Gold Standard vs fiat currency?
Many people claim the gold standard is better than the current fiat currency and fractional reserve banking system used in most developed countries, since it would limit the government's ability to print money. However the gold standard failed to meet the demands of the expanding world's economy in the early 20th century. How do the supporters of the return to Gold Standard offer to solve the main problem in the need for the economy to expand while the whole amount of gold and it's price are set to a relatively fixed amount?
Public Comments
- Gold based money couldn't keep up because the government didn't expand to progressively smaller monetary units. Every government has/will end up printing it's paper money to worthlessness.
- The comforting thing about the gold standard was that you knew there was something of value to back your money. As it is, there is nothing to stop any country from printing more and more money, because it no longer has to be limited to the amount of gold in reserve. That opens the gates for inflation and devaluation of the currency. How can the gold standard accommodate an expanding economy? Quite easily.
- Very good question. Even with continued mining a gold standard would see currency become scarce compared to goods. So we'd see a deflationary pressure. It'd be harder to come by a dollar but our dollars would be able to purchase more. It's far easier to convince someone of a pay raise than convince them of a pay decrease so we'd probably see layoffs as well. In other words companies would have to sell their products for less. To cut costs they'd likely introduce layoffs. Rising unemployment has historically accompanied periods of deflation. On the other hand a fiat currency runs the risk of central bankers printing too much money and causing large inflation. With the way the Fed's been pumping out dollars recently I don't see how we can avoid double-digit inflation sometime in the next year or two. I personally would like to see a fiat system where the only priority of a central bank is to keep the monetary supply proportionate to GDP and keep prices relatively stable. In the US the Fed's priorities are sometimes conflicting. If price stabilization was the only priority it'd be a lot easier to plan one's life or plan one's business. I didn't answer your question exactly. But it got me thinking. :)
