In practice, though, gold’s stability was illusory. In boom times, banks anxious to finance more loans would issue far more notes and deposits than they had gold to redeem. Credit, economic activity and prices rose. When those loans went bad and people demanded their money back, banks failed, the money supply contracted, and the economy fell into a recession. The U.S. experienced multiple crises and recessions while on the gold standard.
The gold standard also left a country’s financial system at the mercy of events beyond its control. Because the money supply was linked to the quantity of gold in circulation, big discoveries of gold in California and Australia in the mid-1800s led to a global boom as prices climbed and economic output along with them, says Michael Bordo, an economic historian at Rutgers University. But eventually, the discoveries petered out, and a bust and deflation followed. (In 1993 Mr. Bordo published a study of how several countries performed under different monetary regimes.)
While differing on the precise mechanisms, historians agree the gold standard was central to the Depression. In 1929, a recession in the United States caused prices, output and imports to plunge and the trade surplus to surge. This drew in gold from its trading partners, forcing them to raise interest rates. When European central banks tried to ease monetary policy, speculators guessed they would devalue, and pulled their gold out, causing the money supply to contract.
One by one, countries abandoned gold, and with their central banks now free to ease monetary policy, recovered. For the U.S., that came in 1933 and 1934 when Franklin D. Roosevelt devalued the dollar against gold and suspended its convertibility.
The Great Depression has persuaded economists that the gold standard—that “barbarous relic” as British economist John Maynard Keynes called it—robbed national governments of macroeconomic flexibility and made booms and busts more severe. Peter Rousseau, an economic historian at Vanderbilt University, says that independent central banks can control the money supply with paper money far better than they could with gold. The euro is a modern-day version of the gold standard insofar as peripheral economies are unable to boost growth by devaluing or easing monetary policy.
And the above chart shows just how poorly economists think of the idea.” Also I am quoted on this issue in a recent WaPo story, “Why Republicans are getting one of the most obvious things wrong.”
If a gold standard starts again, it won’t happen in the United States.
The United States no longer respects gold as a system of monetary policy.
However, if a different country starts its own gold standard and if their currency becomes a better store of value.
The United States will wish it had started a gold standard again and if this happens it will start to respect this monetary system again.
“…the gold standard—that “barbarous relic” as British economist John Maynard Keynes called it—robbed national governments of macroeconomic flexibility and made booms and busts more severe. Peter Rousseau, an economic historian at Vanderbilt University, says that independent central banks can control the money supply with paper money far better than they could with gold.”
What an appalling bit of sophistry in the above statement. “Robbing national governments of macroeconomic flexibility” is a _feature_, not a bug. National governments–especially this one–have proven absolutely incapable of demonstrating fiscal discipline. That punch bowl needs to be takes away as fast as possible and the restraints imposed on it by a 3% physical mining limit is better than relying upon a politician’s useless ego to keep costs in check.
And the continued punishment on savers who choose to be frugal and salt away a portion of their earnings, only to see its value collapse by 40% over 20 years? That value would be better preserved under a commodity or gold standard.
China and Russia recognize what’s going on and they’re increasing their gold holdings for a reason. The quarterly attempts at panic maintenance that’s been ongoing since 1971 by Western central banks has been speeding up since 2008 because it’s unsustainable and is reaching its limit. This fiat money scam has enriched a few players at the top, but it won’t last. Nor will their “fortune.”
Bring back the gold standard, or some kind of commodity standard, as fast as possible. It is a 1000x times better than this almost worthless fiat money we carry around.
One can agree that the gold standard is a bad idea for running an economy. The question is whether giving complete power over the economy to a bunch of Econ Professors and bankers is better. Certainly not when their concern seems to be unemployment, over which it is generally believed they have no, or at best indirect, control; rather than inflation over which they have at least some influence. That these savants have to meet regularly to vote on what to do, and often disagree, is not reassuring.
Friedman was right on many things, but not money. His monetarist theory failed when his average money supply theory was faced with the dynamics of the real world. He essentially admitted this later in life. Gold is a unit of account relative to all goods and services and has remained very stable through the years. Paper linked to gold takes on this stability. But a gold standard is not a cure all. Bad fiscal and trade policy will still create economic downturns. Hardly seems fair to criticize a gold standard for responding to a decreased demand of dollars when the policy makers get fiscal and trade policy wrong. The ‘flexibility’ that fiat money provides only adds to the chaos. They attempt to cover up bad policy with monetary ‘stimulus’ that only impoverishes the masses. Good grief, think again.