In Part I of this post, we explained what a gold standard is, its history, and the history of its use in the United States. A gold standard is a monetary system in which the value of currency is defined in terms of gold, or currency is “backed by gold”. In Part II, we discuss the reasoning behind using a gold standard, arguments for and against using one, and examples of countries that have used one in the past.
Why use a gold standard?
Photo: “Inflation & Gold” by Paolo Camera via Flickr, used under a Creative Commons license
The gold standard makes use of some of gold’s special properties, particularly its durability (gold never rusts or rots), widespread acceptance as currency, scarcity, divisibility, and finite supply.
From a practical standpoint, because gold is heavy and inconvenient to store and transport, a gold bullion or gold exchange standard allows for a more convenient currency form (paper) whose value is still backed by gold.
Other reasons for using a gold standard include:
- Commodity money (gold) is anonymous – identifying marks can be removed
- Gold retains its value even in times of economic crisis, when the national currency may become worthless
- Protection from hyperinflation by limiting the amount of money the government can print
- Long-term price stability
Arguments for and against the gold standard
The gold standard is controversial. Here are some arguments in support of and against the gold standard.
Arguments for the gold standard:
- Gold has real value and is the only “real money” in the world.
- The gold standard limits government’s ability to print money at will. The government can only print money if there is enough gold to back it.
- A fiat monetary system is undemocratic, as unelected central bank officials dictate the money supply. The gold standard allows the free market to determine the supply of money.
- The gold standard provides price stability by limiting inflation and slowing rises in consumer prices.
- The gold standard allows for fixed exchange rates, which reduces trade deficits.
- The gold standard restricts the ability of government to raise the national debt.
Arguments against the gold standard:
- The value of gold widely fluctuates, therefore the gold standard does not provide enough price stability.
- Countries with more gold deposits are unfairly advantaged by a gold standard.
- As an economy grows, so should its money supply, therefore the gold standard limits economic growth by limiting the money supply.
- Printing money, which the gold standard restricts, can help ease economic recessions or depressions.
- The gold standard may bring long-term price stability, but it leads to short-term price volatility.
- Inflation can still occur under a gold standard if the supply of gold grows faster than the economy does.
Countries that have used a gold standard
No government in the world currently uses a gold standard, but here are examples of countries that have at one time used one:
- United States
Part III next week will examine why the United States left the gold standard and the ongoing political debate around returning to one. Meanwhile, call American Bullion at 1-800-326-9598 to speak with a precious metals broker about purchasing physical gold for direct delivery or for your retirement account.