Chapter 2: Findings and Analysis- Problems facing the Gold Standard - National Reserve Currency

2.6     Problems facing the Gold Standard

Problems facing the Gold Standard

When the gold standard was applied throughout the whole world, it did not experience any problems. However, problems arose when the superpowers opted to fight their enemies using money, by introducing alongside the gold standard the non exchangeable (compulsory) paper money standard. For this reason, Western colonial powers established the International Monetary Fund, and the USA introduced the U.S. dollar as the basis for the new monetary standard. Hence, any State operating the gold standard would be faced by certain problems which need study in order to solve and overcome them. These problems are as follows:

1. The concentration of gold in countries whose level of production, their ability to compete in foreign trade and the professionalism of their scientists, experts and industrialists have all increased. This would lead to the flow of gold into these countries either as a price for commodities or as salaries for the workforce i.e. experts, scientists and industrialists. Therefore, most of the existing reserves of gold world-wide would accumulate in these countries, causing an imbalance in the distribution of gold among various countries. This would also lead to countries restricting the transfer of gold for fear of losing their reserves, thus bringing their foreign trade to a grinding halt.
2. Gold could flow into some countries due to the balance of trade being in their favor. However, these countries could prevent this gold from influencing the local market and from causing an increase in the level of prices by flooding the market with a large number of bonds. This could be sufficient to lead to a withdrawal of money equal to the gold they had received, thus such countries end up retaining the gold and preventing it from returning to the country of origin, which would suffer from the use of the gold standard as a result.
3. The widespread use of the gold standard has always been linked to the concept of international specialization in various areas of production and to international free trade. However, a powerful tendency toward the protection of industry and agriculture in these countries has emerged, which has led to the introduction of tariff barriers, thus erecting an obstacle in the face of goods exported to these countries and making it difficult for the transferring of gold out of these countries. Therefore, the trade of the country that operates the gold standard would suffer, for if her goods did not reach other countries’ markets at the normal price, she would either be forced to reduce the level of her commodities’ prices further in order to overcome the tariffs and quotas or not export her goods in the first instance, and in both cases, her trade would suffer.

These are the main difficulties which the gold standard could face if operated by a single country or several countries. The way to overcome such difficulties would be to adopt a policy of self-sufficiency and to make workers’ salaries performance-related rather than estimated in relation to the price of the commodities they produce or manufacture, or their standard of living. Also no consideration should be paid to shares and government bonds as commodities owned by individuals, and there should be no over-reliance on exports as a source of developing wealth. A country should rather aim at generating her wealth within her own boundaries without having to export her goods and services abroad, which would help her do away with trade barriers imposed by other countries. Once a country adopts such a policy, she would have nothing to fear from the gold standard, and instead would reap all its benefits, avoid all its disadvantages and not suffer any setback from it at all. On the contrary, it would be in her interest. So it is inevitable for her to follow the gold and silver standard to the exclusion of all other standards.

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