Returning to the gold standard would cost the world’s largest economies $3.5 trillion, according to new research, shedding light on a policy idea shunned by mainstream economists that nonetheless gained ground among conservatives during the Trump administration.
After countries spent trillions of dollars on implementation, the gold standard would also cost an additional $383 billion per year to maintain as economies grow, Angelo State University economist Brian P. Cutsinger found in a paper recently published in the Quarterly Review of Economics and Finance.
“What typically happens with these debates is that the people who like the gold standard keep talking about how unambiguously great it is,” said Cutsinger.
But proponents of the gold standard rarely talk about practical steps toward its implementation, Cutsinger said. He wanted to ask, “Would those costs be worth the benefits?”
Custinger sees himself as more sympathetic to the gold standard than most economists, but distances himself from its most uncompromising proponents.
“Most economists have a pretty dim view of the gold standard,” he said. “My view is somewhat in between the people that tend to be very pro-gold standard and mainstream economists.”
The gold standard, through which the value of a country's currency is directly linked to gold, has not been in place in the U.S. since 1933 and is not currently used in any country. The precious metal has been replaced by fiat money, which is backed solely by the word of governments rather than the ability to exchange it for a tangible asset like gold, giving central banks like the U.S. Federal Reserve far more control over monetary policy.
During the coronavirus crisis, this control has allowed central banks to lower interest rates and pump money into the economy, driving up equity markets and saving many firms from going under.
Opponents of such central bank intervention argue, however, that private companies would be better left to fend for themselves, and that injecting money into the financial system will drive up inflation at an unacceptable rate.
“The Fed claims to want to promote price stability,” said Cutsinger. “The gold standard did what central banks claim to want to do.”
Cutsinger acknowledged that returning to the gold standard remains far from political reality in the U.S. — much less around the world — but the idea gained relevance during the Trump administration.
Shortly after Joe Biden defeated Donald Trump in the November 2020 presidential election, the Senate narrowly refused to advance Trump’s nomination of economist Judy Shelton to the Federal Reserve Board of Governors after several potential “yes” votes were out sick with the coronavirus and a group of economists, including seven Nobel Prize winners, publicly opposed the nomination.
Shelton, along with other potential Trump Fed picks Herman Cain and Stephen Moore, was an outspoken proponent of the gold standard. However, she withdrew her support for the idea after Trump officially nominated her for the Fed position.
Cutsinger said that Shelton’s near-confirmation to the Fed board could potentially be a high-water mark for the gold standard movement in the 21st century. However, he sees a “perennial interest” in the gold standard that could bubble up again, especially since the idea still enjoys considerable support within the GOP from figures like Sen. Ted Cruz.
But the gold standard is not just a question for the U.S., as more countries would have to adopt it in order to enjoy its benefits, accordion to Cutsinger.
“First, to reap the benefits of a common currency area, more countries than just the United States would need to adopt it,” he wrote. “Second, with only one country on the gold standard — even one as large as the United States — the purchasing power of gold would be subject to significant speculative demand, likely increasing rather than decreasing price-level uncertainty.”
That’s why Cutsinger examined the cost of adopting the gold standard in 10 countries — including the U.S., China, Japan and Russia — as well as the Eurozone, representing about 80% of global economic output.
By examining current gold holdings by central banks in these economies and comparing that to the amount of gold they would initially need to purchase at its current market rate, Cutsinger concluded that the economies would have to spend a total of $3.5 trillion to purchase 2.7 billion troy ounces of gold.
The multitrillion-dollar figure is driven mostly by China, which does not have significant gold reserves. The Eurozone, Russia and the United States all have official gold holdings that are large enough to return to the gold standard without purchasing more gold.
However, if countries purchase merely enough gold to maintain a “historically-realistic reserve ratio” rather than full-on gold redeemability, the price of transition would fall by nearly a factor of 10, Cutsinger found.
Cutsinger, who earned his Ph.D. from libertarian-leaning George Mason University, said economists should not be wedded to the idea of gold as the only asset that could be tied to currencies.
“If people were to start regarding Bitcoin as a hedge against inflation, then it wouldn’t be altogether surprising that it could replace gold [as a potential asset to link to the dollar],” he said.
The paper, titled “On the Feasibility of Returning to the Gold Standard,” was published in the November 2020 issue of Quarterly Review of Economics and Finance. Its sole author was Bryan P. Cutsinger of Angelo State University.