Is gold standard viable in today’s economy?

Many of us know the problems of fiat currency. Governments keep printing paper money or issuing credit directly electronically. In this way, wealth transfers to governments or entities having influences over governments, no matter how hard the rest of us work. 

Because fiat money robs power and wealth from the majority of people, some people advocate the return, or adoption of the gold standard. Is gold standard viable in today’s economy?

Currently, there are around 200,000 tons of gold in the whole world. Each ton of gold roughly worth 40 million dollars. Total gold value worldwide is about 8 trillion dollars. Worldwide GDP in 2018 is around 80 trillion dollars. So total gold value is roughly 1/10 of annual GDP. 

Today, money supply to GDP varies in each country. In US, M2/GDP is about 0.7. In China, M2/GDP is about 2.2. They are all much higher than 1/10, the gold/GDP ratio. If gold standard is adopted, gold price will be much higher, much higher than its production cost. It will cause tremendous wealth redistribution, making wealth concentrated in those with gold. 

If so, why gold standard worked in the past? Current global GDP growth is above 3%, annual gold output is less than 1.5% of total gold available. Assume these growth rates are representative of the past century. This would indicate overall economic growth rate doubles the growth rate of total gold. This means in the past, the sizes of GDP and amount of gold were more compatible. With time, the size of overall economy became larger compared with the size of gold reserve. This was one reason why the gold standard broke down in 1971, under enormous pressure of gold price increase. Since then, gold price has moved from 35 dollar an ounce to over one thousand dollars. Gold standard was untenable in 1971. It is much less tenable today.

Even at earlier age, gold standard was maintained on precarious foundation. In 1933, it became illegal for any US citizen to own gold. This is to ensure governments own all the gold. At that time, authorities must have realized already the supply of gold is very small, compared with the size of economy. To maintain gold standard, it was essential for the governments to maintain monopoly ownership of gold. 

If the gold standard is untenable in today’s economy, will fiat currency tenable over long term? Of course not. No system lasts forever. But this is not the reason to switch to an even less tenable system.