“Gold Standard Restoration Act" (H.R. 2435) of 2023 - reality or farce?
Three members of the U.S. Congress have proposed an important bill that could help stabilize the Federal Reserve note, commonly known as the "dollar," for the first time in over 50 years. This bill comes at a time when America is grappling with the dangers of both inflation and bank failures.
Representative Alex Mooney (West Virginia -Republican), along with Representatives Andy Biggs (Arizona – Republican) and Paul Gosar (Arizona – Republican), have introduced a bill called the "Gold Standard Restoration Act" (H.R. 2435), which aims to peg the value of the Federal Reserve note (the "dollar") to a fixed weight of gold bullion. If the bill passes, the U.S. Treasury and the Federal Reserve would have to disclose all of their gold holdings and transactions within 24 months, after which the "dollar" would be officially pegged to the market value of gold. The "dollar" would become fully exchangeable with gold at this price, and the U.S. Treasury would backstop the Federal Reserve Banks as guarantor.
According to some experts, a return to the gold standard would help to reduce the economic damage caused by inflation, federal debt, and instability in the monetary system. Representative Mooney argues that a gold standard would limit the negative effects of Washington's spending habits and prevent the creation of money out of thin air. He believes that this would put the American economy on a more stable footing and protect families and businesses from the whims of the Federal Reserve and reckless government spending.
Historical backing of the US dollar by gold
The United States stopped using the gold standard in 1971, under President Nixon. Before that, the value of the dollar was tied to the value of gold, which meant that the government would exchange dollars for gold at a fixed rate. However, since the abandonment of the gold standard, the value of the dollar is determined by a variety of factors, including economic growth, interest rates, inflation, and global demand for the currency.
US dollar was once backed by gold. From 1900 to 1971, the US government operated under a gold standard, which meant that the value of the US dollar was pegged to the value of gold. Under this system, individuals and foreign governments could exchange their dollars for gold at a fixed rate, which was set at $35 per ounce of gold. The gold standard was intended to provide stability to the US economy and limit inflation, but it also constrained the government's ability to implement monetary policy during times of economic crisis. The US government officially ended the gold standard in 1971, when President Nixon announced that the US would no longer redeem dollars for gold, and the US dollar became a fiat currency.
In 1933, President Franklin D. Roosevelt issued Executive Order 6102, which required all US citizens to turn in their gold coins, bullion, and certificates to the government in exchange for paper currency. The government then set the value of gold at $35 per ounce, effectively devaluing the US dollar by about 40% and giving the government more control over monetary policy.
In 1934, Congress passed the Gold Reserve Act, which authorized the government to issue additional paper currency and increase the amount of gold held by the Federal Reserve. This allowed the government to continue to maintain the gold standard, but with greater flexibility in managing the money supply. While the US government did make significant changes to the gold standard during the 1930s, it was not until 1971 that the gold standard was officially abandoned.
1971 Nixon closing of the “Gold Window” and “The End” of the Bretton Woods era
Closing the gold window refers to the decision made by the United States government in 1971 to suspend the conversion of US dollars into gold. Under the Bretton Woods Agreement, which was signed in 1944, the US agreed to fix the exchange rate of the US dollar to gold at $35 per ounce, and other countries pegged their currencies to the US dollar. This created a system in which the US dollar effectively became the world's reserve currency, and countries held large amounts of US dollars in their reserves.
However, in the 1960s, the US began running large trade deficits, which led to an outflow of gold from the US. This put pressure on the US government to maintain the fixed exchange rate of the US dollar to gold, and in 1971, President Nixon announced that the US would no longer redeem US dollars for gold. This effectively ended the Bretton Woods system and the gold standard, and the US dollar became a fiat currency, meaning its value is not backed by a commodity like gold. Closing the gold window was a significant event in the history of international finance and marked the end of an era in which the value of currencies was tied to the value of gold. It paved the way for a more flexible exchange rate system and allowed countries to adopt independent monetary policies.
How much gold was needed to back the dollars in circulation?
Prior to 1971, the US dollar was backed by gold held in the US Treasury at a fixed rate of $35 per ounce of gold. The amount of US dollars in circulation that were backed by gold varied over time, as the money supply grew and the amount of gold held by the government changed. At the end of World War II, the US held a significant amount of the world's gold reserves, which allowed the US to effectively use the dollar as the world's reserve currency. However, as the US ran trade deficits and the amount of dollars in circulation grew, the amount of gold held by the US Treasury declined.
According to data from the US Treasury, in 1959, the amount of gold held by the US government was 691 million ounces, which was sufficient to back the amount of dollars in circulation at the time. However, by 1971, the amount of gold held by the US government had declined to around 276 million ounces, while the amount of dollars in circulation had grown significantly. This meant that the US government would have been unable to redeem all of the dollars in circulation for gold at the fixed rate of $35 per ounce.
As a result, in 1971, President Nixon announced the end of the gold standard and the suspension of the convertibility of US dollars into gold, effectively making the US dollar a fiat currency not backed by gold.
How many countries prior to 1971 “custodied” their gold with the US government?
Prior to 1971, many countries held their gold reserves with the US government, which served as a custodian of gold for the international community. The US government held a significant portion of the world's gold reserves at the time, as many countries had converted their US dollar reserves into gold under the Bretton Woods Agreement. According to historical data, the US government held gold reserves for more than 40 countries during this time, including major economies such as France, Germany, and Italy. In fact, the US government held approximately 70% of the world's official gold reserves in 1960, which gave it significant influence over the international monetary system.
Under the Bretton Woods system, other countries held US dollars as a reserve currency, which they could convert into gold at a fixed rate of $35 per ounce. However, as the US trade deficits and budget deficits grew, there was an outflow of gold from the US, which put pressure on the US government to maintain the fixed exchange rate of the US dollar to gold.
Did the US give the gold back?
After the Bretton Woods system ended in 1971 and the US government closed the gold window, it continued to hold gold reserves for other countries. However, some countries did request the return of their gold holdings, and the US government eventually agreed to return the gold. In 1971, when President Nixon announced the suspension of the convertibility of US dollars into gold, many countries became concerned about the value of their US dollar reserves and began requesting the conversion of their dollars into gold. At the time, the US government held significant amounts of gold reserves for other countries, and there was a fear that the demand for gold could lead to a depletion of US gold reserves.
To address this concern, the US government negotiated with other countries to limit the conversion of US dollars into gold and to allow for a gradual transition away from the gold standard. However, as pressure mounted, some countries, such as France and Switzerland, began demanding the return of their gold holdings from the US government.
Over time, the US government agreed to return the gold holdings to these countries. For example, in 1971, Switzerland requested the return of its gold holdings, and in 1973, the US government agreed to return the gold. In 1974, France made a similar request, and the US government returned its gold holdings to France in several installments over the next few years. Overall, while the US government did continue to hold gold reserves for other countries after the end of the Bretton Woods system, it eventually agreed to return the gold holdings to those countries that requested it.
Is the story about France sending warships to US shores to get its gold back from the US government true?
After the US government suspended the convertibility of the US dollar into gold in 1971, France demanded the return of its gold holdings. Negotiations between France and the US government were reportedly difficult, with France insisting on receiving its gold holdings in full and at a fixed exchange rate of $35 per ounce.
There are different versions of the “French Warship” story, but it is true that France demanded the return of its gold held by the US government in the early 1970s after the Bretton Woods system collapsed, and negotiations were not always smooth.
According to some reports, in 1965, French President Charles de Gaulle expressed concerns about the large US trade deficit and the possibility of a devaluation of the US dollar, which prompted France to demand the conversion of its dollar reserves into gold. Over the following years, France continued to convert its dollar reserves into gold, and by 1971, France held a significant amount of US gold reserves.
Some reports suggest that France's demand for the return of its gold holdings prompted the US government to send a military transport plane to France in 1971 to return the gold. However, other reports suggest that the gold was returned through other means, such as via a commercial flight.
There is also a story that France sent a warship to the US to demand the return of its gold holdings. However, this story appears to be a myth, as there is no evidence to support it. In any case, while negotiations between France and the US government were reportedly difficult, the US eventually agreed to return France's gold holdings, and the gold was returned over several years in several installments.
Were some countries never made whole?
There are some countries that held their gold with the US government and have not yet received all of their gold holdings back. One example is Germany, which holds a significant amount of gold reserves that are stored outside of the country, including with the US government. According to reports, as of 2021, Germany had approximately 1,236 tonnes of gold stored with the US government, which represents about 40% of its total gold reserves.
In recent years, there have been some calls in Germany for the repatriation of its gold reserves held by the US government. In 2013, Germany announced a plan to repatriate some of its gold holdings from the US and France, with the goal of bringing back 50% of its gold reserves to Germany by 2020. However, the process has been slower than initially planned, and as of 2021, it was estimated that only about 30% of the planned repatriation had been completed.
There are also other countries that hold gold reserves with the US government, such as Italy and the Netherlands. While these countries have not expressed a desire to repatriate their gold holdings, there is always a possibility that they could request the return of their gold in the future.
Overall, while some countries that held their gold with the US government have received their gold back, there are other countries that still hold gold reserves with the US government or have only received a portion of their gold holdings back.
The exact number and quantity of countries that still hold their gold reserves with the US government is not publicly disclosed. However, according to some reports and estimates, some of the countries that still hold their gold with the US government include:
Germany
Italy
Netherlands
Austria
Belgium
Japan
Switzerland
South Korea
United Kingdom
Australia
Portugal
Canada
It's worth noting that these countries may hold gold reserves with other central banks or store their gold domestically as well. Additionally, the exact amount of gold reserves held by these countries with the US government is not publicly disclosed.
Is it realistic to back the US dollar by gold today?
Since 1971 the US dollar has been a fiat currency that is backed by the faith and credit of the US government, rather than by gold or any other tangible asset. The value of the US dollar is determined by a variety of factors, including economic fundamentals, geopolitical developments, and market sentiment. The US government and the Federal Reserve Bank use monetary policy tools such as interest rate adjustments and quantitative easing to manage the value of the US dollar and maintain price stability.
In my view it is possible to back the US dollar by gold, but it would not be realistic or practical to do so today. There are several practical reasons why it is not realistic in today's economy. First, the amount of gold available is limited, and it would not be able to keep up with the growing demand for currency. Second, backing the US dollar with gold would require the government to hold large amounts of gold reserves, which could be costly and impractical.
Additionally, a gold-backed currency would not necessarily solve the economic problems that fiat currencies face, such as inflation or economic recessions. In fact, tying the value of a currency to gold could limit the ability of the government to use monetary policy to stabilize the economy during periods of economic volatility.
To calculate how much gold would be needed to back all dollars in circulation, we need to first determine the total value of all US dollars in circulation. According to the Federal Reserve, as of February 2022, there were approximately $2.1 trillion worth of Federal Reserve notes in circulation.
To determine how much gold would be needed to back all of these dollars, we need to divide the total value of the dollars by the current price of gold. As of April 2023, the price of gold is approximately $2053 per ounce.
To determine the amount of gold needed to back 2.1 trillion dollars in circulation, we need to use the current price of gold to calculate the value of the gold reserves required.
First, we need to convert 2.1 trillion dollars into ounces of gold. To do this, we divide 2.1 trillion by the current price of gold per ounce:
2.1 trillion dollars / 2053 dollars per ounce = 1,024,542,084.19 ounces of gold
So, we need over 1 billion ounces of gold to back 2.1 trillion dollars in circulation.
Next, we can convert this amount back into a more recognizable measurement. One troy ounce of gold weighs 31.1 grams, so we can multiply the number of ounces by 31.1 to get the weight in grams:
1,024,542,084.19 ounces x 31.1 grams per ounce = 31,864,422,275.29 grams of gold
That's almost 31.9 billion grams of gold required to back 2.1 trillion dollars in circulation, assuming a gold price of 2053 dollars per ounce.
This is a significant amount of gold, and it would far exceed the amount of gold that is currently held by the US government. According to the US Treasury, as of April 2023, the US government holds approximately 261 million ounces of gold, which is about 1/4th of what would be needed.
It's worth noting that returning to a gold-backed currency system is unlikely at this point, as it would require a significant overhaul of the existing monetary system and would have far-reaching economic and political implications.
How many ounces of gold are there in the world and could the US acquire or mine the gold needed?
The total amount of gold that has been mined throughout human history is estimated to be around 197,576 tonnes, or 6.34 billion troy ounces. However, it is important to note that not all of this gold is currently available for investment or monetary purposes, as a significant amount of it is held in the form of jewelry or industrial use, and some has been lost or destroyed over time. Hopefully the US government does not go around confiscating gold crowns to back the dollar with gold again.
Additionally, the amount of gold that is economically recoverable depends on a variety of factors, including the cost of extraction and the availability of deposits. As such, it is difficult to determine an exact figure for the total amount of gold that is currently available for investment or monetary purposes.
But could the government just mine the gold needed?
The stock-to-flow ratio of gold is a measure of the total amount of gold that has been mined (the stock) relative to the annual production of new gold (the flow). According to data from the World Gold Council, the total amount of gold mined as of 2021 was approximately 200,000 tonnes, or 6.43 billion troy ounces. The annual production of new gold varies from year to year, but it is typically around 3,000 tonnes, or 96.45 million troy ounces.
Using these figures, we can calculate the stock-to-flow ratio of gold as:
6.43 billion troy ounces / 96.45 million troy ounces per year = 66.67
This means that it would take 66.67 years of current gold production at current levels to mine the same amount of gold that currently exists in the world. The high stock-to-flow ratio of gold is one reason why it is considered a valuable and precious commodity. It would take 10 years of all gold production all over the world to back the dollar with newly mined gold, that is also based on the price of gold without government intervention.
How much gold is available in the world for monetary purposes and could US government take the gold back from other countries?
According to the World Gold Council, as of April 2021, the total amount of gold held by central banks and other financial institutions was approximately 35,197 tonnes, or 1.13 billion troy ounces. This represents around 17% of all the gold that has been mined throughout history.
According to the World Gold Council the largers hoarders of physical gold are:
United States: 8,133.5 tonnes
Germany: 3,362.4 tonnes
Italy: 2,451.8 tonnes
France: 2,436.1 tonnes
Russia: 2,295.4 tonnes
Other countries with significant gold reserves include China, Switzerland, Japan, India, and the Netherlands. These countries hold gold for various reasons, including as a store of value, a hedge against inflation or currency fluctuations, or as a means of diversifying their foreign exchange reserves.
It's important to note that the amount of gold held by central banks can fluctuate over time, as these institutions may buy or sell gold depending on economic and political factors. Additionally, not all of this gold is necessarily available for investment or monetary purposes, as some central banks may hold gold for other reasons, such as national security or cultural significance.
Short of a threat of war it would be difficult to force other countries to release their gold to the United States as world’s central banks use the gold on their balance sheets for reserves and currency stabilization.
Are others countries and jurisdictions backing their currencies by gold?
There are some countries that are partially baking their currencies by gold or piloting the idea. China, which has been increasing its gold reserves in recent years and is believed to be gradually moving towards a gold-backed currency. However, China has not made any official announcement regarding such a move.
Another example is Russia, which has also been increasing its gold reserves in recent years and has discussed the possibility of a gold-backed currency in the past. However, it has not implemented such a system to date.
In addition, there are a few small countries and territories that have adopted a gold standard or a partial gold standard, such as the Isle of Man and the British Virgin Islands.
UAE (United Arab Emirates), which is a country located in the Middle East. It is a federation of seven emirates, which are Abu Dhabi, Dubai, Sharjah, Ajman, Umm Al Quwain, Ras Al Khaimah, and Fujairah.Auric is a gold-backed cryptocurrency that is designed to be pegged to the spot price of gold and provide a stable, low-volatility alternative to other cryptocurrencies. It is backed by gold held in a secure vault in the UAE, and users can redeem their Auric tokens for physical gold at any time.
The UAE also launched a silver-backed cryptocurrency called "AgAu" in 2019, which is pegged to the spot price of silver. In addition, some smaller countries or territories have introduced or considered introducing precious metals-backed currencies. For example, the island nation of Nauru briefly issued a gold-backed currency called the "Nauru Gold Dollar" in the 1970s, and the Canadian province of Alberta has considered introducing a silver-backed currency in recent years.
While Auric has been promoted as a new and innovative use of gold in the digital age, it remains to be seen how widely it will be adopted or whether it will have a significant impact on the global monetary system. As of now, there is limited information available about who is currently using Auric or how widely it is being traded.
Conclusion
Returning to the gold standard would require significant changes to the current monetary system and could have far-reaching economic implications. While there are some advocates for the gold standard, many economists and policymakers believe that a fiat currency system, backed by the full faith and credit of the US government, provides greater flexibility and allows for more effective management of the economy. Throwing around papers suggesting a return to gold standard may prove much easier than actually doing it.
I write -> you decide!
