Speaking to Congress recently, Fed Chairman Ben Bernanke was asked point blank by Representative Ron Paul if gold was money. He paused, then answered definitively, “No, it’s a precious metal.” However, that precious metal is now at the center of a growing storm of discussions about what to do with the world’s currencies as the global economy sinks into a lingering malaise.
On one hand, you have those who dismiss gold as a relic. It’s nothing more than a traditional store of wealth, with no relationship to the modern economy. On the other hand, you have those who feel that current fiat currencies such as the dollar, Euro, and yuan are the real relics, signs of falling empires and a warning to those who abandon tangible assets. This side of the coin is advocating for a return to money that can’t be manipulated by politicians or influenced by local events – a gold standard.
Ron Paul vs. Bernanke
In some ways, the face off between Rep. Ron Paul and Fed Chairman Ben Bernanke is a perfect illustration of these two viewpoints. Bernanke has gone on record saying that the only reason the U.S. Federal Reserve holds gold is out of “tradition” and not because the Feds consider it to be a form of money. Paul is the antithesis of this view, publishing, speaking, and advocating for the return of a gold-based currency.
The most telling element of the conflict is that Bernanke’s trust and credibility with the general public and business world is falling, while Paul’s is on the upswing. Americans and those who invest in America have had enough of “modern” economic policies. We don’t have to read the headlines to know jobs are scarce and money is tight. Somewhere all the promises of loose fiscal policy have been broken, and it’s time for something a little more reliable than bureaucratic pronouncements and printing presses.
The International Banking View
The international banking community is another place these kinds of opposing viewpoints can square off. Often, the debate is between nations who are debtors and nations who lend money. Nations who are debtors – like the U.S. and much of Southern Europe – see no problem remaining off the gold standard. Nations who are creditors, such as China, Switzerland, and Germany, advocate for sound money that can’t be deflated into nothing.
These creditor nations are putting their money where their worries live. Fearful that debtor nations will simply devalue their currencies into nothing, they buy gold rather than extending more credit by buying bonds and international debts. China has doubled its gold reserves in the last year, while the Swiss parliament is debating the launch of a “Gold Franc” to supplement its regular currency.
The future of monetary policy hangs in the balance. If debtor nations get their way, modern economic traditions of fiat currency remain the norm. On the other hand, if creditors grow more fearful that they will never be paid back, expect to see even more regulations smoothing the path for a return to a global gold standard or at the very least, a gold-based currency for one or more nations to serve as a reserve currency for the world.
Tradition & Common Sense
On a more granular level, there’s the individual picture. For the average American, both tradition and common sense dictate that gold is money… but we’ve all grown up with the idea of greenbacks as money, too. However, you don’t have to be a financial genius to see that paper dollars aren’t buying as much as they used to while gold is buying more and more.
Tradition reminds us that in times of real trouble and economic collapse, gold is what works. Common sense dictates that it pays to hedge your bets for any investment, including the ongoing investment that workers have in the U.S. dollar as a paycheck. Thus, no matter what the talking heads say, regular people are buying up a bit of gold “just in case” something happens. “It is very scary: the flight to gold is accelerating at a faster and faster speed,” said Peter Hambro, chairman of Britain’s biggest pure gold listing, Petropavlovsk. Yet in the debate about moving to the gold standard, who will ultimately be more frightened of a fast shift to gold as real currency? The prepared souls who got a bit of gold while there was time, or the politicians left holding the bag on paper money?