The Gold Standard

Divide your means seven ways, or even eight, for you do not know what disaster may happen on earth.  
Ecclesiastes 11:1

Gold has been the currency of choice going back to 600 B.C. in what is now modern day Turkey.  Many countries, including the United States have had a gold standard at one time which means that paper currency is backed by gold reserves.  

The U.S. went on a gold standard in 1830.  Winston Churchill, in his storied career as Chancellor of the Exchequer, brought England back to the gold standard in 1925. It was controversial and he was widely criticized for his actions.  

Churchill later said that the “world” thought he was the worst Chancellor of the Exchequer ever. Looking back in 1930, he noted that he agreed with them, so “now it is unanimous”.

America printed its first paper currency in 1861.  In 1900, The Gold Standard Act made gold the only metal for redeeming paper currency and gold’s value was set at $20.67 and ounce.  European countries followed suit in the 1870’s printing money which was backed by its value in gold.

When World War I broke out, the U.S. and European countries abandoned the gold standard so they could print enough money to pay for the war cost.  Post-war, countries returned to a modified gold exchange, but when the Great Depression hit, the United States again abandoned the gold standard.

On April 20, 1933, President Roosevelt ordered Americans to turn in their gold (including jewelry) in exchange for dollars in order to prohibit hoarding and the redemption of gold by other countries. My mother was 24 at the time and remembered this event. 

Since America held the majority of the world’s gold,  most countries simply pegged the value of their currency to the dollar instead of gold. President Nixon terminated the ability to convert dollars into gold in 1971 and changed the fixed price of gold.  

Currencies in the post gold standard are now exchanged based on free markets, with the dollar still the primary reserve currency of the world. That may change in the near future.

The departure from the gold standard is important because now countries can print money without the being limited by how much gold reserves they own. 

Fast forward to today where we face what is called MMT (Modern Monetary Theory) which is a supercharged version of government fiat money. This is the new paradigm.

MMT argues that countries can print as much money as they want without concern of consequences.  While governments should have budgets, they don’t worry about debt because there is no limit to how much money they can print.

You have to understand the gold standard in order to see how far “out” the MMT paradigm is.  Sadly, it is upon us, both in the US and in Europe.  The European Union and the US have reacted to the COVID pandemic by enacting trillion-dollar stimulus packages to prop up their economies. They are literally printing fiat money.

The amount of national debt doesn’t seem to concern politicians – either here or abroad. Mind you this is happening during a time of unprecedented low interest rates and low inflation.

But what happens when inflation returns and interest rates increase?  Under normal circumstances, higher interest rates would cause a reduction in other parts of the federal budget.  

MMT advocates like Larry Summers of Harvard suggest that the new paradigm is that we should ignore the federal deficit and that “government borrowing for the right purposes is prudent.”  It assumes low interest rates for a long time in the future.  I am not so sure.

We didn’t foresee 9/11, nor how the world economy would be devastated by COVID.  Higher interest rates will eventually happen and could be a wrecking ball to the world’s economy.

While there are scholarly articles praising MMT, this is an untested economic theory and a departure from Keynesian economics and its effect on the developing world

What should a Christian do in uncertain economic times like this?  The answer comes from Solomon (above):  Diversify, for you don’t know what disaster “may occur on earth”.  For the next generation, some of whom are caught up in the Robinhood stonk frenzy, they need to learn prudent financial habits to survive in changing economic times.

Millennials, in particular, are caught in the crosshairs. They were recovering from the 2008 recession when COVID changed the job markets almost overnight. 

They need to save for retirement more than earlier generations because their social security benefits will not be the same. The Social Security fund is due to run out of money in the next 14 years. They need to plan for greater resources to get them through a longer life expectancy.

Motley Fool  has an abundance of free information about financial planning, retirement and investing basics. It is a great unbiased resource for the next generation to get sensible advice to help make good financial decisions. As mentors, we can be a Nehemiah in their lives helping them fill holes in their financial walls. 

MENTOR TAKEAWAY:   You don’t have to be a professional financial advisor to help your mentee learn to budget and make sound financial decisions.

FURTHER READINGThe Gold Standard – Loudis

What is Modern Monetary Theory – Likos

World Debt Clocks

5 Facts About the National Debt

5 Problems with MMT

The Upside Down World of MMT –Murphy

Addressing Social Security’s Shortfall – Motley Fool

Millennials Need to Save More if they Want to Retire Like their Parents and Grandparents

If I Could Do It Again: Retiree’s Investing Advice for their Younger Selves – Motley Fool

WORSHHIP: Crowns – Hillsong

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