Should we switch back to the gold standard?
Title says it all. I'm not an expert on monetary policy so I apologize if my reasoning is incorrect.
From my understanding, switching to the gold standard prevents the gov from driving up inflation and allows for global stability in currencies and trade. These points seem like advantages considering high government spending/debt, potential inflation from the Fed, and countries like China competitively devaluing their currency. It can also prevent financial repression. Alan Greenspan was quoted as saying, "Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."
On the other hand, the gold standard might prevent central banks from expanding the money supply at will. This means a gold backed currency might not expand fast enough to maintain economic growth. It would also make things like QE during the Great Recession impossible. Most importantly, the dollar doesn't show any signs of loosing value, so might the gold standard be unnecessary?
Seems like a complicated debate to me. Should we make the switch? Or is a gold standard a thing of the past?
Again, sorry if I got anything wrong. Maybe the more informed of you can enlighten me...
The clear answer is NO. And there's no doubt about this answer. If you want a more exact explanation on why, I recommend reading Capitalism and Freedom by Milton Friedman, especially Chapter 3: The Control of Money. Friedman very clearly explains why the gold standard is a bad idea.
I'll provide couple points here though.
First of all, there are commonly 2 versions of gold-standard. - 1) Automatic Gold-Standard, 2) Money as a certificate for certain amount of gold (Gold-coin standard)/Gold stored as a backing for paper money.
1) Automatic Gold-Standard is the "optimal" currency system that self-balances itself. However, it's impossible for it to actually happen.
Interestingly, Friedman predicted the rise of cryptocurrencies. If you think about it, Bitcoin was developed to make it possible to have an actual automatic standard currency system. Of course, security regarding cryptocurrency is a huge issue.
2) Other forms of gold standard have their limitations for couple reasons. First, the unequal distribution of gold deposits among countries gives unfair advantage to countries with a lot of gold. Id you can produce more gold, more money you can have. Due to technological constraints on how fast you can produce gold, how much money you can print is restrained.
Friedman also discusses how even in the ages of gold-standard, significant amount of money was in fact fiduciary, the version we have. Without doing so, the economic system would not have been able to run at all.
The gold standard never worked well and was a primitive form of reserve currency that was actually rarely used in history.
Modern currency is a commodity that can be universally exchanged for every other commodity. It also doesn’t need to be backed by a commodity...what then would the backing commodity do for you? What it IS backed by is the “full faith and credit” of the US government. So you are required by law to use and that’s where its value comes from: the credibility of the government and the governments ability to enforce its use. In simple terms, try to NOT accept dollars and they’ll shut you down....use it, and you can buy any good or service that exists. Fiat translates loosely to “by declaration” i.e. it has value because the government stays it does. Essentially, the currency is only as good as the government controlling it.
The upside to fiat currency is that the supply can be expanded or shrunk at will to speed up or slow down the economy as needed. Need more gold? We all do, too bad, you can’t grow your economy. Need more dollars? Cool, how much? They’ll simply add some zeros in a computer and viola, you now have more bills with which to transact in for your growing economy. Inflation isn’t bad in all cases, just over inflation that a poorly run country would choose to do. The stability of a currency is a direct result of the competency of the people running the country.
Also built into the definition of most currency is an explicit prohibition on currencies NOT minted by the particular country. Bitcoin is NOT currency, it’s an accounting tool that people are trading like it had value...but in reality it would be like trading excel worksheets, kind of pointless. A lot of otherwise smart people have been boondoggled into thinking there’s any value. The description of blockchain itself says it’s a distributed ledger. So, accounting software.
Gold is also not money and should not be. It’s also a poor investment when adjusted for inflation. Real estate or equity positions in stable companies are much much better investments, as the dividend yield reinvested generates far higher returns.
I'll tell you what we need to do, we need to back up our money with ButtCoin.
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