There was an interesting piece by Professor George Selgin in last week’s CityAM forum. In his analysis he articulately describes why the Great Depression should not be blamed on the Gold Standard, but on a flawed version of it; the Gold Exchange Standard.
We wholeheartedly agreed with the distinction between the two forms of gold standard. Introduced at the Genoa Conference of 1922, The Gold Exchange Standard was indeed flawed, and was a system under which the dollar and pound were meant to be as good as gold and operate as reserve currencies. This new system allowed reserves to be counted twice: in the country of issue, and then on the balance sheet of the creditor nation. The reserve countries were thus able to run balance of payments deficits whilst confidence in their management in the reserve currency privilege remained. No government has ever resisted this privilege and this credit machine blew up the 1920s bubble that burst in 1929.
After contextualising the differences between the flawed Gold Exchange Standard and the Classical Gold Standard, Professor Selgin appears to give upon the potential for government sponsored gold money to circulate again. He appears resigned to the fact that gold’s monetary utility will not be harnessed once more by governments to bring the monetary stability that exhibited itself between the years of 1870 to 1914. Professor Selgin feels that the damage the failure of the Gold Exchange Standard caused to public confidence in government sponsored gold monetary systems is irrecoverable.
Is it right to give up on gold in this way?
We would question the validity of this premise that government sponsored gold money can no longer succeed, and return us to improved monetary stability. Just because you got burnt by the less good looking younger sister, why should you not be able to fall in love with her more compatible older sister? Flippancy aside, if the current fiat currency system continues to be so distorting and less and less fit for purpose, then one’s mind surely opens further to the alternatives.
Confidence in our modern government sponsored monetary system hardly looks in good shape for the long haul. Our current system of freely floating fiat currencies existed with relative serenity from August 1971 (when President Nixon closed the
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