The Gold Standard is a system used historically by central banks when paper promissory notes (banknotes) were issued by central banks such as the Bank of England with a statement by the Bank of England Governor on its notes promising: “I promise to pay the bearer on demand the sum of twenty pounds”.
This phrase dates from 1695 when the newly formed Bank of England (1694) was trying to raise gold/silver for the war with France. The banknote was a promise to exchange the note for its value in Gold with the bearer from the Gold Reserves held by the Bank of England. It actually goes back even further when Saxon silver coins, called sterlings, were around hence 20 pounds sterling. Even this goes back even further to Roman times and silver denarii. Hence in Latin countries you may see denari type words such as ‘dinero’ in Spain meaning money or Lira in the Old Ottoman empire countries meaning pounds. Silver was in short supply hence gold and the Gold Standard took over. Gold ever since being in demand.
Do you really think if you walk into the Bank of England and ask for 20 pounds in weight of silver sterlings or twenty pounds worth of Gold they have it? No they do not.
The Gold Standard meant that Banks could not print more bank notes than the value of Gold they had in reserve to cover it. This therefore restricted how much money a country could borrow if you did not have enough gold reserves.
We Need To Borrow More …
The UK abandoned the Gold Standard during the Great War (World War I) as it needed to borrow more than it had in reserves. The USA abandoned the Gold Standard in 1933 during the Great Recession to borrow more money.
Since then, countries all over the world have abandoned the Gold Standard meaning that more and more countries are borrowing even more than they should and are massively in debt. This is a recipe for disaster.
So why raise this now? Coronavirus has meant countries borrowing even more than ever have. In addition, some countries own huge amounts of other countries debts. Step up Donald Trump. China, Japan, Brazil and the UK are the top 4 owners of US debt, amounting to just short of $3 trillion. The means, in particular, the US is exposed to China owning a lot of its debt and at a time for blame game on Covid-19 and trade war rearing its ugly head again, Trump has allegedly muted a call to move back to Gold Standard to protect the $ from external forces that could destabilise it.
We have to agree, a sensible move to protect the USA, but not so good for UK, where half our gold reserves were sold by Gordon Brown for good reasons on dividend/coupon income and paying off debt 1999-2002 but poor reasons by selling when prices were at a 20 year low.
Government debt does need to be controlled as well as global borrowing in general. A gradual move back to Gold Standard would be no bad thing but it may take decades to do so.