Is There a Case for the Pre-1914 Gold Standard? Yes, if You Believe Inflation is a Bad Thing
The Russian central bank recently announced that it will stop buying gold at a fixed rate and will instead buy them at the negotiated rate from banks. Following the numerous sanctions which were imposed on Russia. The Ruble had fallen tremendously against the US dollar, to get out of such a situation it had announced that it would buy gold at a fixed price of 5,000 rubles a gram until June 30. Since that announcement, the ruble has strengthened sharply against the dollar for over one month. Five thousand rubles was worth around $52 on March 25 and around $63 on Thursday.
The mechanism which led to the increase was to allow the markets to play themselves out, in order to combat sanctions, they asked the nations to transact in their currency which, due to the extensive and growing array of sanctions by the western front, was becoming devalued by each day. It was here, by demanding payment in rubles, are attempting to increase demand for their currency which led to its increase where being pegged to hard currency allowed the confidence of the markets to increase so ruble wasn’t dumped extensively
But because once you allow for sound money such as gold pegged to your currency which is dictated by the effective allocating mechanism of the market you cannot ignore the market valuation any longer, therefore the bounce-back and effective strengthening of the ruble which took place more and earlier than expected has now forced them to abandon the fixed-rate currency and move towards a more flexible exchange rate mechanism which would allow them to set the rates effectively in line with the motivation of sellers while discounting for factors such as immediacy, global credit standing and the turns of the global economy.
A classical gold standard requires the central bank to exchange by the process of both purchasing and selling gold and the national currency for each other and to do so according to a fixed weight or quantity of gold per unit of currency. Thus, while neither the pegged currency nor the negotiated rates of exchange comprise the classical gold standard, they nonetheless serve as a great case study into the commendatory effects of having hard money serving as the medium of change in the economy.
In the much-celebrated book of his time, Tract on Monetary Reform, economist John Maynard Keynes urged the United States and Great Britain to abandon the gold standard, calling it a “barbarous relic.” In the decades that followed the book’s publication, countries around the globe heeded Keynes’ advice and relegated the gold standard to the dust bin. It is one of the great historical ironies that almost every advice of from Keynes was taken up by the world in the latter half of the 20th century and that none of the supposed benefits of stability, full employment have come to fruition.
The Problem of Gold standard in the Keynesian system
Keynes’s dictum on the gold standard has become the fountainhead of claims against a return back to the gold standard. Keynes in his analysis found the gold standard to be a barbarous relic of the past that was unscientific and unfit to meet the demands of a modern world. It is his arguments against the gold standard which have been repeated time and again, thus they serve as an excellent case for demonstration as to why the gold standard is superior based on the very allegations which are leveled against it.
Inflation and Gold standard
He wrote in his tract on monetary reform about the ills of inflation “ Inflation redistributes wealth…. Its most striking consequence is its injustice to those who in good faith have committed their savings to titles to money rather than to things…. Injustice on such a scale has further consequences…. Inflation has… destroyed t
Article from Mises Wire