Gold Binding and Monetary Policy: Why National Gold Standards are Problematic for Great Powers

The idea that a country could exit the paper money system and link its currency to gold is undoubtedly an extremely unpleasant scenario for politicians and advocates of large political units. It is a scenario that many consider a nightmare because it controls their own currency and monetary policy in the hands of the market and individualdecisions instead of leaving them to central institutions. But why is that? Why do politicians and governments consider gold binding of their currency as potentially dangerous to their power and their influence?

Gold standard versus paper money: The risks for large political units

At first glance, it could be irrelevant for the European Union, the United States or other large states if, for example, Norway, as a non-Euroland, binds its national currency to gold. In this case, the Norwegian crown would gain significantly in value against the euro and the US dollar. For Norway, this means that the prices of Norwegian products would beForeign buyers are rising significantly, which could lead to a drastic decline in exports. As a result, the competitiveness of the Norwegian economy would suffer significantly and the country’s prosperity could be at risk.

Self-damage from gold binding? Why it affects the others

Many therefore argue: “What does the EU, the USA or the European Central Bank take care of when Norway introduces a gold bond?” But this view is not enough. The truth is that a strong gold bond in a small country that wants to assert itself in the international markets can have global effects. A vivid example of why suchGold binding for small states is problematic, the events in Switzerland offer in the 1990s.

Swiss gold reserves and the political tensions of the 1990s

In 1992, Switzerland joined the International Monetary Fund (IMF). At this time, the Swiss National Bank had 2,590 tons of gold. That was the fourth largest gold reserve in the world at the time – a considerable amount for a comparatively small country. For Switzerland, this meant: a significant fortune that strengthened the stability and perception of the currency. but theBackground to the accession to the IMF is not fully transparent to this day. There is a presumption that the government either obscured the actual motives or was not fully aware of the scope of their decisions. Although Switzerland traditionally adopts a neutral stance, the government actively sought to be more inclusive in the internationalcommunity. The goal was to position Switzerland internationally and to protect its economic interests. However, the country also went in a direction that later led to considerable political tensions.

The IMF’s mission and the problem of gold binding

Let’s consider the goals of the IMF as set out on its official websites: The IMF was founded to promote international currency cooperation, increase global trade growth and ensure the stability of exchange rates. The stability of the exchange rates is a central concern. But it is precisely this stability that becomes considerableDifficult to maintain gold bonding of their currency while others do not have such a bond. If a country – like Switzerland back then – has gold backing its currency, while other countries use free-flowing, fiat-based currencies, an imbalance develops. The country without gold cover is much more flexible in its monetary policy, can make more moneyprint and thus react to economic shocks. The gold-bonded country, on the other hand, is restricted by the gold stock limit.

The consequences of gold binding: devaluation and debt policy

In such a scenario, the country’s currency without gold cover tends to be devalued against the gold-backed currency. This is because governments – commonly known – tend to spend more money than they actually have to fund their spending. Without a gold standard, this is easy to do, and this expansion of money inevitably leads to a devaluation of theCurrency. Devaluation is a sensitive issue for politicians. Because it directly reflects the monetary policy failures. The currency becomes visible proof of the debt and spending policy, which is primarily characterized by excessive borrowing and government spending. This devaluation is hardly conveyable for the population, as it reduces the value of the money and thatConfidence in the stability of the currency shaken. There is also a risk that companies will relocate their production abroad because it is cheaper for them to produce there or to keep their savings in more stable currencies.

Legal protection against gold binding: The IMF and the International Rules

In its contracts – the so-called Articles of Agreement – the International Monetary Fund has inserted a passage to prevent countries from binding their currency to gold. This prevents individual states from introducing gold binding that could destabilize the global monetary system. After the Bretton Woods system collapsed at solidFor a long time, Switzerland was the only currency in the world that was still covered by gold.

The importance of Swiss gold reserves and the political attacks

The stability of the Swiss franc, which was further strengthened by its gold binding, made it attractive for investors and savers. In an international comparison, Switzerland had considerable gold reserves, which further increased confidence in the currency. This stability led to the Swiss franc being considered a safe port currency – a property thatmakes a particularly interesting for investors. But it was precisely this strong position that became the target of attacks in the 1990s. The Swiss banks repeatedly found themselves accused of appropriated the assets of Jews who died or were missing in World War II. Although there were extensive voluntary reviews and payments to heirs, the allegations continued. in additionwas accused of the Swiss government of cooperating with Hitler during the Second World War.

The pressure of the international community and the consequences for Switzerland

The international pressure, especially from the USA, was enormous. The allegations and politically motivated pressure led to Switzerland changing its gold policy and selling its gold reserves. If Switzerland had followed a different, stable policy at the time, it would have retained its gold reserves and made its currency even more stable. Today the Swiss Franc still appliesAlways as one of the most solid currencies in the world, not least because of its significant gold reserves and the strong, stable economy. History shows how political and international influences can significantly influence the monetary policy of a small country and why gold bonds remain undesirable for large states who want to secure their power and control.

The influence of gold binding on global monetary policy

Overall, it can be said that a gold binding of a country’s currency – especially a small state – can have significant consequences for international stability and the global economy. Great powers that base their power on manipulating currencies see this as a danger. Control of your own monetary policy is significantly increased by a gold bindingrestricted, which makes them unattractive for large states with extensive economic interests. Switzerland’s experiences in the 1990s, political tensions and international attacks show how fragile and risky such a strategy can be. Only by abolishing gold binding and accepting flexible, fiat-based currencies can aFinding balance that preserves both the stability and flexibility of the global monetary system. For large states, this is a crucial point to permanently secure their economic sovereignty and political power.