Measured in dollars, the US economy is 25 times bigger than it was in 1971. But measured in gold, which remained the basis of the dollar’s foreign-exchange value until that year, the American economy peaked at the turn of the millennium. It’s been declining ever since, and is today less than half the size it was when Richard Nixon abandoned the greenback’s convertibility to gold.

Some economists would suggest that this proves why a gold standard is a bad idea. When the supply of money is fixed, it makes it hard for an economy to emerge from recession, since central banks can’t ease spending and investment by printing money. Libertarian economists who call for a return to the gold standard can retort that once it has the power to print money at will, there will be nothing stopping a government or central bank from doing so endlessly. Today, for instance, despite the fact that economies aren’t in recession, inflation is rising and asset prices are skyrocketing, the world’s major central banks are still overseeing a rapid expansion in the supply of money.

This is worth noting following the news that gold prices finished this week close to all-time highs, having surged almost 50% this year. Investment banks have begun advising clients to stock up on gold to protect against currency debasement. They can read the runes, because what makes the engineered degradation of money’s value so appealing to governments is the sheer level of debt that has been accumulated in Western countries by both the public and private sectors. Among the G7 economies, only Germany has a public debt burden smaller than the economy. Add in private debt, and G7 countries all have total debt burdens that range from two to four times the size of annual output.

With annual economic growth seldom much above 1%, and with a growing share of output allocated to paying interest, it looks like these debts might never get paid. So the temptation of allowing inflation to run hot for several years in order to inflate away the debts becomes irresistible. Not only are central banks easing monetary policy, but the Trump administration is expressly pushing for low interest rates in order to make the burden manageable.

That will be good for debtors but bad for creditors, including pension funds such as the US Social Security system. But currency debasement can run out of control. The last time gold prices surged as they are doing now was in the Seventies. That decade ended with double-digit inflation, mortgage rates in the high teens or more, and ultimately a deep recession.

It’s not surprising, therefore, that investment banks are advising their clients to run for cover. Central banks are themselves allocating a rising share of their reserves to gold, dumping fiat currencies in the process. As a result, the price of an ounce of gold looks set to crash through the $4,000 mark. But another way of looking at it is that the value of the dollar, or of the euro or pound, is collapsing. It’s less easy to convince people they’ve never had it so good when the value of their money has never been so bad.

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John Rapley is an author and academic who divides his time between London, Johannesburg and Ottawa. His books include Why Empires Fall: Rome, America and the Future of the West (with Peter Heather, Penguin, 2023) and Twilight of the Money Gods: Economics as a Religion (Simon & Schuster, 2017).

jarapley

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