Making the Transition to a New Gold Standard

11 Pages Posted: 6 Apr 2013

See all articles by Lawrence H. White

Lawrence H. White

George Mason University - Department of Economics; George Mason University - Mercatus Center

Date Written: June 15, 2012


Suppose for the sake of argument that we all agree to the following proposition: If we could change the monetary regime with zero switching cost, merely by snapping our fingers, we would prefer the United States to be on a gold standard. In the most general terms, a gold standard means a monetary system in which a standard mass (so many grams or ounces) of pure gold defines the unit of account, and standardized pieces of gold serve as the ultimate media of redemption. Currency notes, checks, and electronic funds transfers are all denominated in gold and are redeemable claims to gold. We then face the question: What would be the least costly way for the United States to make the transition to a new gold standard? We need to choose a low-cost method to ensure that the agreed benefits of being on the gold standard exceed the costs of switching over.

Two transitional paths suggest themselves (1) let a parallel gold standard grow up alongside the current fiat dollar, and (2) set a date after which the U.S. dollar is to be meaningfully defined as so many grams of pure gold. This second, more conventional path, was followed after the suspension of the gold standard during the U.S. Civil War. It is more commonly described as establishing an effective parity stipulating so many dollars per fine troy ounce of gold. In our present situation, where Federal Reserve liabilities (book entries and currency notes) and Treasury coins constitute the basic dollar media of redemption for bonds and commercial bank liabilities, that implies converting the Federal Reserve System’s liabilities and the Treasury’s coins into gold-redeemable claims at so many grams of gold per dollar (or equivalently so many dollars per ounce of gold).

We see analogs to these two transitional paths when we observe how two countries have made the transition to using the U.S. dollar. In Ecuador in 1998-2000, a parallel unofficial U.S. dollar system emerged as the annual inflation rate in the local currency rose from low to high double digits, then to triple digits. The private sector of the economy was already heavily dollarized when the plug was finally pulled on the heavily depreciated local currency unit in 2000. In El Salvador in 2001, the government chose to permanently lock in the dollar value of the currency — by switching from a dollar-pegged exchange rate to outright adoption of the U.S. dollar — while inflation was low and the local currency still dominant. In a nutshell, when the official switch to the harder currency came in Ecuador, it was an act of necessity in the midst of a hyperinflation crisis. In El Salvador it was an act of foresight, to rule out such a crisis.

Keywords: gold standard, international monetary system, U.S. monetary reform, U.S. money supply, U.S. dollar, Federal Reserve Bank, exchange rates, fiat currency

JEL Classification: N12, E42, E52, E58, E60

Suggested Citation

White, Lawrence H., Making the Transition to a New Gold Standard (June 15, 2012). Cato Journal, Vol. 32, No. 2, 2012, Available at SSRN:

Lawrence H. White (Contact Author)

George Mason University - Department of Economics ( email )

4400 University Drive
Fairfax, VA 22030
United States

George Mason University - Mercatus Center ( email )

3434 Washington Blvd., 4th Floor
Arlington, VA 22201
United States


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