Return to Gold Standard

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The return to the gold standard is sometimes described as a potential solution to many of the financial problems that modern economies face. Much attention is usually paid to inflation and financial crises. It is necessary to discuss the possible advantages and disadvantages of this strategy. In this way, one can demonstrate the extent to which it is applicable the contemporary societies.

One should mention that the use of gold was critical for financial transactions in the nineteenth century. In addition to that, the currencies of various countries had to be convertible into gold. Nevertheless, this practice was gradually abolished after World War II. Overall, it is critical to examine the long-term implications of returning to the gold standard since this policy can profoundly influence the economy at the national and international levels.

The supporters of this policy argue that the value of gold is recognized in various countries. In other words, this metal can be used to measure value. Therefore, this strategy can limit the inflation of currency. This argument is frequently advanced by the advocates of adopting the gold standard. Nevertheless, the critics of this approach point out that the value of gold also fluctuated in the course of history. For instance, the discovery of minable gold and subsequently increased supply can decrease its value.

Additionally, scientists can design more efficient ways of extracting gold from ore (Mankiv, 1997, p. 102). Thus, the currency which is convertible into gold can also inflate. Additionally, one should keep in mind that the demand for this metal can significantly influence its price. As a role, private investors purchase gold at the time when the economy passes through a period of crisis (Pugel, 2006, p. 641).

In this case, gold is regarded as the safest asset that a person can buy. Nevertheless, this behavior is rather uncommon at the time when the economy grows steadily since investors feel more secure. During these periods, the price of gold tends to decline. This is one of the details that should be taken into account because it shows that the value of gold can also depend on various external factors, and they cannot be controlled by governments. This is one of the problems that should not be overlooked.

Moreover, the advocates of this policy suggest that the adoption of the gold standard can enable market mechanisms to determine the value of the currency. In this case, it will be determined by the inflow and outflow of gold into the country. In their opinion, this method of value determination is more democratic, because it is based on a certain objective criterion such as the quantity of a certain highly-priced metal (Should the United States Return to a Gold Standard? n. d).

It should be noted that at present, governmental institutions regulate the amount of currency that can be issued. More importantly, this task can be performed by unelected officials. In other words, the citizens are not able to influence this process (Should the United States Return to a Gold Standard? n. d). Thus, the return to the previous policies can address this issue. Nevertheless, there are important problems that should not be overlooked.

In particular, the extra supply of currency can be important for investing in public infrastructure, social welfare, and creating employment. This increased amount of currency can be of critical importance for addressing the problems faced by the state.

Economists believe that the adherence to gold standard considerably worsened the effects of the Great Depression in various countries, including the United States (Pugel, 2006). This is one of the challenges that should be taken into account by people who develop economic and financial policies.

Apart from that, it is believed that the return to the gold standard can reduce the risk of crises and bubbles. The increased supply of fiat money can make credit easily available, and people can invest capital into the assets that are very overvalued (Should the United States Return to a Gold Standard? n. d). In the long-term, this situation can result in such problems as housing and dot-com bubbles that can have profound implications for many stakeholders.

In this case, the advocates of gold standard rely on the assumption that the limited supply of currency can make financial institutions much more careful in their investment decisions. Yet, one should keep in mind that economic bubbles could emerge long before the abolition of gold standards.

They can be attributed to people’s beliefs about the value of certain assets, such as the stock of various companies or real estate. The arguments expressed in favor of the gold standard indicate the inefficiency of the modern economy, but their critical examination suggests that this particular policy may not be the best solution. This is one of the points that should be considered.

Overall, the critics of this strategy believe that the task of national banks has become more complicated during the twentieth century. It should be mentioned that modern governments have to spend capital on social welfare (Pugel, 2006, p. 493). Therefore, they may need to regulate the supply of currency without considering the amount of gold possessed by the state. Furthermore, the value of products manufactured within a country can significantly surpass the value of gold that various banks possess.

This argument is particularly relevant if one speaks about the role of technology that can significantly increase the productivity of manufacturers. Therefore, by pegging the currency to gold, policy-makers can slow down the development of the economy because the money supply available to investors will be limited dramatically. As a result, many businesses will have fewer opportunities for growth. Moreover, they will not be able to sell their goods to buyers.

This effect can manifest itself at an international level, and it can evolve into a crisis that can become more dangerous than the Great Depression. This is the main pitfall that can be identified because it can outweigh the possible benefits identified by the supporters of the gold standard.

Furthermore, the implementation of this policy can require a profound change in the existing policies, and it may be necessary to implement them at the international level. This task can be very time-consuming, and this reform can undermine trade between countries. This is another risk that should not be overlooked.

Overall, it is possible to say that the adoption of a gold standard is not the best solution to modern financial problems. The alleged benefits of this policy, such as decreased inflation, do not outweigh the potential risks. The main problem is that this policy can become an artificial barrier that limits the growth of businesses.

Admittedly, current financial problems do require new regulations, but they cannot be addressed by pegging the currency to gold, silver, or any other metal. This approach can limit economic growth and undermine international trade. This is why it should not be adopted.

Reference List

Mankiv, G. (1997). Macroeconomics. New York, NY: Worth.

Pugel, Thomas. (2006). International Economics. New York, NY: Cram101 Incorporated.

Should the United States Return to a Gold Standard? Web.

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Return to Gold Standard

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