What is the gold standard?

Tim Bennett explains in simple terms how a gold standard works, why the last one was abandoned, and whether we should return to one today.

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  • Colin Selig-Smith

    So… A fan of the gold standard then? 🙂

    I personally favour gold as the world reserve currency, not necessarily within a country. The primary feature s the self limiting nature of consumption vs production.

    If a country persistently runs a trade deficit, gold leaves the country to it’s trading partners. This increases the relative value of gold locally within the country and implicitly devalues the currency, reducing the amount of external products which can be purchased, boosting demand for domestically produced equivalents and the export of those equivalents, which then fixes the trade deficit.

    i.e. The USA/China situation wouldn’t occur. Where the US exports worthless paper to China and imports worthless tat from China .

    The other thought would be, why bother with a standard at all then, why not simply trade electronically using grams of gold.

  • Bumble

    Did you mean to say that gold has many industrial uses? I don’t think it does. Its main use outside bullion is in jewellery making. This contrasts with metals like platinum and palladium, which are industrially important.

    It would have been nice to hear you expand a little more about the consequences of having a gold standard. Presumably it has consequences for interest rates, and it would create difficulties for countries with very different economies and growth rates, like the problems we’re seeing now in the eurozone.

    Being really picky now, but “malleable” = can be hammered into sheets, and “ductile” = can be drawn into wire.

    I really like your videos. Keep them coming.

  • Tim Bennett

    Bumble – thanks! I should really be able to distinguish my “malleable” from my “ductile”!

    Also in the days of the gold standard gold used to have more industrial uses (a famous one being solar protection for the pilot front windows on concord, ironically around the time the standard ended). I accept these uses are much more limited these days compared to say silver. Sorry for any confusion on that point.

    I will probably shoot some more detailed gold videos – this was just intended as a very basic intro guide. Topic suggestions welcome – anyone for a video on the gold/silver ratio for example?

  • Simon Learner

    Thanks Tim,

    Very interesting video and would be great if you could go into more depth with the gold standard. For example the consequences for Britain if we went back to a gold standard and how could it be done considering we own so little gold. The argument you often hear from critics which you also touched on is that economies are too complex now for a return to gold, which is obvious nonsense as trade always conforms to the same principles. Inflation is also mentioned as a good thing and deflation is very bad – I’ve never understood the logic of this as if things get cheaper, our buying power increases…..

  • Pete

    We are producing microphones for mobile phones which have gold contacts.This is because humidity from breath does not influence the microphone.Gold is not affected by moisture like many other metals.We have recently invested heavily in this Gold process of manufacture.This is a relatively recent new industrial use for Gold which will see greater use in the future.

  • Jim

    Isn’t gold used in dental fillings? Recently had one so I should know. Also, from what I understand, its used as a contact in computer graphic cards.

    And didn’t Britain, when it was on a gold standard, had to stop using it because of the world wars?

    Wouldn’t prices still rise even with a gold standard? I’m wondering about the USA with crop prices rising because of the drought.

    Would be interested in more on how gold is used as a standard.

  • Tim

    Jim. Thanks – I feel another video (or two) coming on…Tim.

  • Jim C

    Hi Tim,

    Nice to see you cover this topic.

    I think you’ve missed the main reason gold is the only element it makes sense to base a currency on (besides its fungibility), and that is the stock to flow ratio (in fact, it’s this very feature of the supply of gold that disinclines me to call it a ‘commodity’ in the first place).

    Virtually all gold ever mined is still in (accessible) existence, and the stock increases at around 1.5% per year. Now that silver is widely used (and rendered economically unrecoverable) in industrial processes, what other ‘commodity’ has this attribute?

    As an aside – when people propose using oil or a basket of commodities to underpin a currency as an alternative, I always wonder how they propose to make such a system work.

  • Jim C


    Yes, a gold standard severely limits a government’s ability to wage war, because it either runs out of gold, has to borrow, or has to tax, to pay for the enormous expense of sending (often) millions of its citizens to go and destroy someone else’s capital wealth overseas. So governments have usually come off the standard during periods of large-scale warfare.

    Most of the economic problems of the first half of the twentieth century were the result of this, and bureaucrats’ cack-handed attempts to resume the gold standard at exchange rates that reflected the pre-war, pre-inflated amounts of currency.

  • Jim C

    On the subject of gold’s uses… well, these are circumscribed by its price.

    If people lost their taste for using it in jewellery, and lost faith in it as a safe haven, then the price would drop to the point it might make a nice substitute for anything involving an inert, conductive, malleable and ductile metal… except, because there’s not a lot of it around (most estimates put it at less than one ounce per person worldwide) it can never be a cheap substitute for anything more abundant.

    So if you were hoping to install gold plumbing, I wouldn’t hold your breath 🙂

  • Tim Bennett

    Jim C. Gold plumbing? That really would be a top of the market indicator!

  • Jim C

    @Tim, gold plumbing? I’d say it would be a top of the stock & bond markets indicator, but a bottom of the gold market indicator.