The Gold Standard is a practice where the value of a currency is defined by a fixed quantity of gold. There are three types of gold standards that can be used to distinguish the standard economic unit of account. These include specie, bullion and exchange. The gold species standard is seen as the unit that is associated with the numerous gold coins that are in circulation. However, there are cases in a gold specie standard the monetary value is associated to one gold coin while the other coins may be less valuable. The gold bullion standard is identified a currency standard where the gold coins are not in circulation. Instead the authorities will sell the gold bullion at a fixed price for the circulating currency. The gold exchange standard also does not involve circulation of gold. The government in this case provides all other countries using gold standards a fixed exchange rate regardless of their notes or coins (Waggoner, 2012). The following paper looks into the issue of whether to establish a gold standard in the US or not.
Most countries in the world had established a gold standard monetary system which was abandoned in the 20 th Century. However, these countries continue to hold significant amount in gold reserves. In the global economic crisis of 2007-2009 many countries were forced to think of the numerous causes of the economic crisis. One of the major factors is the float based system that is currently in use in the United States. The float-based system is seen to be a fluctuating exchange rate where the currency of the country is allowed to respond to the numerous mechanisms of the foreign-exchange market (Obstfeld, 2013). This is the economic unit that is used in most of the world including the US dollar, Norwegian krone, British pound among other currencies. Most economists support a floating exchange rate as it enables the country from the impact of business cycles and prevents the occurrence of balance of payments crisis.
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The use of a float-based system is believed to be a poor choice as it is unpredictable due to the dynamic actions of the market. The fixed exchange rate is seen as more preferable to the float-based system as ensures the prices of the country’s currency are strong in relation to the others. This is particularly related to the gold based system where the currencies of the state are used to ensure a fixed exchange rate to that of the other country (Waggoner, 2012). However, there is a critical dilemma presented through establishing the gold standard system as an economic unit in the country. This is particularly regarding prices experienced by the local residents of the country.
The article in The Atlantic by O’Brien (2012) identifies that returning to the gold standard is a fatal decision particularly to the interest rates. This is where the interest rates will rise whenever gold is scarce. This is usually regardless of the state of the economy (Obstfeld, 2013). As a result, the incorporation of the gold standard may have a serious effect on the country’s residents. This occurrence of a rise and fall of the interest rates is seen as inflexible. The gold standard system was seen to be the cause of the Great Depression that took place in the early 20 th Century hence may cause the same if it is re-established. The more a country deviates from the gold standard the faster it was able to recover from economic crisis.
Another problem that may prevent returning from the gold standard is the fact that there is not enough gold. This will prevent other countries from practicing the gold standard system. Additionally, returning to the gold standard, the government relinquishes its control of the monetary policy and as a result money supply cannot be increased during an economic crisis (Waggoner, 2012). Though the system is identified for its ability to ensure monetary discipline it may bring to the country. However, the interference of the government may also serve as a critical factor as they may manipulate the market price of gold.
The above factors demonstrate the need to refrain from returning to the gold standard system. This is particularly because of the low supply of gold despite its high level of demand. This may create high prices for the residents of the country resulting in a low value for the currency in circulation (Waggoner, 2012). Through the government relinquishing control of the monetary policy the country may also fall into yet another recession and this may be harder to pull out of. The government has also been seen to be a great interference through manipulating coinage either by setting the price or diluting amount of gold.
References
O’Brien, M. (2012) Why the Gold Standard Is the World's Worst Economic Idea, in 2 Charts . The Atlantic, Online. Retrieved from http://www.theatlantic.com/business/archive/2012/08/why-the-gold-standard-is-the-worlds-worst-economic-idea-in-2-charts/261552/
Obstfeld, M. (2013). The international monetary system: living with asymmetry. In Globalization in an Age of Crisis: Multilateral Economic Cooperation in the Twenty-First Century (pp. 301-336). University of Chicago Press.
Waggoner, J. (2012) Should we return to the gold standard? USA Today, Online. Retrieved from http://usatoday30.usatoday.com/money/markets/story/2012-04-23/return-to-the-gold-standard/54493710/1
