What would a return to the gold standard really mean?

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Reform UK published 'Our Contract with You' a while ago, and although the idea is not fully formed, there are hints, including from public statements from Richard Tice MP, that they are toying with the idea of a return to the gold standard. I have been explicitly asked to comment on this, and given the importance of the issue, I am happy to do so.

The idea of returning to the gold standard is pure economic fantasy. It is, however, a fantasy with dangerous consequences, not least because of the increase in inequality that would result in the UK. That needs explanation.

First, the gold standard needs explanation. Under such a system, the amount of money in circulation is linked, and is sometimes directly tied to the quantity of gold a country holds in its reserves. Money, in effect, becomes a token for a fixed quantity of gold, and governments are restricted in the amount of currency they can issue. The result is that the capacity of the state to act flexibly, or even adequately, is bound by the meaningless amount of metal that it possesses, held in a vault.

Second, this has nothing to do with the modern economy. The gold standard was abandoned for good reason: it made democratic management of the economy nigh-on impossible. If money cannot expand with the needs of a growing population and economy, the only way to redistribute or reallocate is through deflation and forced austerity, both of which are deeply harmful. There is no macroeconomic space for discretion under the gold standard: someone must lose for someone else to gain. Everything is a zero-sum game, but the real economy is nothing like that at all. It is dynamic, but the gold standard is linear.

Third, and most crucially, this scarcity promotes inequality. A gold standard might restrict the money supply, but not the number of people, or their needs. As the population increases, or as the economy demands investment, or the government wishes to supply more services, the limited quantity of money would lead to increasing competition for increasingly scarce money because of the deliberately imposed constraint on its availability. Unsurprisingly, those with power and assets, who already have the most money, would win since they would already hold all the aces, and so inequality would grow.

Fourth, this would lead to profound economic and social harm. With limited money available:

  • Investment would slow as interest rates would rise in a scramble for scarce monetary capital.

  • Wages would be suppressed to contain inflation, or worse, to 'restore economic equilibrium', which is itself a meaningless concept.

  • Public services would be slashed because the state could no longer create money to fund them and would instead have to pay heavy interest costs to, in effect, borrow money from the wealthy, or seek to impose tax rates that would create political backlash in the wealthy-owned media.

  • The poorest would be hit first and hardest, because the system would demand they carry the burden of “balancing the books” while the wealth of the asset-owning class remains protected.

Fifth, and it is vital to make this clear, if the gold standard were to be used, economic growth —whether of the sustainable variety or otherwise — would have to be constrained unless new gold was discovered or imported. A totally artificial constraint would prevent it from happening. And if the growth in question were to manage the crisis created by climate change, that too could not happen. Meanwhile, if the population kept growing, as is likely in the UK for a long time to come, this constraint would, on average, mean that real incomes must fall, unless some get more by ensuring others get less. That's the precise mechanism by which inequality is engineered into the gold standard system, as we can only presume that Reform wants by promoting it.

Sixth, none of this is accidental. Those promoting a return to the gold standard do so because they want to restrain the state. They want money to serve the interests of the wealthy, not of society. They want the government to be unable to invest, unable to spend, and unable to redistribute. That is not a bug of the gold standard: it is the point of it, and always has been.

So let me summarise what is at stake here. A return to the gold standard would:

  • Strip the government of its ability to respond to crises, whether economic, environmental, or social.

  • Undermine employment, growth and investment.

  • Institutionalise inequality by embedding scarcity into the monetary system.

  • Empower those with existing wealth at the direct expense of the majority.

This proposal is, then, not only backwards-looking, but it is also profoundly unjust. The gold standard is a system designed to serve the wealthy and disempower democracy. It removes from elected government the tools required to serve people and deliberately hands power back to unelected holders of capital. If we care about equality, justice, or the health of our economy, we must oppose any return to the gold standard. Money is a tool to serve society, not a means to bind it, as Reform suggests it should be.


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