To what do you not drive human hearts, this cursed craving for gold
Had the old boy Virgil been alive today he might have changed 'gold' to 'gold standard'. Certainly, some still believe it would have been better for the British economy if we had never left the gold standard and, almost by osmosis, joined the Euro. The thinking there is that, rather like the gold standard, the Euro acts as a base to which all else can be referred.
In the simplest way (and it has to be the simplest way for myself to understand it), the gold standard works like this: you make apples; the other individual make oranges; five apples can be made in an hour against three oranges so the rate of exchange is five apples to three oranges. One day you want oranges so you proffer five apples; but your colleague does not want apples at the moment; so your colleague gives you the three oranges and you give your colleague a gold piece (or, a specific weight of gold) that you have mutually agreed represents an hour's work on both oranges and apples; later, when your colleague is ready for apples, you receive back the gold piece and give your five apples in exchange. We are both working on the gold standard because we agree what a specific weight of gold represents.
Ultimately, we can adapt our own currencies relating our coinage to gold and thus we have a mutual rate of exchange; we agree that one Glaswegian is equal to one million Edinburghers and that both amounts are equal to the same weight of gold. So you can exchange your million Edinburghers for one Glaswegian knowing that both amounts are solidly based.
The gold standard thus helps solve the problem of trade at a distance. When you export, you want to know that what you are being paid, in whatever currency or form, is worth what you want – not simply a pile of paper money that may be worthless in your country. Tying in the values of currencies to gold at a fixed rate was/is the answer.
Gold itself has only been of limited use throughout the ages apart from being a medium of exchange and as a beautiful and relatively easily worked metal for jewellery production. It does not tarnish and, like silver, it is malleable and non-allergenic – and it surely gleams. Being non-allergenic has helped since Medieval times (if not before) in making gold useful for filling teeth – although early medical people certainly did not recognise this property but only used gold as required by their client as an ostentatious display of wealth.
Since the first days of the last century, however, gold has come into its own in a very practical sense. It is a superb conductor of electricity (your smart phone has an incredibly tiny amount of gold in it) and, in outer space, it can be used as a blocking material against radiation. It can even act as a lubricant under certain circumstances. Further, its medicinal use has considerably increased – it can help with rheumatoid arthritis. And the fact that it does not degrade coupled with it being relatively rare – it is estimated that less than 200,000 tonnes of it has been mined in the whole of human history – made it the ideal substance for trade.
In fact, almost from its inception, the nation of the United States prohibited anything other than gold and silver coins being used as trading tender. In 1853, the United States was effectively on the gold standard and with the enactment of the National Banking Act in 1863 (an expedient forced by the civil war), the dollar was enshrined as the US currency, although it was not until the year 1900 that America officially adopted the gold standard.
Being on such a standard allows holders of the currency of a particular nation to have confidence that the money they hold is sound and can be supported and backed-up by actual gold. The simplicity of this system is attractive and thus many still call for a return to the gold standard.
There are many advantages to such a system. As said, it lays down understandable conditions for trade throughout the world; a trade relatively free of restrictions and government controls and also comparatively safe from inflation; a self-regulating system that worked. Up to a point! That point is linked to austerity policies. In order to keep the financial house in order – to ensure spending (importing) does not outrun the gold reserves – expenditure has to be disciplined, even cut back upon. The gold reserves impose a ceiling and that ceiling can only be kept under control by way of raising interest rates and striving to regulate earnings.
In the past, this attempt to manage finances in such a manner has led to the shrinking of an economy – a period of recession. In turn, this has caused loans to increase and the taking on of more debt as a stop gap expedient. Does all that sound familiar?
Being on the gold standard is similar to being in the Eurozone (not the same though). The gold standard effectively ensured to creditors that the currency will be maintained in value through austerity measures; and the new German Mark (oops – sorry, I meant the Euro) is now taking the place of the gold standard in Europe and, to hold its value, requires austerity measures.
Could an independent Scotland in the EU afford to be out of the Eurozone?
We'll leave that to another time.
Bill Paterson is a writer based in Glasgow