get rid of US debt, but it could also cause problems in times of economic crisis. It’s important to remember because 68 percent of the U.S. economy based on consumer spending, if inflation had risen due to rising gold prices, many consumers would have cut spending. It will also affect the stock market, which could lead to a recession or worse, if the government fails to mitigate this blow through the money supply.

This means that the return to the gold standard will also expose the US economy to sometimes sharp fluctuations in the yellow metal – although some think that gold provides greater price stability, it is no secret that in the past it was unstable. Looking back at the recent stability of the metal, it declined quite sharply from 2011 to 2016.

As you can see, returning to the gold standard would be a difficult test with many pros and cons. The likelihood that the U.S. will return to the gold standard is small, but no doubt the issue will continue to be discussed in future presidents.