Changing Planet

Greening the Gold Standard

As the price of gold reaches an all-time high and some ask us to go back to Fort Knox in considering our banking system, we need to consider some essential historical questions. Why did gold acquire such prominence in economic policy during the age of scientific discovery and industrialization? Why was gold then abandoned as a monetary anchor, and why is it now again being considered seriously as the ultimate asset? The discourse on gold and its linkage to monetary policy tends to be highly polarized. Yet proponents and detractors have not adverted to the ecological aspects of gold’s potential comeback. As we unravel the history of the gold standard, some insights about monetary discipline can be traced back to incipient ecological constraints. Variations on the gold standard and its underlying assumptions  could indeed provide a solution to the economic and ecological profligacy of Homo economicus.

Origins of the Gold Standard

The rise of the gold standard can be traced back to the work of a scientist of no less eminence than Sir Isaac Newton, who also had the distinction of serving as the “Master” of the Royal Mint and was also fascinated by the alchemist’s desire to turn lead into gold. The elemental quality of gold as a rare and durable primary resource may have played some role in Newton’s championing of the gold standard, particularly in comparison to its more reactive competing metal – silver. The popularity of silver as a currency was largely due to the abundant stocks of the metal that were discovered in South America by the Spaniards, particularly in the mines of Potosi (in present-day Bolivia) which continues to be a region of ecologically questionable mineral extraction.

Environmental factors during the heyday of the gold standard were hardly a consideration. Indeed to many the proclivity for gold was as “natural” as evolution, and during the height of the nineteenth century gold rushes the imagery of evolution was often used to promote the gold standard as opposed to other metals and materials.   In contrast, those who opposed the gold standard also tried to “denature” the image of gold by showing that it was only representative of perceptions of value and did not have any inherently useful quality. The critics of the gold standard represented gold as sterile compared to, say, a seed planted by a farmer that could accumulate value as labor and nutrients gave it intrinsic worth as a vital form of nourishment. Yet the primacy of gold and the rush to find it endured even this line of critique.


Gold Rush and Beyond

Celebrated chronicler of the Klondike gold rush, Jack London, conceded in his back-of-the-envelope cost benefit analysis that the miners had probably invested over $220 million dollars to build infrastructure and sustain themselves in order to dig up around $22 million of gold. Yet to him, this calculation at the turn of the twentieth century was still weighted in favor of the yellow metal’s worth. He noted still that this monumental effort was still of “inestimable benefit to the Yukon country,” because “natural obstacles will be cleared away or surmounted, primitive methods abandoned, and hardship of toil and travel reduced to the smallest possible minimum.”

Gold was almost universally valued, but there were some rare exceptions to the rule. In highly resource scarce communities, such as the desert tribes of the Sahara, the mineral commodity of choice was not an inert metal like gold but a compound formed by one of the most reactive metals in the periodic table – sodium. Peter Bernstein describes the comparison between gold and salt in the eyes of the Saharan tribesmen: “What must those poor diggers have thought of the funny people from the North country who swapped inestimable salt for stuff whose only role was to give men pride and pleasure by letting them see its luster.”

Unlike salt, gold was not a physical mineral necessity for human survival.  Nevertheless, its durability made it highly attractive as a standard for monetary exchange. Like silver, gold coins were at times used as currency, but it was impractical to use them on a large scale with various denominations. Hence the move towards some form of centralized acquisition of gold at banks. Following Newton’s earlier interest in gold, there was a period of uncertainty worldwide until huge reserves of gold were discovered in Southern Africa towards the end of the nineteenth century. The United States instituted the gold standard during a similar period of gold obsession. From 1834 onwards, gold was considered alongside silver as a standard reserve metal in monetary policy with a fixed price of gold set at $20.67 per ounce – which remained in force until 1933.

During this period, there was a global resurgence in the primacy of gold, particularly towards the end of the nineteenth century due to gold rushes worldwide.  These rushes fueled phenomenal growth in various industrial sectors and paved the way for many other sectors of the economy to develop. Gold rushes created capital flows which allowed for investment in many other sectors of the economy. Economic historians Paul David and Gavin Wright also contend that in the larger scheme of things the rush towards minerals also laid the foundations for lasting development and diversification in ways that are often neglected in contemporary research: “Rapid resource extraction in America was also associated with an ongoing process of learning, investment, technological progress and cost reduction, generating a many-fold expansion rather than depletion of the nation’s resource base.”


The Arguments Against Gold

The arguments against the gold standard have been predicated on how it limits the range of policy tools dealing with extenuating circumstances, such as the needs of a wartime economy. Following World War II, the Bretton Woods agreement, which created the World Bank and related financial institutions, recognized the salience of gold by keeping a reserve currency system, albeit with a variable price of gold.  Following the Vietnam War, President Nixon withdrew from the international gold exchange standard completely. The US dollar itself became trustworthy enough in the eyes of the international community for it to be liberated from the shackles of gold. However, these shackles are precisely what many current proponents of the gold standard consider so compelling.

The gold standard has the potential to instill discipline in monetary policy and can prevent governments from wantonly printing money and causing inflation. The standard can also prevent governments from overspending and creating huge deficits – hence its current popularity with many in the Tea Party movement. However, it is not just those who resist according power to centralized government banks who are championing the gold standard again. In May, 2011, the Mexican government announced that it was buying $4 billion worth of gold to boost its reserves and provide economic security. Such international confidence has raised the price of gold to an all-time high and the potential for a comeback of the gold standard in some form deserves serious revisiting.


Gold and the Environment

From an ecological perspective, the gold standard has the attraction of linking economic growth to natural resource constraints, a linkage that has been a recurring theme in much of ecological economics discourse (Read “The Real Price of Gold” from National Geographic Magazine). However, the environmental impact of mining gold is so intense that any support for resurrecting the gold standard is summarily dismissed by many activists. For example, each ounce of gold produces 30 tons of waste, and the US EPA estimates the cost of cleanup for existing metal mines to be around $54 billion. However, it is important not to conflate gold mining with the gold standard in terms of the discussion of sustainability.

Given the durability of gold and its ease of recycling, the gold standard can in principle be maintained without having to mine more gold. Furthermore, if gold is being used as a reserve in and of itself, the main issue of consequence is property rights over the gold. If there were international consensus on the global gold reserves still in the ground, then trade and ownership of such reserves could also be handled through an international treaty system that regulates ownership of gold reserves, rather than through physical extraction. For example, if the world’s total gold deposits could be centrally certified and shares issued for buying these reserves, the same purpose could be served as stockpiling gold in a vault.  In other words, a nation’s gold reserves could remain “stored” in their natural underground state, rather than being mined, purified, and deposited in a Fort Knox-like vault.

Some discounting factor could be added to account for the accessibility of certain deposits versus others and countries which have gold on their land could get preferred purchase rights to the shares similar to how company founders or employees have preferred stock options. While this would be environmentally preferable to the present system of mining and storage, ecological economists would be right to ask: why not simply anchor currency to some other metric of planetary carrying capacity which could be considered in the same way?  Perhaps a “leave it underground” approach to gold could be a first step on the road to considering more ecologically benign means of storing and measuring “wealth.”

The gold standard has a checkered history in terms of its overall efficacy in economic development but there is little doubt that we need to instill some discipline within our financial institutions. Historically, gold mining and the gold standard have contributed to a great deal of ecological devastation.  However, they have also contributed to the great enterprise and economic growth of the modern era. The gold standard unwittingly acknowledged the connection between monetary power and natural resource reserves, which constitute the core of many contemporary environmental ideologies. While the earlier proponents of the standard did not envisage this connection, the “discipline” they sought was the result of the natural limits of gold extraction and the underlying finite gold reserves.

Current conversations about resurrecting the gold standard should focus on this underlying presumption of the standard. Indeed, such an approach may help to also bridge the perceived tension between environmentalists and conservative politicians and economists. The take-home message remains that the salience of a gold standard for financial discipline is due not only to the nature of gold itself but is a product of the fact that gold is a relatively scarce natural resource with the persistent allure of durability. Revisiting a hybrid form of the gold standard paradigm, as suggested here, could provide a potential solution to dealing with the challenge of excessive public and private sector consumption within a capitalist framework.

Saleem H. Ali, a professor of environmental studies at the University of Vermont, is a National Geographic Emerging Explorer for 2010 and author of Treasures of the Earth: Need, Greed and a Sustainable Future (Yale University Press). He can be followed on Twitter @saleem_ali.

Saleem H. Ali is Blue and Gold Distinguished Professor of Energy and the Environment at the University of Delaware (USA) and a Professorial Research Fellow at the University of Queensland, Australia. He is also a Senior Fellow at Columbia University's Center on Sustainable Enterprise. Dr. Ali is a National Geographic Emerging Explorer for 2010 and World Economic Forum "Young Global Leader" (2011). His books include "Environmental Diplomacy" (with Lawrence Susskind, Oxford Univ. Press) and "Treasures of the Earth: Need, Greed and a Sustainable Future" (Yale University Press). He can be followed on Twitter @saleem_ali.
  • Shakeel

    What reason other than tax easvion could there be for Goldman Sachs Group to set up three subsidiaries in Bermuda, 5 in Mauritius 15 in Cayman Islands? Why did Countrywide Financial need 2 subsidiaries in Guernsey? Why did Wachovia need 18 subs in Bermuda, 3 in the British Virgin Islands, and 16 in the Caymans? Why did Lehman Brothers need 31 subs in the Caymans? What do Bank of America’s 59 subs in the Caymans actually do? And AIG, why does it have 18 subsidiaries in tax-haven countries?

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