The benefits of the current system, say central bankers, is that in times of trouble they can take remedial action, they can lower interest rates which encourage people to spend rather than save – which gives a boost to economic activity.
Detlev Schlichter says giving this sort of power to the monetary authorities is part of the problem, because it only postpones a financial crisis:
“The present system is a policy tool. It allows the central bank and by extension the state to manage the economy. It creates near-term booms but we pay for them with a big hangover at the end of the boom.”
If we had stuck to the gold standard, it is probably true we would not be in the mess we are today.
Yes, our economy would be much smaller – but perhaps its foundations would be more solid if the only money in circulation was money that tied to something tangible like gold.
But in a world where monetary systems are controlled by central banks and governments, would a return to the gold standard work?
“You can’t force a government to stay on gold, so therefore gold has no credibility,” says Lord Lawson, chancellor of the exchequer in the 1980s under Margaret Thatcher.
“Because [leaving the gold standard] has happened in economic history on many occasions, gold no longer exerts that discipline.”
Countries have indeed abandoned gold when the going got tough – as they did in the 1930s and the 1970s. So if currencies did return to the gold standard, it might please the so-called “gold bugs” who have lost faith in paper money – but equally, it might introduce a new wave of sceptics, for whom the golden ring of trust has already been broken.
Listen to the full report on Analysis on BBC Radio 4 on Monday, 2 July at 20:00BST and Sunday, 8 July at 21:30BST. You can listen again on the Radio 4 website or by downloading the podcast.
