Gold-backed currency an idea of the past, say economists

Under the Gold Standard, a country’s currency is pegged to its gold reserves. (Bloomberg pic)

KUALA LUMPUR: Economists have panned Dr Mahathir Mohamad’s proposal for a gold-backed currency, saying the idea is “unworkable” and one of a bygone era.

Speaking to FMT, Firdaos Rosli from the Institute of Strategic and International Studies said a gold-backed currency – known as the Gold Standard – only sounds good on paper.

“For the Gold Standard to work again, major economies would have to get the ball rolling, and Malaysia simply cannot do this due to a lack of stockpile and its relatively small economy in the global arena,” he said.

Under the Gold Standard, a country’s currency is pegged to its gold reserves, meaning that the price of gold is used to determine the currency’s value.

It was used by Great Britain and the US until the 1930s, when it was replaced by fiat currency.

Mahathir had said that a currency backed by gold would be more stable and less prone to manipulation than current currency trading.

The suggestion was welcomed by some economists who said it could curtail currency trading and the uncontrolled creation of money by international banks.

Firdaos said there are benefits to a gold-backed currency but cautioned that Malaysia does not have enough gold reserves for this even in the event that major powers opt for such a system.

He said the world economy had grown on credit, not gold, following the global financial crisis.

He also said gold would not be relevant today as no one can predict how much they will be able to accumulate.

He warned against using past strategies to guide future endeavours, saying the world today is very different.

“For example, if we had another financial crisis, would we be able to peg the ringgit to the US dollar as was done two decades ago? It would be detrimental to us in more ways than one,” he said.

Yeah Kim Leng from Sunway University Business School agreed that it would be difficult to see the world returning to the Gold Standard.

He, too, noted the gold reserves that countries must have to use the system, saying this is why it was ditched by the likes of the US.

“If the government wanted to print more money than it had reserves, its hands would be tied. Governments want the freedom to print more money,” he said, adding that this allows them to stimulate the economy and increase spending.

“Going back to the Gold Standard means governments won’t be able to spend beyond their means.”