When people are convinced of the superiority of a gold standard system – not too hard considering its 500 years of real-world success – they then ask: how do we get there from here?

In principle, it is easy. We could have a world gold standard system up and running in 24 hours. It is just a matter of adjusting the monetary base according to a gold target, rather than a Keynesian interest rate target.

The Keynesian establishment, now in control of central banks and academic departments worldwide, just has to say: “OK, you were right and we were wrong. Let’s go back to a gold standard system right away.”

Doesn’t seem very likely, does it? Alas, in the best practical scenario, we are likely to have a tumultuous transition period, which is necessary to shift the political consensus from one of “the present system is good enough,” to “anything but this!”

At present, the best transition path that I see is for the introduction of parallel gold-linked currencies, circulating alongside today’s existing fiat currencies. This was proposed just recently by a conservative portion of the Swiss parliament. Also, it is the basic idea behind the “gold dinar” project promoted by the Malaysian government, which has been in nascent operation since 2004. We are already moving along this path.

There would be no need for a government to make some dramatic decision. Just make the option available and let people choose for themselves.

By the end of next year, I would like to see the introduction of gold-linked paper currencies. The Swiss government, or a private organization with government endorsement, might make available for sale a simple gold-linked banknote denominated in a unit worth perhaps one-thousandth of an ounce of gold (or about $1.60 in U.S. dollars today). You could redeem a thousand of them for a one-ounce gold coin similar to a Krugerrand. Ideally, you could trade your fiat paper currencies for these gold-linked currencies at any bank that offers foreign exchange services.

These gold-linked currencies would be totally voluntary, and would trade alongside existing fiat currencies.

At first, they might seem like mostly a precious metals investment product, a speculative vehicle, sort of like trading paper shares in a gold ETF. However, they would be legally treated as a currency, without any trading-related taxes.

The first impulse might be just to store them in a shoebox, like any gold coin. But, at some point, people might like to buy something with this alternative currency. Or, possibly, they will demand to get paid in the alternative currency. They can borrow and lend using the gold-linked currency of denomination, or simply use it as a basis for pricing goods and services. Banks can offer deposit and checking accounts for the new currency, just as they do with any currency.

Once the concept is proven, a number of these currencies could emerge worldwide. Since they are all linked to gold, they would all trade at fixed exchange rates.

In time, there could emerge a worldwide “gold bloc” of entities that are using some form of gold-denominated currency. These would not be countries per se, but more like a network of private individuals and corporations, who prefer to do business in high-quality gold-linked currencies. As this “gold bloc” expands, it becomes more attractive because there are more and more people who are ready to do business with a gold-linked currency.

As more and more people voluntarily enter the “gold bloc,” they withdraw from the the fiat-currency world. Thus, the demand for existing fiat currencies would decline, accelerating their decline in value in the face of general neglect by central banks.

Soon it would dawn on a broad swath of the public worldwide that these fiat currencies are doomed, and they would rush to the network of gold-linked currencies. The tipping point is reached. Governments, especially those hundred-plus governments who today depend on some sort of dollar or euro link, would see the writing on the wall and mandate the use of gold-linked currencies instead of the collapsing major fiat currencies.

The issuers of the major fiat currencies – the dollar, euro, pound and yen – would probably try to hold on to their fiat currency empire as long as possible, but they would soon become irrelevant as they effectively disappear.

And thus, without a single academic debate, without any dramatic government actions, by way of a transition period determined by the people themselves at their own pace, the world would dispose of the Keynesians and their funny paper.

If you were given the choice, would you rather do business in a gold-linked currency or fiat paper locked in a spiral of decline? When people have actually been given this choice, throughout history, they always choose gold.

Nathan Lewis