With the emergence of crypto and the long ago abandoned gold standard, it seems like currencies are increasingly vulnerable, as they are based upon no real value other than the fact that people trust them. I’m no economist but it seems like the classic makings of a bubble. What happens when a world event shakes confidence in the Swiss Franc for example? What would the domino effect be?
For the Franc I would advocate a return to some kind of tangible standard. Gold would be ideal, and more feasible for the Franc than the US dollar. Then at least one major currency could serve as a rock solid basis.
It sounds far fetched but concern over a Currency Trust Bubble are real.
@MarkOlsen You might find this book interesting: Debt: The First 5000 Years, by David Graeber
One key point made is that the departure from the gold standard is a huge shift that marks the beginning of a new era that could last centuries. So we are indeed likely to see volatility and instability in the short term.
Personally, I agree that the current signs are concerning and that corrections are likely to be needed soon. However, I think the likelihood of any major Western powerhouse returning to the gold standard is fairly slim.
@MarkOlsen Certainly an interesting concept for one country to re-establish a gold standard and what the implications would be internationally.
An immediate challenge in this context, would be the necessity for adequate gold reserves to sustain the entire money supply of a country. Looking up some numbers, I found that Switzerland has approximately 65 USD billion in gold reserves, while the Swiss Franc money supply equates to around 1,300 USD billion. This ratio means that gold reserves account for merely 1/20th or 5% of the money supply. And it looks like very few countries (if any) have more than single digit percentages of gold in reserve compared to their money supply.
So, transitioning to a gold standard under these circumstances would imply that only 5% of the money supply would be convertible into gold. Exploring this idea further, any options to align this disparity would be complex/risky, for example:
Devaluing the Swiss Franc: This approach could make the currency align with existing gold reserves but would very likely be economically and politically unpalatable.
Swiss National Bank Purchasing More Gold: While theoretically possible, this would risk driving up gold prices and may lead to inflationary pressures, even hyperinflation, necessitating careful implementation and long-term planning (and would need to have long-term bipartisan support).
Maintaining a Fixed Reserve Ratio at 1:20: Although this would reflect current reserves, it could diminish trust in the Swiss Franc, undermining the very purpose of a gold standard.
Given these challenges, returning to a gold standard appears very unlikely at this point (for any country), given the many challenges and broader economic issues they would need to grapple with. However, I agree with your premise that our current fiat currency system seems increasingly vulnerable and I think we’ve started to see this with recent events leading to notable expansions in the money supply worldwide, and the erosion of confidence that has followed.
@Jo-CKC-Studio Great point that there simply isn’t enough gold in existence to realistically enable any major currency to return to that standard. Another factor to consider is that modern economies are highly complex and countries need to maintain the flexibility to implement measures such as quantitative easing, which aren’t necessarily possible when a currency is pegged.
@MarkOlsen The concept of a currency “Trust Bubble” is interesting. Haven’t heard that particular phrase before. This seems more likely to relate to cryptocurrencies, as we have seen play out in the real world. Arguably BTC experienced a trust bubble burst when it hyped its way to US$65k only to nosedive to $20k within a year, based upon nothing but investor sentiment.
As @Jo-CKC-Studio said, the idea of one major currency, like the Franc, adopting the gold standard raises some really intriguing questions as to the worldwide ripple effect. It could extend into crypto as well.
To add to Jo’s stats… Switzerland would need to accumulate approx. 17% of all the gold ever mined. The value of which would be roughly 2x their GDP.
(Source: derived from Wikipedia stats)
But if one country could pull that off, it would be Switzerland.
I wonder if there’s an economist who can weigh in on this. Would a gold-backed Franc make the world financial system more stable? Or would it create unpredictable restraints that inhibit growth?
OP here, thanks everyone for the spirited discussion. Your comments have shed light on the impracticality of any major country physically accumulating enough gold to fully back their currency. Those days are over.
So I would like to pose a new question if I may. What could be used instead of gold, as a tangible backing for a modern major currency? It would have to be abundant yet valuable.
Bitcoin is often seen as ‘hard’ money that could offer a solution to the ‘gold standard’ problem, due to its non-inflatable nature with a maximum market cap of 21 million. Divided into ‘satoshi’ units (100 million per bitcoin) for liquidity, and with ‘layer 2’ solutions like the lightning protocol, it can move value across borders within milliseconds for minimal cost, avoiding gold’s transportation challenges. However, as a nascent form of money, Bitcoin is still volatile.
But even without considering volatility, Bitcoin would encounter the same challenges that prevent Switzerland from adopting a gold standard. Matching the money supply could result in currency devaluation or inflationary pressures, and the implementation of a Fixed Reserve Ratio might counteract the very purpose of a Bitcoin/gold standard.
Considering these challenges, (and in my personal opinion) the prospect of returning to the ‘gold standard’ or initiating any new monetary ‘standard’ appears improbable. The global issue of an ever-increasing money supply creates a barrier to anchoring currency to a finite entity. It seems unlikely that any ‘hard’ form of money, such as gold or Bitcoin, would be chosen as the foundation for a new monetary standard. Ironically, the reason for this does not lie with gold or Bitcoin, but rather with the money supply; affixing it to something finite could potentially exacerbate the problem.
