Why gold backed currency is bad?

This brings us back to where we started. With a gold standard, inflation, growth and the financial system are all but stable. There are more recessions, greater swings in consumer prices and more banking crises. When things go wrong in one part of the world, anguish will be transmitted more quickly and completely to others.

In short, re-creating a gold standard would be a colossal mistake. According to the gold standard, the supply of gold cannot keep up with its demand and is not flexible in difficult economic times. In addition, gold mining is costly and creates negative environmental externalities. The gold standard makes currency availability dependent on the amount of gold available and nothing else.

We lose the ability to control it, which makes it more difficult to deal with inflation. Many countries sought to protect their gold stocks by raising interest rates to entice investors to keep their deposits intact rather than turning them into gold. The global price of gold is set by the market (leaving aside manipulation by major players), not by Slobovia's central bank. The recession that began in October 1873 during the height of the classic gold standard lasted a shocking 65 months.

Sweden gave up gold in 1931, and in 1936 its industrial production was 14 percent higher than its 1929 level. For 5000 years, the combination of brilliance, malleability, density and scarcity of gold has captivated humanity like no other metal. Changes in the price of gold in dollars could also have significant fiscal effects if the country that unilaterally supports gold is an exporter of commodities beyond gold, such as oil, because commodities are usually quoted in US dollars. The following section discusses issues related to the unilateral introduction of variants of a gold standard.

If the price of gold in pounds changed, but the price of gold in dollars did not, the result would be a movement in the real exchange rate between the dollar and the pound. For example, the Federal Reserve, endowed with the “exorbitant privilege of printing unlimited supplies of the world's key currency,” could easily benefit from a foreign central bank's promise to convert money into gold and simply increase its own gold reserves. Bordo and Rockoff referred to the gold standard as a “seal of approval for good domestic practices,” suggesting that governments will be obliged to implement prudent policies. If the gold backing is not entirely credible, one would exchange one's money against gold in case of doubt.

However, as Wolf points out, “that would be just a form of segmentation by price level and there is “no reason why you want to target the price of gold, rather than the price of goods and services, as a whole. A very rigid option would be to require the monetary authority to back the monetary base 100 percent with gold, “with the unit of account. In addition, unemployment levels were lower in the decades before the United States abandoned the gold standard. A link to gold (or some other commodity) is that the value of money would apparently be free from manipulation by the government.

Prior to 1971, the United States had several forms of gold standard in which the value of the dollar was backed by gold reserves and paper money could be exchanged for gold on demand.

Garland Pietrzak
Garland Pietrzak

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