1279: The Gold Standard | Skeptical Sunday

What It Covers

The Jordan Harbinger Show examines whether returning to the gold standard would solve inflation problems. Nick Pell explores the history of the gold standard from 1821 to 1971, why countries abandoned it, and whether modern alternatives exist that provide fiscal discipline without destabilizing global trade networks worth $115 trillion.

Key Questions Answered

• •Gold Standard Timeline: The United Kingdom adopted the gold standard in 1821, pegging currency to 7 grams of gold. Germany followed in 1871, the United States in 1879. By the 1890s, most industrialized nations used it. Countries suspended convertibility during World War One because fractional reserve banking funds wars more easily than gold-backed currency, making the system last only about fifty years in practice.
• •Inflation Management: Economists target 2% annual inflation to optimize economic growth. Predictable low inflation encourages spending and investment today rather than waiting for deflation, and makes debt easier to manage for business expansion. The United States peaked at 9.1% inflation three years ago but currently maintains 2.9%, demonstrating the Federal Reserve's ability to stabilize purchasing power at consumer levels.
• •Economic Scale Mismatch: The global economy totals approximately $115 trillion while all mined gold equals roughly $28.5 trillion in value, representing only one quarter of world economic output. Returning to the gold standard would require revaluing gold between $50,000 and $100,000 per ounce or dramatically reducing money supply, either causing catastrophic deflation and making debts unpayable while halting international trade.
• •Historical Depression Patterns: The Long Depression following the 1870s railroad bubble burst lasted over twenty years with 14% peak unemployment, demonstrating gold standard instability. The Great Depression reached 25% unemployment but recovered faster. Since abandoning the gold standard, no comparable depressions occurred, suggesting elastic money supply prevents prolonged economic contractions despite occasional recessions like 2008.
• •Trade Imbalance Consequences: Under the gold standard, net exporting countries accumulate gold while importers bleed reserves, creating constant liquidity crises. China would initially benefit as the largest exporter, while the United States would lose reserves. However, gold cannot flow fast enough for modern interconnected trade networks, ultimately impoverishing everyone when trading partners lack purchasing power.
• •Alternative Monetary Anchors: Switzerland requires government debt repayment within specified timeframes, providing flexibility with discipline. The Taylor rule, a mathematical formula influencing 1990s monetary policy, achieved simultaneous low inflation and high growth. Pegging currencies to energy production, commodity indices, or asset baskets could provide stability without gold's limitations, though adoption probability remains near zero without crisis.