Why the gold standard is a bad idea?

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, grief will be transmitted more quickly and completely to others. The restoration of the gold standard is “a profoundly bad idea”, write professors Stephen Cecchetti and Kim Schoenholtz on their blog, Money and Banking.

Evidence shows that both inflation and economic growth were quite volatile under the gold standard. It was also associated with greater volatility, not less. As the historical record indicates, a gold standard regime is not necessarily a bad idea. The classic gold standard performed comparatively well back in the day.

However, a gold standard regime is not necessarily a good idea today, because virtually every country now has a central bank, and central banks are major players in monetary policy and financial markets. Unless we eliminate central banks (an unrealistic proposition), instituting some kind of system similar to the gold standard would require relying on central banks to manage the system well. Congress passed the Gold Reserve Act on January 30, 1934; the move nationalized all gold by ordering Federal Reserve banks to turn over their supply to the U. Therefore, the classic gold standard of the late 19th century was not simply a superficial shift from silver in circulation to gold in circulation.

The role of gold was severely limited, as other countries' currencies were fixed in terms of the dollar. Until 1850, only Britain and some of its colonies were on the gold standard, and most other countries were on the silver standard. In the Civil War, the government found it difficult to pay its obligations in gold or silver and suspended payments of obligations not legally specified in kind (gold bonds); this led banks to suspend the conversion of bank liabilities (banknotes and deposits) into kind. In 1900, the gold dollar was declared the standard unit of account and a gold reserve was established for government-issued banknotes.

Since that date it has remained at a constant value in terms of gold, as the Bank regularly provides gold when it is needed for export and, at the same time, by using its authority to restrict, as far as possible, the use of gold in the country. Clinging to the gold standard during that previous depression, gold strikes around the world and more efficient refining techniques flooded the economy with the precious metal, inflating the money supply anyway. Between 1913 and 1971, when the United States had some kind of gold standard, there were 12 years in which deflation occurred. In principle, a country can set its currency equal to one unit of any commodity, but historically, gold and silver have been the most notable examples.

Given that the classic gold standard concluded just before the creation of the Federal Reserve, it is fair to compare the economic performance of the U.S. UU. under this standard with its performance under the Fed. The partially backed interwar gold standard was inherently unstable due to the conflict between the expansion of liabilities with foreign central banks and the consequent deterioration of the Bank of England's reserve ratio.

Many organizations support a return to a gold standard, such as the American Principles Project, the Lehrman Institute and several economists from the Austrian school affiliated to the Ludwig von Mises Institute. In the 1920s, John Maynard Keynes retrospectively developed the phrase “rules of the game” to describe how central banks would ideally implement a gold standard during the classic pre-war era, assuming that international trade flows followed the ideal mechanism of price and species flow. A proclamation by Queen Anne in 1704 introduced the British West Indies to the gold standard; however, it did not result in the widespread use of the gold currency and the gold standard, given Britain's mercantilist policy of accumulating gold and silver from its colonies for use at home. After World War II, the Bretton Woods Accords established a system similar to a gold standard and sometimes described as a gold exchange standard.

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Garland Pietrzak
Garland Pietrzak

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