Fiat Currencies May be Replaced by Gold Standard → Washingtons Blog
Fiat Currencies May be Replaced by Gold Standard - Washingtons Blog

Thursday, April 9, 2009

Fiat Currencies May be Replaced by Gold Standard

Gillian Tett is the head financial writer for the Financial Times, one of the leading mainstream financial publications. Investment analyst and financial writer Yves Smith says of Tett:

[Whatever] Tett is writing about ... will be taken seriously, since Tett is read by central bankers.

So it is newsworthy that Tett writes today that the odds of a return to the gold standard are increasing:

A panel at the World Economic Forum meeting in Davos ... was asked to produce one concrete recommendation to fix the global financial crisis.

The top pick? ... a new reserve currency, akin to an old-style gold standard....

Moreover, these musings about a gold standard are currently cropping up in all manner of unlikely places. One savvy European property developer (who aggressively sold most of his holdings in early 2007) recently told me that he is now moving a growing proportion of his assets from government bonds into gold, even at today's elevated prices.

"The logical conclusion of where we will end up eventually is with some type of gold standard," he explains, arguing that future inflation will almost inevitably cause a future collapse in government bonds.

Half a world away in the Middle East, some sovereign wealth funds now say that they are stocking up enthusiastically on food and gold, due to similar reasoning.

Meanwhile, in New York a (still) formidable American hedge fund recently circulated private research that echoes the reasoning of Mr Smith. Most notably, this hedge fund points out that since the world abandoned the gold standard on August 15, 1971 credit creation has spiralled completely out of control.

But this four-decade long experiment with fiat currency is not just something of a historical aberration, it argues - but potentially very fragile too. After all, the only thing that ever underpins a fiat currency is a belief that governments are credible. In the past 18 months that belief has been tested to its limits. In coming years it could be shattered, particularly if the current wave of extraordinary policy measures unleashes a wild bout of inflation.

Hence that chatter about a gold standard. Indeed, as the debate bubbles up, some financiers are now even e-mailing each other an extraordinary little essay that Alan Greenspan himself wrote in support of a gold standard back in the 1960s, called "Gold and Economic Freedom"*....

"Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets . . . [but] in the absence of the gold standard . . . there is no safe store of value," Greenspan wrote back then, pointing out that without a gold standard in place, there is little to prevent governments indulging in wild credit creation. "Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights."...

Shell-shocked investors are increasingly reluctant to rule anything out, as they stare at such uncharted waters. So while I would not bet today on a gold standard returning any time soon, I would also not bet that the debate dies away. Nor would I bet that the gold price crashes too far from its current rate of $900, while so much fear continues to stalk the world.

Bottom line? Even mainstream financial players are starting to mull a return to the gold standard. While it would not happen any time soon, it might happen in the medium-term future.

Note: I am not an investment advisor and this should not be taken as investment advice.


  1. Many who refer to Yves Smith's stellar work at Naked Capitalism still do not realize that Yves is a woman. So, that would be Ms. Smith, not Mr. Smith referenced in your post.

  2. It’s one thing to say that Honest Money will be re-instituted or re-introduced.

    It’s quite Another thing however to allow gold to continue to be derivatisable,

    Washington blog? So that should read “derivatizable”, I suppose.

    Only USD or EUR - oil relationship?
    Thursday, March 13, 2008
    The secret to all of this is in the "Legal Tender laws". Allowing gold to be used as a Legal Tender,,,, "for the settlement of all debts public and private",, but changing international law such that no form of debt can force it's payment in gold! This opens a one way street for gold and a two way street in fiat currencies. No one will lend gold because they cannot force it's return in the courts, thereby making gold a physical only international currency. Yet, on the other hand, we all must borrow in this modern world and currencies will be the only avenue for this. Creating a demand (and added value) for them in addition to general use demand.
    The first thought many will have is that everyone will just buy gold to make debt payments, driving out fiat currencies. But remember, if you have debts they will be in currency settlement only. One will weigh the cheapest form for repayment! Gold in this atmosphere will be completely free to trade, become extremely expensive and stay that way. Not to mention that it's sale as a commodity (outside it's money use) on the private level will be well taxed.

  3. Some excellent ideas here and I get a good information for gold standard. Thank you very much and all the best in future
    Watch a free video on Gold IRA.

  4. Excellent post. I’m actually surprised the use of blogs and wikis isn’t higher.

  5. Hello
    This is an great article regarding the Gold and the fear in people of replacement in Fiat currency. Must post another like this.

  6. What about gold exactly makes it valuable other than people saying so? To answer my own question, nothing. Hmm, what do you call a trade medium that's valuable only because of others' good faith? Fiat? Oh, how very interesting...


→ Thank you for contributing to the conversation by commenting. We try to read all of the comments (but don't always have the time).

→ If you write a long comment, please use paragraph breaks. Otherwise, no one will read it. Many people still won't read it, so shorter is usually better (but it's your choice).

→ The following types of comments will be deleted if we happen to see them:

-- Comments that criticize any class of people as a whole, especially when based on an attribute they don't have control over

-- Comments that explicitly call for violence

→ Because we do not read all of the comments, I am not responsible for any unlawful or distasteful comments.