Should the US return to the gold standard?
Fact Box
- The Gold Standard was a system where currency was fixed to a specified amount of gold or linked to the currency of a country that used the standard.
- The gold standard was abandoned by most economies in the 1930s. Now, most have free-floating exchange rates.
- In 1933, the United States stopped using the gold standard for domestic transactions, and it stopped allowing the dollar to be converted to gold internationally in 1971.
- President Richard Nixon delinked the US dollar from gold in 1971. At that time, the rate was $35 for an ounce of gold.
Maha (No)
Though the gold standard isn’t new to the US economy, there are many reasons why it was abolished in 1973. Firstly, the gold standard did not actually guarantee fixed pricing or provide price stability. History testifies to this, as the shift to this system in 1933 led to the increase of the dollar value of gold. This, in turn, increased the money supply and led to significant price inflation.
Reintroducing the gold standard could also impact spending power, budgets, and the economy. It would limit the Federal Reserve's ability to help the economy. Moreover, with banks holding their gold reserves, clashes between gold-as-money and gold-as-commodity are expected, especially if gold smuggling activities pick up later.
Another reason to avoid the gold standard is the length of gold recessions. The recession that began in October 1873 while the gold standard was implemented lasted 65 months. It was followed by a 38-month recession from March 1882 to May 1885. Even the Great Depression ended after 43 months—when the country quit the gold standard. Additionally, returning to a gold standard would require a global cooperation that just couldn’t be done in a time when there is increased political unrest abroad.
Finally, if a gold standard were to be as flexible as its supporters claim it can be, how would that differ from the current system? A flexible gold standard can cause imbalances over time, demand large adjustments, and lead to financial friction. So, it may be best not to revive the gold standard to prevent the cure from turning into a new disease.
James (Yes)
The gold standard was an effective monetary system used in the United States from 1900 to 1971. Although the gold standard was criticized for having several drawbacks, several advantages made it a useful currency system. The gold standard, first and foremost, provided price stability. Inflation was drastically limited because the dollar's value was tied to a particular amount of gold, and thus, the amount of money in circulation was constrained. Due to the resulting improvements in cost predictability, price stability made planning and investing easier.
Additionally, the gold standard limited the government's spending. This means that government expenditures were constrained by the amount of gold retained since a nation's gold reserves dictated the amount of money in circulation. This helped to avoid overspending and borrowing, which may have caused inflation and economic instability. Such a gold-backed currency would increase public trust and confidence in the US monetary system, as people would know that their currency has a tangible value and is not subject to arbitrary government decisions.
Furthermore, the gold standard helped to create confidence in the US dollar since tangible underlying assets directly supported its monetary value. As a result of other nations' willingness to hold and exchange US dollars, this trust facilitated international commerce and investment. The gold standard also offered longer-term stability. The fixed exchange rate gave the economy a solid platform for growth, making it easier for people and companies to make future plans. Also, this stability contributed to avoiding abrupt and unanticipated economic shocks that may have caused financial crises and overall economic instability.
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