Top Pro & Con Arguments
The availability and value of gold fluctuates and does not provide the price stability necessary for a healthy economy.
Under a gold standard the supply of money would be dependent on how much gold is produced. Inflation would occur when large gold discoveries were made and deflation would occur during periods of gold scarcity.
For example, in 1848, when large gold finds were made in California, the United States suffered a monetary shock as large quantities of gold created inflation. This rise in U.S. prices caused a trade deficit as American exports became over priced in the international marketplace.
Under a gold standard, economic growth can outpace growth in the money supply since more money cannot be created and circulated until more gold is first obtained to back it. When this happens deflation and economic contraction occurs. Between 1913 and 1971, when the United States was on some form of a gold standard, there were 12 years in which deflation occurred.
According to Federal Reserve Chairman Ben Bernanke, “the length and depth of the deflation during the late 1920s and early 1930s strongly suggest a monetary origin, and the close correspondence… between deflation and nations’ adherence to the gold standard.” Since leaving the gold standard in 1971 there has only been one year (2009) in which any deflation occurred (-0.4%).
Between 1879 and 1933 the United States had financial panics in 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933. During the panic of 1933 alone 4,000 banks suspended operations. Many of these panics were exacerbated by contraction in the money supply caused by the gold standard (more money could not be printed without first acquiring additional gold to back it). Many economists contend that the gold standard played a role in preventing the United States from stabilizing the economy after the stock market crash of 1929, and prolonged the Great Depression. In 1933, when the United States went off the full domestic gold standard, the economy began to recover.
Between 1879 and 1933, when the United States was on a full gold standard, the inflation adjusted market price of gold fluctuated from the $700 range (1890s) to the $200 range (1920s). From 1934-1970, when the U.S. was on a partial gold standard, the inflation adjusted price of gold went from $563 to $201. Fluctuations like these are damaging to a gold standard economy, because the value of a dollar is attached to the value of gold. For example, a 10% increase or decrease in the value of gold would eventually result in a 10% rise or fall in the overall price level of goods across the country.
The total world gold supply increases about 1.5% to 2% per year. To maintain a healthy rate of global economic growth, the nominal rate of growth in world trade should be around 6% to 6.5%. If an international gold standard were to be re-introduced this growth rate could not be maintained.
Further, gold mining is estimated to be “economically unsustainable” by 2050, with new gold supplies running out and large-scale gold mining becoming impossible by 2075. At current rates, gold mines in South Africa, one of the largest global gold producers, could be stripped by 2040.Read More