When the barbarous relic hit $1,000

On March 13th, 2008, gold prices on the New York Mercantile Exchange passed $1000 per ounce for the first time in history. One reason gold is so valuable is that there is not much of it about. The world annual gold production would make a cube of just 14 feet on each side. All of the gold ever produced by anyone throughout history would only reach one third of the way up the Washington Monument.

Another reason for its value is its comparative incorruptibility, which is one reason behind its almost universal acceptance. France’s President de Gaulle, who favoured a return to currencies fixed to the price of gold, in a 1965 press conference sang its praises: “That which is immutable, eternal.” He resented the influence that the dollar gave to the US, and he wanted a return to the gold standard, which would not be the political instrument of any one country.

A more surprising “gold bug” was ex-Federal Reserve Chairman, Alan Greenspan. In 1966 he wrote "Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process.” He later admitted he was in a tiny minority at the Fed who favoured a return to the Gold Standard.

In modern times the lessons of Zimbabwe and Venezuela point to the catastrophic effects that can follow when a corrupt or incompetent government finances its lavish spending by printing more of its currency.

The Gold Standard favours the countries that have gold deposits, but it has the advantage of making it difficult for governments to inflate prices by expanding the money supply. It engenders long-term price stability because the money supply can only grow at the rate at which gold is produced. Inflation can come, though, if a major new source of gold is developed, as happened with Spanish gold from the New World, or with various “gold rushes.”

On the other hand, a fiat currency, one backed by the government that issues it, can be increased in supply at the rate of growth in the economy. Some economists think that limits to the supply of gold act to limit the economy’s ability to supply the capital needed for growth. John Maynard Keynes said in 1924, “In truth, the gold standard is already a barbarous relic.”

Furthermore, some point out that a fiat currency gives a country the ability to handle economic shocks. The fact that governments could control the money supply in the wake of the 2008-09 financial crisis is said to have helped prevent even worse effects from following.

The rise of gold through the $1000 per ounce barrier happened some years after Chancellor Gordon Brown sold about half of the UK’s reserves of it. Between 1999 and 2002 he unloaded about 395 tons of it at an average of about $275 per ounce. By announcing his intention in advance, he virtually ensured rock bottom prices. It subsequently rose to over four times that level, but the currencies he traded it for have not done as well.