What if the DOLLAR Was Still Pegged to GOLD | Gold Standard | ENDEVR Explains - YouTube

This is a 100 dollar bill. It’s just  a piece of paper. The value, however,  

is based on the “full faith and credit” of  the United States’ government. It varies  

according to different economic factors, like the  monetary policies of the Federal Reserve Bank.  

For example, if the Fed resorts to  policies that increase the supply of money,  

the dollar value can decrease in comparison  to other currencies around the world. This is  

possible because the dollar is a fiat money, which  means it is not backed by any tangible commodity.  

But it was not always like this. For some time,  the value of the dollar was pegged to gold in what  

economists call the gold standard monetary  system. This system was abandoned in 1973,  

but the idea still survives among enthusiasts.  But how would the Economy be if we still had  

the gold standard? Would we be better  or worse off? Let’s take a look.  

Every once in a while, the gold standard goes  back into fashion. The world has moved on from  

currencies attached to the precious metal for  50 years, but discussions around the topic are  

more vivid than ever. To understand why going  back to the gold standard is still appealing  

to some people we need to dive into what are the  disadvantages and advantages of the system.  

The biggest argument pro Gold standard  has to do with safety and stability.  

One can argue that gold retains a stable value to  the currency. And this theoretically could reduce  

the risk of instability and economic crises.  With a fixed asset backing the money’s value,  

governments wouldn’t be able to raise  their debts without first buying more gold.  

For some people, especially those who worry about  hyperinflation and do not trust governments or  

Central Banks, the gold standard is a great  tool to legally curb government spending  

and the money supply into society. According to this thought, with the currency  

attached to limited physical assets like gold, the  risks of debt spiraling out of control followed by  

inflationary periods are smaller and long-term  stability, safety and prosperity would follow.  

Supporters of the gold standard believe that the  system does not allow the government to resort to  

expansionary measures as it seems fit. Or what  critics usually say: simply “print more money”  

to finance new debt. And let’s be honest, the US  debt problem is getting bigger by the day.  

At the end of 2020, the US government debt held by  the public was at more than 21 trillion dollars,  

a little bit more than the whole GDP. As a  comparison, that’s much more than what the country  

owns in gold. The US gold reserves were valued  at 11 trillion dollars by the end of 2020.  

If we look at the historical graph of Us  debt since 1966 we can clearly see a path.  

Look at it here. That’s when the  country left the gold standard.  

Now check what happened next. Some believe that  if the United States continues down this path,  

the result will inevitably be a severe crisis in  the years to come. And the solution for that might  

rest on going back to the gold standard. But for some, things are not as simple as gold  

standard defenders believe. No one disagrees  that the US fiscal situation is challenging.  

But having the currency tied to gold would change  some of the most basic fundamentals of the current  

monetary policy. In the ongoing system, the  Federal Reserve can respond to financial  

crises in many ways. Among many measures, it  can lower interest rates during a recession,  

raise the rates during an inflationary period or  it can buy or sell government bonds and inject  

money into the economy when necessary. And this  flexibility to act according to the situation  

was very important in the last decade. During  the 2008 financial crash or 2020 Covid crisis,  

the Fed has resorted to expansionary measures. In  both cases, if the currency were still pegged to  

gold, the Fed’s actions would be limited  and one can only imagine both the social  

and economic impacts that might have incurred. On the gold standard system, the focus of any  

monetary policy would be diverted away from  ensuring economic stability to maintaining  

an exchange-rate target. With gold being  the most important aspect of the economy,  

the country’s need to keep its reserves intact  becomes the focal point of the central banks,  

more than providing an ideal business scenario,  fighting unemployment, or raising productivity.  

Also, making exchange rate adjustments  would be more difficult and the government  

would have to resort to alternatives like  protectionist measures, higher tariffs,  

import quotas and or exchange control. The  results of this would harm economies around  

the world and affect global trade. Another negative aspect of the gold  

standard that is not very often discussed  would be environmental damage. Gold is a  

scarce mineral. Increased demand for gold would  mean that mining activity would also increase,  

very often on indigenous lands around the world.  The impacts of this could be devastating.  

Ok, back to the question of how the economy would  look like when we still had the dollar pegged to  

gold. Three economists have a possible answer  to this question. Through a quantitative method,  

they calculate how the US economy would have  performed if the dollar was still pegged to the  

gold between 2000 and 2020. The results are not  very good for the Gold standard advocates.  

For example, the researchers found that the  shocks on gold supply and demand would have  

a greater negative effect on the economy  than any other shocks that have happened,  

such as an economic crisis. If the Gold standard  was still in place during this period, we would  

have an increase in economic volatilities and a  deterioration of the household welfare .  

Basically, the speed at which gold is mined  introduces a lot of randomness to monetary policy.  

The Fed would have to set interest rates  to maintain a fixed dollar price of gold,  

rather than to target inflation as it is today.  For example, in moments of crisis, people spend  

less and investors purchase more gold, a safe  haven investment. In this case, the central  

bank would have to increase the interest rate to  make other assets more attractive and control the  

price of the mineral. If the reverse happens and  for some reason there is more gold in the world,  

the central bank would have to lower the  interest rate. In the end, the monetary  

decision would not be rational or based on facts  and estimations, but more a matter of faith,  

or a belief on what could happen to the gold  situation in the world. In summary, an economy  

based on how much gold is mined around the world  would be, let’s say, probably more unstable.  

But is it even reasonable to consider a transition  back to gold standard? Well, it depends who you  

ask. For some, it would be a big mess, but  not impossible. For starters, the United  

States would not be able to go back to the gold  standard alone. Due to trade and money supply,  

it would be very complicated for the US to do this  alone. Otherwise, countries that own large chunks  

of US debt, like China, for example, could just  ask for their dollars to be exchanged for gold.  

In theory, that would not be a problem, but,  and that’s a big but, if every debt holder does  

the same, the US probably won’t have enough  gold in its reserve to pay it all back . So,  

if it wants to go down this path, the US would  have to pump its gold reserves. Or the gold price  

would have to be set so high and the dollar  would be so devalued that inflation would  

follow and trade would possibly crash . That’s the scenario that critics of the gold  

standard believe to happen if an attempt to  go back would take place. But defenders do  

not agree with that. In the end, the gold standard  is not as unusual as some people want to believe.  

It’s just a fixed- valued system. According to  the IMF, many countries around the world have  

their currencies somehow linked to an external  standard, typically the euro or the dollar. For  

a country going back to the gold standard would  be more of the same and not that crazy.  

And if these views were once restricted to the  fringes, it really made it to the mainstream  

in the last years. The Republican Party called  for a commission to investigate the viability of  

going back to the gold standard on the campaign  platforms of 2012 and 2016. A bill to establish  

a commission to look into the feasibility  of the gold standard was approved in the  

House of Representatives in 2015 and 2017, but  never managed to get approved in the Senate.  

Alexander Mooney, a representative from West  Virginia, even proposed the full-on return  

to the gold standard on a bill that never  got co-sponsors and never happened.  

In 2020, when then-president Donald Trump  appointed Judy Shelton, a long-time gold  

standard advocate, to a seat on the Federal  Reserve’s Board of Governors, everyone thought  

that Shelton would finally get to the front  seat of monetary policymakers. The nomination  

got stuck in the Senate and never happened, but  Shelton’s ideas were put under the spotlight.  

In the past, she had called for a “new Bretton  Woods conference”, referencing the 1944 meeting  

that established the post-war economic order. To  understand exactly what a new Breton woods would  

mean today, we need to go back in time and look  into the origins of the first one.  

The road to Bretton woods was paved by policies  and choices from way before the conference.  

In 1900, the gold Standard act made  the policy official in the country.  

The gold dollar was then declared the standard  unit, and all forms of money issued by the  

government were to be maintained at parity with  it. After the first World War, countries started  

experimenting leaving the gold standard and  printing more money to save their economies.  

The United States kept the gold standard.  After the crash of 29, investors started  

trading commodities and currencies looking for  safer investments and the price of gold rose.  

A hoarding phenomenon spread in the United  States, affecting the country’s gold reserves.  

In 1933, US President Franklin Delano Roosevelt  issued an executive order forbidding hoarding  

and the Gold Reserve Act was signed in 1934. With  the foriding, people were allowed to keep just the  

equivalent of 100 dollars and everything  else needed to be returned to the state.  

The Gold Reserve Act would lead to the creation of  the reserves at Fort Knox in 1936, the legendary  

US gold depository in Kentucky, where 143 million  ounces of gold are kept at the moment.  

Fast forward to the last year of the second world  war. Representatives of 44 countries gathered in  

July 1944 in Bretton Woods, a resort place in New  Hampshire, to organize what would be the postwar  

monetary system. It was also in the same event  that the ideas of the International Monetary Fund  

and the World Bank, initially focused  only on reconstruction, were forged.  

The Americans arrived at Bretton  Woods in a very strong position.  

With reserves of 20 thousand metric tons  of gold, roughly 60% of the world’s total,  

they advocated for fixed conversion rates assured  by a dollar tied to gold. The Brits, heavily in  

debt and broke after the war were hoping for  flexible exchange rates to revive exports.  

But the Americans feared post-war inflation. In the end, the Americans had their way. After  

the agreement, the countries were to keep their  currencies fixed but adjustable to the dollar,  

which was pegged to gold at 35 an ounce. It was  only by 1959, however, that the system started  

operating as agreed in Bretton Woods. Up to this  point countries maintained fixed exchange rates in  

relation to the dollar by buying their currency  in exchange markets when too low or increasing  

the supply of money when too high. During the  60s, a surplus of dollars caused by foreign aid,  

military spending due to the Vietnam  War and foreign investment made it  

almost impossible for the United States  to keep the value of the gold at 35.  

Presidents tried to control the gold price with  actions like restrictions on foreign lending.  

This resulted in the nation’s foreign trading  position being damaged for the overvalued dollar.  

In 1971 then-president Richard Nixon announced  that the United States would no longer buy gold  

to maintain the price at 35 dollars and halted  the convertibility, which meant that countries  

could no longer redeem dollars for gold. Two years  later, the gold standard was scrapped altogether.  

The members of the European Community tied their  currencies together and jointly floated against  

the U.S. dollar. This marked the end of the  Bretton Woods agreement. With Sheldon far from  

the Fed’s Board of Governors, a second edition  of Bretton Woods might not happen anytime soon.  

But the idea of going back to gold standard  is still around and will not go away.  

So that’s it for this video: what if the dollar  was still pegged to the gold! We hope you liked  

to learn more about the relation between gold and  the monetary system. Since you made it to the end,  

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