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Source: Bob Pisani, August 29, 2011 - cnbc.com
The New Gold Standard
Under the Bretton Woods Agreements, a type of gold standard was maintained. Many countries fixed their exchange rates relative to the U.S. dollar. The U.S. government, still maintaining convertibility of its currency into gold, continued to promise to fix gold at $35 an ounce.g
By the 1960s the European economies had recovered. The United States was embroiled in a costly war in Vietnam. There was a serious negative U.S. trade balance, and the government was printing money.
The large supply of overseas dollars began coming home: European countries redeemed their dollars for gold at the price of $35 an ounce. The U.S. gold supply dwindled, and the dollar weakened. In August 1971, President Nixon stopped accepting dollars for gold.
As a result, the special role of gold in the world monetary system was ended. The Federal Reserve was not obliged to tie the value of the dollar to gold, or anything else. Most of the currencies of the world now float freely against each other.
Gold, of course, is still of value as a store of private wealth. In fact, President Gerald Ford legalized private ownership of gold coins, bars and certificates in 1974.
Should the world return to the gold standard? It's attractive for some. Price stability is its one great virtue, since a government cannot change the money supply without changing the gold supply.
But the math doesn't even come close to adding up. Do it yourself: The total amount of gold ever mined is about 165,600 metric tons. That's about 5.8 billion ounces, multiplied by $1,500 an ounce, which is about $8.7 trillion. That's just about the roughly $8 trillion that is the total value of the money circulating or on deposit — M2 — in just the United States. Even if you think the U.S. money supply is inflated, it's clear the world would have to dramatically shrink the amount of money in circulation to go back to the gold standard.
For more on the history of gold:
The History Channel's 2001 special, "Gold: the History of Man's Greatest Obsession" also mines similar territory.
