Steve Forbes, US businessman, publisher and editor-in-chief of the business magazine Forbes boldly predicted a couple of days ago that “… a return to the gold standard by the US within the next five years now seems likely because that move would help the nation solve a variety of economic, fiscal and monetary ills.” The optimism of his prediction comes mixed with a judgment of the US government and economy.
Some of the present “ills,” like unsustainable fiscal and trade deficits, were extant in the late 1960s, when the US dollar was still backed by gold, and were among the reasons why US President Richard Nixon abandoned that standard in 1973. Economists today still largely refute that a return to a gold standard would be a cure. They point to the UK after World War I, which returned to its pre-war gold standard and then suffered recessionary stagnation. New gold standard advocates explain this as the result of the UK attempt to return the pound’s value back to pre-war levels, instead of fixing a new gold standard, which would have accounted for the currency’s debasement during the war.
The merits and risks of Forbes’s prediction are another debate, but a return to a gold standard would mean that US dollars should be backed by the gold holdings of the country’s Federal Reserve. Do we speak here of just the so-called “currency in circulation,” i.e., the coins and paper money, the so-called “monetary base,” i.e., the dollars issued by the Federal Reserve, or do we even include the dollars created by the credit system?
Let’s limit ourselves to US currency in circulation, to be fully backed by the roughly 7,414 metric tons of gold held by the Federal Reserve, which would then yield a gold price of some USD 3,560 per ounce. If the European Central Bank similarly backed its currency in circulation with its gold holdings, then the gold price would have to be EUR 2,320 per ounce. In the UK, the gold price would be GBP 6,110 per ounce, and in Japan JPY 3.3 million per ounce.
The most spectacular price is for Switzerland, where the gold price would be CHF 1,320 francs per ounce. Since gold here presently costs CHF 1,360 francs per ounce, the Swiss currency in circulation is now backed 103%! The old saying that the Swiss franc is as good as gold is presently not true; right now the Swiss currency is even better.
This new Bretton Woods regime — all currencies in circulation backed by respective central bank gold holdings — would yield some interesting exchange rates. EURUSD, fixed at 1.5370, would be close to the present exchange rate. EURCHF at 0.5860 and USDCHF at 0.3810 would show massive Swiss franc strength. At the other extreme, the pound and the yen would depreciate hugely, with GBPUSD at 0.5820 (instead of today’s 1.6250) and USDJPY at 924.70 (instead of 81.60).As caveat to this view of the world, for example, backing the base money instead of just the currency in circulation would lead to different numbers. Or, a country like Japan could sell its trillions in US dollar-denominated assets to buy gold, back its own currency more seriously, and thereby depress the US dollar value. Such mind games as these show how far we have gone in our paper-backed currency system since 1973. Mr. Forbes may prove prophetic of a form of gold standard, but I remain skeptical that this could happen within the next five years.
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