Sean O'Grady: Gold has made a comeback as a de facto world currency


It was John Maynard Keynes who condemned the use of gold as money was a "barbarous relic", and it was he as much as anyone who liberated the world from currencies based on gold or, more unusually, silver, convertible by law from paper promises to hard metal on demand.

Since the final break of the US dollar's link with gold in 1971, the world has conducted its commerce on the basis of paper or fiat money, created by governments and, with central banks applying varying degrees of restraint, routinely debased through inflation.

Gold has had its ups and downs, but, long term, it has preserved value better than dollar bills or sterling banknotes. The $2 trillion (£1.2trn) of new money created by the US Federal Reserve since 2008 – and the proportionally larger, in relation to the size of our economy, £200bn "printed" by the Bank of England – was designed to create inflation and prevent deflation when the recession threatened to turn into a slump, with the spectre of falling prices and a rising real value of our enormous debts.

The fear now is that that expansion in money supply will spur uncontrollable inflation, as it did in the 1970s. So, barbarous or not, the return of gold as an effective "store of value" – one of the essential attributes expected of money – should be no surprise in an era of higher inflation. It is a perfectly rational reaction, though gold offers no interest yield and, if you get your timings wrong, can lose your shirt for you.

But it is that overriding fear of the vanishing purchasing power of paper money that has made investors the world over turn to gold once again, as they always have in times of trouble. This has been true in the developing economies of India and China, where gold has traditionally been hoarded and used as an outward expression of wealth, and where they may have more cause than most to distrust the authorities.

Without anyone particularly noticing, gold has made an informal comeback as a de facto world currency. The currency vigilantes of Utah are, if anything, somewhat behind the times. That said, the danger of gold replacing the dollar as the dominant world reserve currency – a de facto gold standard – is remote, but we ought to recall there was a reason why we abandoned it. For gold depresses economies, forces wage cuts and leads to bouts of mass unemployment, political instability and, yes, wars.

As the American politician William Jennings Bryan put it at the 1896 Democratic convention: "Having behind us the producing masses of this nation and the world, supported by the commercial interests and the toilers everywhere, we will answer their demand for a gold standard by saying: 'You shall not crucify mankind upon a cross of gold'." He was never popular in Utah, however.