It is becoming less and less common for the average layperson to understand where our financial and monetary systems originated from. Many people are wholly unaware of the gold standard that was in place for much of modern history prior to WWI.
Even as the 20th century progressed, there was a reasonably stable gold-exchange standard used (in slightly different forms depending on the time and place). Under this indirect gold standard, essentially, the major currencies were directly convertible into gold and emerging central banks in newly-liberated parts of world would manage their foreign exchange reserves in order to maintain a stable value for their currencies.
During this period prior to the Bretton Woods system that prevailed after WWII, the world’s major reserve currencies like the U.S. dollar, British pound sterling, and French franc were backed by gold, with hardly any other foreign-exchange assets underlying them. However, today’s regime of floating fiat currencies has essentially reduced all of the world’s monetary standards into this type of web of relations.
The Current Currency Problem
The goal of building up and manipulating any one central bank’s foreign-exchange reserves—large holdings of the currencies of other countries—is to consistently adjust and update the levels of these reserves in order to stabilize the value of the currency issued by said central bank.
Unfortunately, the results of this arrangement have grown increasingly worse over the past four decades. As Nathan Lewis explains for Forbes,
“Just look around you. [Federal Reserve Chair] Yellen. [European Central Bank President] Draghi. [Bank of Japan Governor] Kuroda. Negative interest rates. Brexit. The collapsing middle class. This is all pretty pathetic stuff compared to the great successes of the pre-1914 era, or the fantastic global wealth creation of the 1950s and 1960s. For now, we have to live with it. But, maybe not too far in the future, we might be able to choose again what kind of system we want. I vote for gold.”
In fact, Mr. Lewis researches and writes about this very idea, both in a book called Gold: The Monetary Polaris and on his website, New World Economics.
By calling gold a “Monetary Polaris,” he’s referring to the “North Star,” Polaris, which is used as the pole star: “Polaris stands almost motionless in the sky, and all the stars of the northern sky appear to rotate around it. Therefore, it makes an excellent fixed point from which to draw measurements” and find one’s bearings, according to Wikipedia.
This is not only a clever use of figurative language, but a great illustration of what gold provides in terms of stability. It is the proper lodestar of the financial system thanks to its “natural stability,” as classical Irish playwright George Bernard Shaw aptly put it.
The more and more out of hand and unwieldy the fiat money system becomes, will it be the sooner we approach a time when gold will indeed regain it’s official status as the reserve currency of the world? Only time will tell, but several experts past and present undoubtedly believe this to be the case.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.