The gold standard is silly. No one should be in favor of going back to it. Here’s why:
- The Gold standard does not create “Sound Money” policy. One of the biggest myths about the Gold Standard is that it will create “sound money” policies that won’t allow the government to debase the currency. History shows this is totally wrong. A gold standard does not restrict the government from devaluing the currency. Over the course of the existence of the bimetallic system in the USA the ratio of the values in silver/gold relative to dollars was consistently and continuously altered as more of the metals were mined and the economy evolved. The history of the metallic standard shows very little consistency in the value of the conversion rates and in fact exposes the reality that the gold standard’s inflexibility resulted in numerous depressions during which these metallic pegs were consistently altered or abandoned (temporarily before eventually being abandoned permanently). The gold standard imposed very little discipline on the government and instead created restrictions that were inevitably changed.
- The Gold Standard is inherently deflationary. During the history of the USA there have been 11 major depressions and/or financial panics. With the exception of the Great Recession, all 10 of the other panics or depressions occurred under the metallic standard thanks in large part to its inflexible design and inherently deflationary nature (The Panic of 1797, the Depression of 1807, the Depression of 1815, the Panic of 1837, the Panic of 1857, the Panic of 1873, the Panic of 1893, the Panic of 1907, the Depression of 1920 and the Great Depression). Although growth was much higher in the era of the metallic monetary system this growth was also extremely volatile and resulted in numerous long and destructive depressionary periods.¹
- A gold standard is disastrous for foreign trade. Under a true gold standard a country with an overvalued currency will experience a deflationary bias as they will be forced to settle cross-border transactions by losing gold to foreign countries. This process will continue for as long as it takes for the currency to fully rebalance, a process that can take years and even decades. A modern day example of this nightmare is Greece which exists in a single currency system with no floating exchange rate. Greece is experiencing the equivalent of a gold standard style “internal rebalancing” where they suffer through a long sustained deflation that makes their economy more competitive. The USA tried to move to a quasi-gold standard after the Great Depression, but found that, as the key player in the international monetary system, the same inflexible design led to substantial demand for US Dollars in foreign markets and continual trade imbalances.
There’s a reason why almost no mainstream economists support a return to the gold standard – it is an economic disaster. It was too restrictive and too deflationary. Yes, the current system is far from perfect. It is inherently inflationary and controlled largely by an oligopoly of banks. But it is a market based system with an elastic money supply that expands and contracts with the needs of its users. Further, the system of international trade has moved to more fully free floating exchanges rates. This has substantially alleviated the global deflationary pressures we once experienced and has established a much more market based rebalancing mechanism. While imperfect the current system is far superior to the excessively inflexible gold standard.
¹ – The history of the Gold Standard in the USA is complex and really more a history of a bimetallic or quasi metallic standard. It is broken down nicely in this paper by Craig Elwell and can be summarized as follows:
- 1792-1834 – Basically Silver Standard
- 1834-1862 – Basically Gold Standard
- 1862-1879 – Fiat Paper Money
- 1879-1933 – A True Gold Standard
- 1934-1973 – A Quasi-Gold Standard
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.