What would be the costs and benefits of returning to the gold standard?

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What would be the costs and benefits of returning to the gold standard?


Under the gold system, either gold circulates as money, or there is a fixed relationship between the amount of currency in circulation and the amount of gold, given the dollar price of gold. In either case, it means that a valuable resource which has both industrial and personal uses is instead “tied up” in being the monetary standard. Hence, one cost of the gold standard is the lost benefits that could be derived from using the gold for jewelry or industrial purposes.

A second facet of the gold standard is that a nation’s money supply depends directly upon the amount of gold it has. Depending upon one’s trust in government and central banks, this can be bad or good. On the one hand, it means that the only way the government can directly control the money supply is either by breaking the link between currency and gold, or by changing the dollar price of gold. Either action, in essence, violates the conditions of a gold standard. Thus, if the government is prohibited from taking either action, the Central Bank has no real ability to control the money supply. For those who worry about hyperinflation and do not trust government (or Central Banks), this would be a benefit. At the same time it means that the domestic money supply is subject to capricious changes due to new discoveries of gold, or the depletion of gold stocks through industrial or personal use.

But the benefits some see in having the gold standard – removing the ability of Central Banks to control the money supply – is exactly the cost most economists would see. A government has the capacity to influence the economy in the short run through monetary or fiscal policy. On the gold standard (or, for that matter, a fixed exchange rate standard for a small country), you take away the ability of the government to use monetary policy. If fiscal policy is also constrained – perhaps because of debt worries – then the government has run out of adequate tools to counter economic cycles. For the clearest modern example of this, look at the unemployment rates in Greece and Spain, who are constrained from using fiscal policy due to their pledges to international institutions and who cannot use monetary policy due to their membership in the euro zone.

Furthermore, there is little historical evidence to indicate that goods prices were more stable under the gold standard, or that economic cycles were fewer or less severe under the gold standard. Indeed, the opposite is probably the case.

So, the costs of the gold standard are both the real costs of not being to use the gold set aside for monetary purposes and the potential cost of not being able to control the money supply. For those who distrust government, the latter would be seen as a benefit.