In the last few weeks, inflation hit a near 40-year high in the UK and the Sterling dropped to a record low against the Dollar. The conversation on the economy must now turn towards guarding against environmental shocks like the ones causing the current financial crisis. However, the answer that seems to be missing from the debate, also seems to me to be the best option that would provide a long-term solution rather than a plaster bound to fall off when the next economic incident occurs. While controversial and not without its faults, that remedy is the long overdue… return to the Gold Standard.
The Gold Standard works by pegging the value of the pound to a set amount of gold. In some forms, currency can be exchanged for the equivalent amount and in others it is purely representative but is still tied to the value gold. The general premise is that the value of gold is stable and therefore guards against hyper-inflation, something we most certainly need today.
The Gold Standard was used in the UK following Sir Isaac Newton’s change to the silver to gold exchange rate in 1717 and slowly spread throughout the world. It was the basis of currencies around the world throughout the eighteenth and nineteenth centuries before dying out in the early twentieth century. It was last used in Britain in 1925 after the Chancellor and future Prime Minister Winston Churchill reintroduced it in his first budget, remaining in place until Britain withdrew from it for the last time in 1931.
FIAT Money, the system the world has been operating on for the last few decades where currency is not backed by any commodity and has value solely by Government decree, has time and time again failed to prevent inflation creeping into the market. In fact, hyperinflation is more prevalent in countries with FIAT systems, the Mark in the Weimar Republic being the best example. I think we have enough evidence from the last hundred years that the experiment has failed, and we now need to go back to something more stable.
Opponents of the scheme, most of whom follow orthodox and Keynesian economic ideologies, claim the problem with the Gold Standard is the inability to adjust the value and supply of money during economic shocks, however, that is rather the point. By taking the power over the value of the pound in your pocket away from governments and banks, the economy is less susceptible to crumbling from fiscal mismanagement. Governments would then be forced to deal with supply side issues instead of playing around with the value of the pound and then being surprised when the problem only gets worse. It also encourages more long-term thinking instead of the short-termism we have become far too familiar with in recent years.
Introducing a fungible scheme, wherein consumers would be able to trade in their notes and coins for the relevant amount of gold, could be costly in the short term and in the long term would likely cause instability in the international gold market. A non-fungible scheme however, would allow for a relatively quick implementation, and we would finally find ourselves with a currency linked to something stable and an opportunity to focus on long term solutions instead of constant firefighting.
Now the likelihood of the Gold Standard coming back anytime soon is unfortunately rather slim. There is sadly not the political will in any of the major parties at the minute for such a radical reform and every civil servant with “Orthodox” economic training would fight tooth and nail to stop any removal of power from the Bank of England and Treasury. That doesn’t mean it shouldn’t happen (if anything it makes it more necessary) nor that it won’t at some point, but we may be waiting while. Nonetheless, we should be introducing the idea into the debate at the very least.