Every handful of years, a large debate over the basis of our financial systems crops up, with calls yearning for a return to the gold standard, where all paper money was backed up by a tangible resource, such as gold. At first glance, there might be some reason to these appeals. After all, gold has a lot more inherent value than mere paper money in a fiat currency system, and locking the value of the dollar to the value of gold could theoretically stabilize the currency. However, these beliefs overlook an entire host of facts and ignore some key foundational truths. Here are just a few reasons why the gold standard can’t work, and never will...
Gold is exceptionally volatile
First of all, the idea that gold is some sort of stabilizing anchor for how much money is worth is a problematic one, at best. Gold, like anything else, is only worth what people are willing to pay for it. Thusly, the value of gold can fluctuate just like a fiat currency. As a matter of fact, gold has a very volatile track record, when it comes to price. In the past 50 years, alone, gold has been worth $230 per ounce, at times, and has been worth over $2000 per ounce only a decade later, only to drop back down to around $650 per ounce over the course of another decade. Can you imagine if the dollar was tied to that?
Inability to respond to economic fluctuations
One of the primary reasons that we are off of the gold standard is due to the fact that there is no way to respond to economic fluctuations. For example, when the gold supply decreases, the only thing that the government can do to respond is inrease interest rates. When this happens during the same time as a natural recession, the results can be disastrous, as people stop lending from banks and the velocity of currency halts to a screeching stop. This is what occurred during the Great Depression. Fiat currency gives governments many tools to stabilize the economy through monetary policy.
Inflation and deflation would be sporadic
For many people, gold is the answer to inflation, which is a word that people tend to be afraid of. However, inflation is actually important for a healthy economy, if it is stable and hits projected targets. The gold standard, on the other hand, can put the entire economy at the whim of the price of gold, which causes intense periods of both inflation and deflation.