Gold Standard Would Ruin Us

A Gold bullion standard- whereby paper money can be exchanged for a fixed amount of gold at a fixed set price, is NOT good.

If the government were to continue to hold gold at a nominal set fixed price, a growing economy would deflate itself to zero.

A growing population increases economic activity, as economic activity increases, the economy needs a proportional increase in money supply to keep things constant- zero inflation zero deflation. That means, your economy can grow, and your money supply can grow- WITHOUT inflation or deflation.

If economic activity increases, but money supply does not, there is only one way to compensate, lower prices.  As prices lower, thereby causing “deflation” we then push the economy to zero.  This is why a federal agency needs to closely monitor the economy in order to increase money supply proportional to economic activity. 

Indeed, this is a very simplistic explanation, but in short, this is why a gold standard is not a viable option.  In fact, it was the gold standard which was a major factor in causing the 1929 banking crisis to develop into a full blown depression.  Hoover himself stated that he demanded that the Federal Reserve inject money into banks on the brink of collapse, but that there was no money available, since the government had a limited amount of gold, and the US dollar at that time was backed by gold, the government would have had to allocate funds to buy more gold in order for more money to be printed.  Since we did not have the required elasticity of a fiat currency- we created an instant- hyper-deflation which caused the economy to crash hard and fast, the 1929 depression- REASON- gold standard.

In addition, as the United States runs a trade deficit with many nations, America would be drained of its gold rather quickly (as foreigners would ask to trade in their surplus dollars for gold, as actually happened to America and Britain when they were on the gold bullion standard)-

The gold standard does not work for a growing economy, but only for a theoretical stagnant economy where all factors remain constant.




James Luko

Former United Nations Official, International Criminal Tribunal for the Former Yugoslavia, Deputy Head of Office- ICTY Office of the Prosecutor, Canadian Defense Department-Ottawa Canada, National Council for Soviet-East European Research- Washington DC