US President Donald Trump has praised the gold standard in the past, but could he really bring it back? We look at whether it’s possible.
The gold standard hasn’t been used in the US since the 1970s, but in the last couple of years there’s been some speculation that US President Donald Trump could bring it back.
Rumours that the gold standard could return center largely on positive comments Trump has made. The president has said it would be “wonderful” to bring it back, and a number of his advisors think so too — Judy Shelton, Robert Mercer, John Allison and others have also expressed support for the idea.
But could the US really return to the gold standard? And what would would it mean if Trump brought it back? Read on to learn what the gold standard is, what Trump has said about it and what could happen if he actually brought it back. Plus, take our poll to let us know whether you think it could happen.
What is the gold standard?
How the gold standard works
The gold standard is a monetary system where the value of a country’s currency is linked directly to gold. Countries that use the gold standard set a fixed price at which to buy and sell gold, and then use that fixed price to determine the value of their currency.
The gold standard was first introduced in Germany in 1871, and by 1900 most developed nations, including the US, were using it. The system remained popular for decades, with governments worldwide working together to make it successful; but when World War I broke out the system became difficult to maintain. Changing political alliances, higher debt and other factors led to a widespread lack of confidence in the gold standard.
How the gold standard ended
In the years following the war, Britain’s pound sterling and the US dollar became the world’s reserve currencies, and other countries began to accumulate those currencies instead of gold. The stock market crash of 1929 exacerbated the situation — many countries raised interest rates in order to keep people interested in owning gold, but ultimately the higher rates worsened the global economy.
Finally, in 1933, Franklin Roosevelt, then president of the US, largely removed the US from the gold standard and made private ownership of gold bullion, such as gold coins or bars, illegal. The move allowed the government to affect the money supply by “pump[ing] money into the economy and lower interest rates.” Foreign governments were allowed to exchange gold for dollars until 1971, but President Richard Nixon put a stop to that in an effort to halt the depletion of the country’s gold reserves. He also completely severed the link to the gold standard at that time.
What replaced the gold standard?
Today no countries use the gold standard, instead employing fiat systems where the value of currency fluctuates dynamically against other currencies and is not based on any physical commodity.
What has Trump said about the gold standard?
While it’s perhaps not common knowledge, Trump has long been a fan of gold. In fact, as Sean Williams of the Motley Fool points out, Trump has been interested in gold since at least the 1970s, when private ownership of gold bullion became legal again. He reportedly invested in gold aggressively at that time, buying the precious metal at about $185 per ounce and selling it between $780 and $790.
Since then, Trump has specifically praised the gold standard. In an oft-quoted 2015 GQ interview that ranges from marijuana to “man buns,” Trump says about the system: “[b]ringing back the gold standard would be very hard to do, but boy, would it be wonderful. We’d have a standard on which to base our money.” In a separate interview from the same year he also says, “[w]e used to have a very, very solid country because it was based on a gold standard.”
Aside from that, Trump hasn’t said much about the gold standard. But some believe actions speak louder than words. And if that’s the case, then there are a few things he’s done that are worth considering.
As noted, Trump has “surrounded himself with a number of advisors who hold extreme, even fringe ideas about monetary policy,” as Politico’s Danny Vinik puts it. Of those advisors, “at least six … have spoken favorably about the gold standard.” Shelton, Mercer and Allison, all mentioned above, are just a few of them. Others include Ben Carson and David Malpass.
Emphasizing how unusual that is, Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics, told the news outlet that the support for the international gold standard around Trump “seems like nothing that’s happened since the Great Depression.” Gagnon, who has also worked for the US Federal Reserve, added, “[y]ou have to go back to Herbert Hoover.”
Politico also quotes libertarian pundit Ron Paul, another supporter of the gold standard, as saying, “[w]e’re in a better position than we’ve ever been in my lifetime as far as talking about serious changes to the monetary system and talking about gold.”
Aside from the company he keeps, newsletter writer Jay Taylor points out that Trump’s tariffs and Iranian sanctions could have been motivated by an attempt to reduce the trade deficit, and in effect claw back the dollar to US soil. Whether or not it’s working is in question, but Taylor points out that Trump’s efforts on money supply would be more effective if the gold standard was restored.
What would it take to return to the gold standard?
The consensus seems to be that despite Trump’s apparent positivity, a return to the gold standard is highly unlikely. For the most part, even the most ardent supporters of the gold standard recognize that going back to it could create trouble. As The Motley Fool’s Williams explains, by and large economists agree that moving to a lower-key version of the gold standard in 1933 “was a big reason why the U.S. emerged from the Great Depression,” and believe that a return “would be a mistake.”
But if Trump did decide to go through with it, what would it take? According to Kimberly Amadeo at TheBalance, due to trade, money supply and the global economy, the rest of the world would need to go back to the gold standard as well. Why? Because otherwise the countries that use the US dollar could stand with their hands out asking for their dollars to be exchanged for gold — including debtors like China and Japan, to which the US owes a large chunk of its US$21.6-trillion national debt.
That wouldn’t be too big of an issue if it weren’t for the fact that the US doesn’t have enough gold in its reserves to pay it all back. So for Trump to unilaterally return the US to the gold standard, the US would have to exponentially replenish its gold reserves in advance.
In addition, Money Morning’s David Zeiler suggests that returning to the gold standard would require the price of gold to be set much higher than it is currently. “West Shore Group chief global strategist Jim Rickards has calculated the gold price would jump up to $10,000 an ounce,” he comments.
That means the US dollar would be “severely devalued,” causing inflation, and since global trade relies on the US dollar as a reserve currency, trade would “grind to a halt.” Conversely, returning to the gold standard and keeping the gold price low would cause deflation.
What would happen if the US returned to the gold standard?
Going back to the gold standard would have a huge impact on the US economy. For one thing, it would make it impossible for the Fed to offer fiscal stimulus. After all, if the US had to have enough gold reserves to exchange for dollars on an as-needed basis, the Fed’s ability to print paper currency would be incredibly limited.
Supporters believe that could be the perfect way to get the US out of debt, but it could also cause problems during times of economic crisis. It’s also important to remember that because 68 percent of the US economy is based on consumer spending, if inflation rose due to the gold price rising, then a lot of consumers would cut spending. That would then affect the stock market as well, and could very well lead to a recession or worse, without the ability of the government to soften that blow via money supply.
So a return to the gold standard would also mean “accepting the wild swings that are sometimes inherent in the lustrous yellow metal.” And while some think that gold would offer greater price stability, it’s been volatile in the past. Though the gold price has been fairly stable lately, if we look back further we can see that it dropped steeply from 2011 to 2016.
As can be seen, returning to the gold standard would be a complex ordeal with many pros and cons associated. What do you think about the idea? Do you think Trump should bring back the gold standard? Let us know in the comments, or by taking the poll below.
This is an updated version of an article first published by the Investing News Network in 2017.
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Securities Disclosure: I, Amanda Kay, currently hold no direct investment interest in any company mentioned in this article.