Advantages of the Gold Standard

The gold standard limits the power of governments to inflate prices through excessive issuance of paper currency.

The gold standard makes chronic deficit spending by governments more difficult, as it prevents governments from 'inflating away' the real value of their debts.

High levels of inflation are rare and hyperinflation is impossible as the money supply can only grow at the rate that the gold supply increases.  (However, the Great Depression began while USA was still on the gold standard).

Disadvantages of the Gold Standard

A gold standard leads to deflation whenever an economy using the gold standard grows faster than the gold supply.  Deflation rewards cash savings and punishes debtors. Real debt burdens therefore rise, causing borrowers to cut spending to service their debts or to default. That undermines the financial system. Deflation also robs a central bank of its ability to stimulate spending. Deflation is difficult to control, and is a serious risk to a growing economy.

The total amount of gold that has ever been mined has been estimated at around 142,000 metric tons.   Assuming a gold price of US$1,000 per ounce, or $32,500 per kilogram, the total value of all the gold ever mined would be around $4.5 trillion. This is less than the value of circulating money in the U.S. alone, where more than $8.3 trillion is in circulation or in deposit. Therefore, a return to the gold standard would result in a significant increase in the current value of gold, which may limit its use in current applications. For example, instead of using the ratio of $1,000 per ounce, the ratio can be defined as $2,000 per ounce effectively raising the value of gold to $9 trillion.

Following a gold standard would mean that the amount of money would be determined by the supply of gold, and hence monetary policy could no longer be used to stabilize the economy in times of economic contraction.

Monetary policy would essentially be determined by the rate of gold production. Fluctuations in the amount of gold that is mined could cause inflation if there is an increase or deflation if there is a decrease.

The gold standard may be susceptible to speculative attacks when a government's financial position appears weak. 

Free Market Currency

A currency is a truer measure of countries worth because it includes the value of land, commodities, all assets of perceived value and statist value of a central government’s policies.

A Currency is easier to conduct trade between nations.

The value of one countries currency in relation to another country is known instantaneously due to trading activity in the currency markets.  

Statists use monetary policies to finance deficit spending in the mistaken belief that the unit of monetary measure never changes. In actuality; the value of a currency changes in the market place making the markets a better judge of the true value of a countries financial strength in comparison to other countries.

Interesting thoughts

Fairness is a little understood concept which recent research in primate behavior is demonstrating itself to be part of the social fabric.   This research is showing that fairness is a driving force for social interaction. As a species, man creates laws and regulations to create fairness.   The financial markets are an attempt to create fairness in monetary value. Interestingly, there is no way to truly define fairness because of the complexity of the issue as a man-made perception and all attempts to do so will eventually fail. This is primarily due to man’s ever changing perception of value. 

In the political arena, the attempt to be fair is the driving force behind legislative attempts to regulate the activities of man. A large portion of the electorate becomes emotionally supportive of politicians who promise to level the playing field by redistributing the wealth of others to be “fair”. Fairness has such a strong emotional connection that people will create unfairness just to be fair. 

Fairness concerns what some consider being socially just with respect to the allocation of goods and services in a society. Thus, a community in which incidental inequalities in outcome do not arise would be considered a society guided by the principles of distributive justice. Allocation of goods takes into thought the total amount of goods to be handed out, the process on how they in the civilization are going to dispense, and the pattern of division.

Civilizations have a narrow amount of resources and capital; the problem arises on how the goods should be divided. The common answer to this question is that every individual receives a fair share. The problem with this answer is that the world is not fair. Fairness is a creation of man and to adhere to the concept that fairness is the correct way to view the world is futile.

People advocate the Gold Standard during periods of “High Distrust” of a central government. The hope of a gold standard is to change the behavior of the central governing body. The desire for a gold standard is an attempt to create fairness and distributive justice; a policy that is inherently unattainable.   Hence gold standard advocates are really being the opposite of what they are advocating. 

We would be better off to challenge any regulation or legislative attempt at fairness because reality cannot be put in a nice neat little box.

Final Note:  Returning to the gold standard is like tipping at Wind Mills.  It may be noble goal but will never happen.  It is like wanting to end the Federal Reserve (arguably the most powerful institution in the world) or repealing the 16, 17th, or any amendment.  We simply don't have the time to waste.  The Central Government has grown out of control (it has taken decades of voter neglect and apathy and poor citizenship) and it is the main impetus to real economic reform and a return to stable and sustainable growth. We must focus on the reduction in all federal outlays and realign our tax policy with policies that will enhance capital formation, increased liquidity, and investment in people and equipment – that will create jobs by the private sector – where it belongs and is natural order of capitalist based economy.