Why Bringing Back The Gold Standard Is Not The Solution To Current Day Economic Problems
Returning to the gold standard has recently come up after years of money printing via Quantitative Easing and fears of a devalued dollar. While the fears of a devalued dollar are legitimate, 90% of economists believe that returning to the gold standard would create much more problems than it would help. The gold standard had its time and place, but when we started to face problems modern industrialized societies face, it was time to abandon it.
Before I go into the negatives of a gold standard, I will go into the positives. A gold standard would force governments to be held accountable with borrowing and spending because they would need to pay it back in a currency that wouldn’t devalue as much or at all. A gold standard would mean that a fixed asset would represent the currency you are using so rather than relying on a government to have a sound financial policy, the market self regulates itself through basic economic theory. Finally it would also mean that countries would be highly incentivized to export goods rather than import goods in order to capture a larger amount of the semi fixed asset. These reasons can be beneficial depending on what you want from your government, but there are also negatives to each of those benefits. So now onto why it is a bad idea.
In mainstream Keynesian economics, there is a belief that governments can in the short term provide economic benefit and ease burdens on an economy through spending. Many don’t agree with this, but there is very good proof that without FDR abandoning the gold standard, the US might have not transitioned out of the great depression as well as it did. Much of the problem with the great depression was caused because of the gold standard. When a government’s currency is backed by a fixed asset that is traded and available in the open market, they lose all ability to control interest rates, which if high interest rates align with an unexpected economic downturn, disastrous results occur. This is exactly what we saw during the great depression. Interest rates were too high and rather than expand businesses cut back workers, infrastructure and ultimately shrunk.
There was nothing the government could do because monetary and fiscal policy controls were lost due to a rising gold price. It was only once the standard was partially abandoned that the government could invest in infrastructure, hire unemployed workers and start controlling interest rates. Sure in the long run the market would have corrected itself, but as Keynes is famous for saying “in the long run we’ll all be dead”.
I believe that as little as possible government intervention is ideal, however an someone trained in Keynesian economics, I also believe that there are times the government has to step in and provide some relief. The problem comes when the government starts providing too much relief, that they don’t let the market adjust, like what is currently going on in the world. The problem isn’t fiat currency, it is that the government is abusing the monetary policies it has at its disposal. Why I think we are heading for a massive correction in the market is because the government has been pumping near 0% interest loans into the economy and it has become addicted. If we raise rates, the market growth will stop and that scares them. Like ripping off a band-aid, we need to do it fast and whether the downturn or else it just gets worse.
If we have other places we can store our hard earned dollars, then fiat should not be a problem. Today we can invest in fixed assets, commodities, stocks ect. If the government sticks to a policy of very low inflation, economic performance can be boosted, new business can be created and we all benefit. We need to be financially competent to know that keeping money in a bank account or in a vault isn’t the way to store your wealth.
What we really need is to hold our government more accountable for the bad monetary and fiscal policies it employs, but honestly im not sure how we do that. Both sides of the isle are choosing extreme solutions to avoid short term economic distress. The best monetary policy is one that does little when it is not needed, to the point where you don’t even realize it. Like I said before there are times the government can step in to ease a burden, but it should only be momentarily and not something that is persistent.
With the amount of debts we have today and with no real ownership of gold anymore in the United States, bringing back the gold standard would hurt the economy much more than it would help it. Fiat money will never die, the point is to offer alternative currencies that can work along side fiat to help regular people save and avoid inflation. Like I also said in the beginning, much of this will also depend on the kind of government you want. In theory no government intervention and completely free markets are ideal, but that will never happen in our lifetimes. If we want to look at the here and now, we need to stop zero interest rates and slowly ween our economy off the stimulus it has been receiving for almost the last decade at this point. The longer we wait, the bigger the bubble burst is going to be.