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The collapse of the Gold Standard, and why we might want to revive it.


As you can see from the video, Alan Greenspan has some positive comments to make about the Gold Standard and the roll it once played.

Others who support a return to the Gold Standard in some form include Ron Paul and Steve Forbes.

If you are not familiar with the history of the Gold Standard, here is a quick overview:

The Gold Standard Act was passed in 1900. At this time, the value of all American currency was to be based on actual gold. Basically, you could go to a bank and exchange your paper dollars for the equivalent amount of gold. And dollar bills couldn’t be printed unless there was enough gold held in reserve to cover that dollar bill.

In other words, money supply was limited by the amount of gold being held in reserve.

The dollar was “as good as gold”.

In 1946, the Bretton Woods System was enacted, which made some changes to the original Act. Under this system, fixed exchange rates allowed other governments to sell their gold to the United States. The price was set at just $35 an ounce, a far cry from today’s prices.

The collapse of the gold standard came in 1971, when President Richard Nixon ended the system, driven in large part by the rising cost of the Vietnam War. He needed more money to pay for the war, and didn’t have enough gold in reserve, which meant that printing more money would simply devalue the dollar and lead to inflation.

At the same time, all formal links between major world currencies and actual commodities were broken.

No more limits on the amount of money a country could print. And no more fixed exchange rates between countries.

This is the world we live in today, and this is what has led to the economic problems now faced by the US and many European countries.

No wonder some economists are calling for a return to some kind of version of the Gold Standard.

Steve Forbes, of Forbes Magazine fame, recently stated, “If the gold standard had been in place in recent years, the value of the U.S. dollar would not have weakened as it has and excessive federal spending would have been curbed…The constantly changing value of the U.S. dollar leads to marketplace uncertainty and consequently spurs speculation in commodity investing as a hedge against inflation.”

He went on to say, “If the dollar was as good as gold, other countries would want to buy it.”

Will we return to a new version of the Gold Standard? I think such a move would make a lot of sense, but don’t believe the political will is sufficiently strong to make it happen any time soon.

Further reading…

6 Reasons to buy gold…

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