What if the United States had to pay its debt in gold?

In the old days, before the monetary reforms of the 20th century...notably, Richard Nixon's unilateral decision to renege on America's promise to pay its bills in gold...countries had to settle up with each other in the yellow metal. The system worked well; it was reliable; it prevented bubbles. Edward Chancellor explains:

"A country had to pay for its imports or foreign investments with money gained from a surplus on trade. If more money was sent abroad than had been earned through exports, then gold would be packed onto ships to discharge foreign creditors. A declining stock of bullion would induce the central bank to raise interest rates in order to attract gold from abroad. Rising rates would produce a credit contraction, unemployment and general economic misery. The typical nineteenth century was severe, but short- lived."

Then came the improvements. And the Great Depression. And now we are faced with another one.

Governments are fighting this one...just as they did the last one...but with much more money. The cost is in the trillions - most of it in the form of public debt. How will these debts be paid? We all expect that they will ultimately be eased by inflation - in full or in part. But suppose the feds had to pay up in real money?

Colleague Simone Wapler compared government debt to government gold. The United States has gold worth about $241 billion, she reports. Its official national debt is $11.5 trillion. That gives it a debt/gold ratio of 48 - meaning; the feds have 48 times as much debt as gold.

Britain is even worse. Prime Minister, then Chancellor, Gordon Brown sold much of England's gold at the worse possible moment - about 10 years ago. This leaves the island with only $9 billion worth of gold compared to $1,274 billion of government debt - a ratio of 1 to 139. But Japan is the worst of all. It has $23 billion worth of gold and $7.3 trillion of government debt, for a ratio of 1 to 323. (Of course, Japan has vast holdings of dollars too!)

What nation has the best gold/debt ratio? Switzerland. It has only twice as much in government debt as it has in gold.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia