Gold

 

Goldfinger

Mister Goldfinger
Pretty girl beware of this heart of gold
This heart is cold

He loves only gold
Only gold
He loves gold
He loves only gold
Only gold
He loves gold 

Will the sanctions imposed on Russia result in a return to the gold standard? 

Prior to 1933, the US Dollar was on the gold standard. Each US Dollar could be converted into gold which could then be owned by an individual. This currency, medium of exchange, would inevitably lead to economic crashes when one group acquired most of the currency, and the supply and demand curves had to readjust. ( Because one person’s buyer is another person’s seller. It’s just  Apartment House Rules. One man’s ceiling is another man’s floor). In 1933 individual ownership of gold was made illegal which effectively took the dollar off the gold standard. The US Dollar before that time was what is called a commodity currency, it could be converted into a commodity (gold). After 1933, the dollar became what is known as a fiat currency. The US Dollar became worth what the US government said that it was worth. 

At that time international trading was still done in gold. However during World War II, the United States became the principal holder of gold in the world. If international trade was to take place, then there needed to be another medium of exchange. To promote international trade, there needed to be a fiat currency, to replace gold. At Bretton Woods in 1944, John Maynard Keynes proposed an international currency, the bancor. The United States proposed the US Dollar, convertible into gold. Needless to say the US won. 

By 1971 international trade had increased such that if the foreign countries who had accumulated US Dollars as a result of trade called for a conversion into gold, those countries would empty the US gold supply. This prompted the Nixon Shock of 1971, when the US Dollar was no longer convertible into gold by foreign nations. The rapid inflation that resulted in the 1970s was similar to the economic crashes that had been experienced domestically when the dollar was on the gold standard as the supply and demand curve adjusted. 

Trade, an exchange of goods, requires trust between the buyer and the seller, including the medium of exchange used in that trade. When one of the parties reveals themselves to be untrustworthy, say by invading Ukraine, you can refuse to trade with them. You can also say that the medium of exchange that county has acquired will no longer be honored. 

What that country could do, and apparently has done, is to say that in the future they will only deal in gold, or hard commodity currencies, for trade. The advantage of gold is not only that it has a value which has been agreed to, and it is liquid, but it is also much more untraceable than fiat currencies, and is a  means of evading international sanctions. 

This is a suitable time for the United States to suggest discussions on establishing an international fiat currency, to be a managed by an international association such as e.g. the United Nations, the International Monetary Fund, the World Bank, or G-7, etc. The objection by Russia seems to be it can not trust the United States, so everyone should adopt the gold standard, not trust anyone and everyone should return to the gold standard. Saying that there is an international fiat currency that is NOT the US Dollar says that people should trust each other, even if you don’t trust the United States. 

Goldfinger was a villain. He loved only gold. Let’s not become villains ourselves.