We all know gold is valuable and pretty much always has been. For much of human history, it was money itself. Then we switched to paper money, which was… somehow tied to gold? Basically, anyway: It was called the gold standard, but it’s no longer actually our standard.
So how did it work? What happened to it? What’s with all those conspiracy theories about the monetary system? And what about those Glenn Beck ads encouraging old people to buy gold? Alongside Andrei Andreev, a finance lecturer at San Diego State University’s Fowler College of Business, we’re going to dig into some oldies, but more importantly, goldies.
Okay, what’s the gold standard, anyway?
The gold standard was a way to back our currency (U.S. dollars) with gold — in other words, to assign it value. It arose out of the way that banks would store your gold in exchange for a paper note that said they were keeping the gold in their bank. While convenient, this system, as you can imagine, had its flaws. “Each bank was printing its own money,” Andreev says, “and then the bank would go under because some bankers weren’t very honest people — they’d steal the gold and you’d be left with worthless money.”
The U.S., he says, went to a single currency when we started building infrastructure like railroads, and had to borrow money from other countries. Still, it was backed by gold held by the U.S. government, most famously in Fort Knox.
But then (to make a very long story very short), the 20th century happened — which is to say, two world wars and the Great Depression. As the U.S. accumulated more gold, it printed more money. Wars, however, are expensive to pay for, and so, the government resorted to printing more money. As the relationship between the value of gold and the value of the printed money became more and more unworkable — gradually going down to 50 percent gold standard, then 40 percent, and so on — the U.S. eventually began the process of getting off it entirely. The Bretton Woods Agreement, in 1944, pegged the currencies of more than 40 countries to the value of the U.S. dollar, which in turn was pegged to a fixed price of gold. Over the next 29 years that system ended, and with it, our gold standard.
Are we better off without the gold standard?
Andreev says it makes a world of difference to our economy: The Federal Reserve is better able to pull more levers when it controls monetary policy; it can fight inflation by printing or constraining the flow of money, as well as by controlling interest rates (the cost that banks can charge to lend money). These sorts of abilities allow the Fed to largely keep an economy at full efficiency, and it means that the Federal Reserve isn’t at the mercy of the price of gold itself — which as a commodity just like corn or coal, has a fluctuating price.
Though other countries are off their own gold or silver standards too, this control of money is why America’s economy is — believe it or not — the envy of the world. “The more developed a country’s financial system is, the higher level of economic development there will be in the country,” Andreev says. “So there’s a direct correlation between the efficiency of the financial system and the development of the economy. That’s why we have the biggest economy.”
The value of the dollar, in other words, can be managed: It has no unit value, its value instead existing in relation to other currencies — and the Fed controls that value by controlling the supply, the interest rate and the trade balances with other countries.
Can you still use gold as legal tender?
Nope! A crazy old guy who stashes gold in the woods can’t get dollars out of it directly — he’d have to sell it on a gold market, or through a gold dealer. Likewise, Uncle Sam won’t actually give you the gold in Fort Knox if you try to redeem your dollar bills for it.
What are they doing with all that gold in Fort Knox, then?
It’s on the Federal Reserve’s balance sheet, according to Andreev — an item of value that the bank holds. Maybe some politician somewhere in another country asks for a payment in gold instead of dollars, for example, according to Andreev.
So what’s with all those advertisements convincing people to buy gold? Are they more bullshit, like ads for commemorative coins?
Ever notice how those commercials are always targeted toward older people? That’s no accident, says Andreev. “My mother, in Russia, buys gold like crazy,” he says. This is old-school, the product of old habits. Older people, who have lived through wars, the Depression and the sky-high interest rates of the 1970s remember that each time, gold was a hedge against inflation. In gold’s defense, it’s portable (moreso than, say, a house, at least), it’s storable and everyone recognizes its value, so you can trade anything for it. You see this sort of thing play out in other ways elsewhere with hyperinflation. “Like any commodity, if you’re in Venezuela and inflation is 1 million percent, you go and you buy a TV,” Andreev says. That’s how they hedge against a currency whose value will be worth less tomorrow than today.
As long as these gold buyers aren’t getting scammed — which many certainly are! — gold isn’t a bad investment at all. Investing in a commodity is a good addition to a diversified portfolio. Over the long term, Andreev says — say, 50 years — gold will increase in value. Of course, some people get scared into buying gold via conspiracy theories, or those ads that tell people to buy gold when the price is up (and suggest that the world is coming to an end), but that’s just hype.
Gold will always have value, then?
Yes. For thousands of years, gold has had value. It still does, and probably always will. It’s just that it’s not actual currency anymore (except for gold coins that the U.S. Treasury mints, but as we’ve previously established, those are for collectors).
And we’re not going back to the gold standard, right?
Nah. Andreev stresses that some of the brightest minds work at the Federal Reserve, and our current monetary policy gives it so much control over our economy in order to keep it from falling off a cliff (as we likely would have during the Great Recession). Why give that up?
“Imagine a huge locomotive going 250 miles per hour,” Andreev says. “Going back to the gold standard would be like putting the brakes on at full speed. These proponents who want to go back to the gold standard, good luck to them. It will never happen. We are way past this.”
And that’s advice worth its weight in… well, you know.