Gold Revisited

Brief Analyses | Economy

No. 832
Tuesday, August 02, 2016
by Colin Combs

Gold is a useful hedge against inflation and uncertainty, but investing in it speculatively is not always a good strategy. In 2011, the price of gold climbed to historic heights; but since then, it has fallen significantly, though not to pre-Great Recession levels.

Why Do People Care About Gold? For thousands of years, gold has been used as a means of exchange and a store of value. In 1900, the Gold Standard Act guaranteed the convertibility of the U.S. dollar into gold. In 1933, the United States banned private ownership of gold, a prohibition that was not lifted until 1974. Since 1971, the United States has had a pure fiat money system. Today, central banks around the world still hold 18 percent of all the gold ever mined, though no currency is tied to it.

Some policymakers have advocated that the United States return to a gold standard as a way to prevent governments from debasing the currency (that is, inflating). However, many economists, such as Milton Friedman, have warned that such an inflexible regime would deepen recessions by constraining the amount banks are able to lend. This is disputed by some, most notably those in the “Austrian School,” such as F. A. Hayek, who argued lending should be restricted to the amount people save.

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