WHEN Prime Minister Dr Mahathir Mohamad made the case for a common East Asian currency pegged to gold at the 25th International Conference on The Future of Asia held in Tokyo in May, many, including Malaysian economists, pooh-poohed his suggestion.

These economists, arguing against the gold standard monetary system, put two reasons forward. First, the shortage of gold bullion to support such a standard. Second, a fiat currency and credit system – also known as the Keynesian floating currency system – is instrumental to current global growth, a phenomenon that the limited supply of gold bullion would not be able to achieve.

Both points have flaws. These economists’ argument concerning a shortage of gold bullion is based on the assumption of a stable supply and stable annual increase of 2% from gold mining. They fail to differentiate between money supply and true gold supply. Officially, the current global gold holding is about 35,000 tonnes. The total amount of M1 (narrow money, or cash and coins, and other money equivalents that are easily convertible to cash, in circulation) for the four largest economies, namely the US, China, Japan and Europe, stood at about US$27 trillion as at April.

The 35,000 tonnes of gold bullion may be stable, but the US$27 trillion, if paired to the gold standard, is not. The value of the dollar fluctuates and adjusts automatically to the economic conditions at any given time. The gold standard system can make available any amount of currency, so long as it is at a fixed parity value. It is based on the principle that all banknotes, coins, and even electronic money, have a value that is equivalent to a specific quantity of gold.

History has shown that the gold standard favours growth. Nathan Lewis made compelling arguments by comparing 42 years of the two different systems. From 1870 to 1912, when the gold standard was in place, growth from industrial production in the US was about 682%. In 1971, then US president Richard Nixon abandoned the gold standard. From 1970 to 2012, the era of floating fiat currencies, growth was only 159%.

It was even worse during the short periods when the dollar’s value fell significantly versus gold. Growth was at 21% in the 12 years from 1970 to 1982, and only 7% from 2000 to 2012. On the other hand, from 1946 to 1970, under the Bretton Woods gold standard system, US industrial production growth rose by 209%.

It is generally agreed that introducing a gold-pegged currency or going back to the gold standard will not be easy. The mechanism for an international exchange has to be worked out. Fixing an appropriate value of the aggregate global money supply, or M1, to gold is challenging, but not impossible. If there are discrepancies in affixing the parity value, problems may arise, as what had happened during the Great Depression from 1929 to 1940.

Critics of the gold standard often use the example of the Great Depression era to argue that growth was stifled because governments were not at liberty to create money in a short period to stimulate industrial activities. Jim Rickards, another proponent of the gold standard, explained that the system failed because it was a gold exchange standard, and not a pure gold standard. He said: “It was a poorly designed hybrid, manipulated and mismanaged by a discretionary monetary policy conducted by central banks, particularly in the UK and the US. The whims of central bankers did not take gold’s free market price into account.”

The world economy, with the fiat currency system, is now at a historic juncture, where neither a monetary nor fiscal policy is able to bring growth. The 2007-2010 US subprime mortgage crisis, and the financial crisis of 2008, which happened at a time when both inflation and interest rates were low, led the Federal Reserve to launch quantitative easing from 2008 to 2014. As the interest rate was then already close to zero, the Fed had to resort to an unconventional monetary policy by purchasing government bonds and other financial assets to stimulate the economy and increase liquidity. The Fed’s balance sheet ballooned to US$4.5 trillion, and globally, increased to US$12.3 trillion. The expansionary policy did not result in growth, but stagnation.

If not for the series of quantitative easing, the US economy – and the world – would have long been in depression. The reverse, quantitative tightening, is now in the unwinding process to remove excess money created in the financial system. The US Fed and European Central Bank have signalled at lowering interest in the months to come. Global M1 is already indicating a contraction. These are signs of recession and depression ahead.

The forces of economic collapse are building up, waiting to explode. The illusory growth riding on the fiat currency system will soon be apparent. By then, there is a likelihood of blood in the streets. Only a return to the gold standard monetary system can restore order and confidence. – July 4, 2019.

* Captain Dr Wong Ang Peng is a researcher with an interest in economics, politics, and health issues. He has a burning desire to do anything within his means to promote national harmony. Captain Wong is also a member of the National Patriots Association.

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.