The unprecedented changes in global economy in last couple of years and its aftershock have evoked debates over several unique economic issues, one of them being the possibility of returning to the Gold Standard. This particular economic phenomenon is nothing new, as far as economic history is concerned. The classic gold standard was in place from last part of 19th century till First World War. This allowed a country to maintain a balance between its monetary reserves and its gold holdings. It also allowed an economy to limit the amount of credit it could create. In essence, it forced a country to maintain a balanced budget and prevented it to “go beyond its means”.
Under the Gold Standard, a government is limited-both legally and practically-as to how much paper money it can print. As recently as the Lyndon Johnson administration (1963-1968), the U.S. could print paper dollars equal only to four times the value of the nation’s gold reserves. Under this standard, governments that print too much paper money risk runs on their gold reserves. Runs occur as holders of the paper seek to convert to gold before the vaults are empty. A run on the dollar is what happened in the late 1960s, which culminated in President Richard Nixon “closing the gold window” in 1971.
The subsequent offshoot was the governments creating budget deficits to the unsustainable level. As at present (in May 2011), the US debts amount to $14.32 trillion, representing 98% of 2010 GDP of $14.66 trillion (source: Wikipedia). This undue expansion has had its consequences, with the dollar losing its value (in purchasing power) of over 80% in last 40 years, after the abandonment of gold standard. In this crucial junction of global economy, it is worthwhile to think of some drastic changes, at least there are some learning points from this particular issue of Gold Standard.
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