The gold standard as it existed under the Bretton Woods system until 1971 is likely never coming back. There are a myriad of reasons for this but the most important lie with the US government’s ability to control the economy. Under the gold standard, the government no longer has the tools it uses to support the economy.
This mostly includes the government’s control over the USD. Under a gold standard, those with the most gold naturally control the dollar. While a large portion of gold is mined in the U.S., a majority is produced by foreign powers. Moving back to the gold standard would effectively entail surrendering the dollar to the control of those with the most stockpiles of the metal.
So the Bretton Woods gold standard isn’t tenable but is the current fiat system much less problematic? Many believe that the new system concentrates too much power in the Federal Reserve. For example, the Fed increased the M2 money supply (the amount of all dollars in circulation including deposits) by 27% in 2020-2021 under its aggressive Quantitative Easing (QE) program that aimed to prevent a recession. This was the largest increase in the country’s history, beating out even the second world war (18%) and the 2008 financial crisis (10%). To the surprise of (almost) no one, this heavily contributed to widespread, lasting inflation that is still affecting American citizens today.
Economists still argue over whether the Fed’s actions were positive or negative on the whole but many agree that QE unfairly benefits monolithic corporations over small businesses and individuals. Many detractors of the buying spree hope that a gold standard could be a good way to bring the Fed into line.
A full gold standard is probably impossible but (state) Senator Bryan Huges (R) and Representative Mark Dorazio (R) of Texas think they have found a way to bring back many of its benefits. They introduced matching bills to their respective houses that propose the introduction of a gold-backed digital currency.
The bills state that “The [state] comptroller shall establish a digital currency that is backed by gold so that each unit of the digital currency issued represents a particular fraction of a troy ounce of gold held in trust.” They would also require that “The trustee shall maintain enough gold to provide for the redemption in gold of all units of the digital currency that have been issued and are not yet redeemed for money or gold” to prevent bank runs.
The bills’ sponsors made sure to add that the funds received from purchasing the digital currency, the gold held under the trust, and any proceeds resulting from the sale of the redeemed gold are not available for legislative appropriation. This would prevent the state legislators from pillaging the trust and hopefully keeping the gold backing intact.
This bill is fascinating in many different ways. It’s an interesting attempt to return to some semblance of the gold standard as well as one of the world’s first potential experiments in central bank digital currencies (CBDCs).
The bill also raises intriguing questions about the future of federalism in the U.S. For example, would the Treasury Department allow Texas to create its own digital currency? There doesn’t seem to be a clear answer yet but it seems to be outlawed in the constitution under Clause 1 of Section 10, depending on your interpretation. The clause states that “No State shall…coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts…”
Texas isn’t the first state to attempt to create their own state currency. At least 13 other states considered it after the 2008 financial crisis. Legislators argued that the section of the clause that says “make any Thing but gold and silver Coin a Tender in Payment of Debts” allows this, despite the fact that “no state shall…coin Money” appears in the same sentence.
The Texas bills haven't been assigned to a committee yet (the next step of the legislative process after a bill is presented) so these questions may not be answered for a long time. Until then, investors will have to settle with physical gold and other precious metals to protect their portfolios. In the end, physical gold will likely still be the superior safe haven asset because you can store it yourself to avoid counterparty risk.
Investors are turning to gold and silver in droves to protect their portfolios as uncertainty rises in the economy. Check out Benzinga’s Precious Metals Hub to master the sector and discover the best precious metals trading platforms.
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