Con 1
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. [60]
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. [9]
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. [10]
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%). [10] [41]
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. [49] [41] [44] [45] [48] [50]
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. [36] [38]
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. [61] [62]
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. [117]
Read MoreSee AlsoCan I Legally Sell Gold Anonymously?Do I have to Report My Gold and Silver Coin Sales to IRS?Can the Government Track Your Gold & Silver Purchases?Gold Standard
Con 2
A gold standard would limit the ability of the Federal Reserve to help the economy out of recessions and depressions, and to address unemployment.
Under the current fiat money system (money not backed by a physicial commodity such as gold) the Federal Reserve can use monetary policy to respond to financial crises by lowering interest rates during a recession, raising them during a period of inflation, and injecting money into the economy when necessary. A gold standard would severely hamper the Federal Reserve from performing these functions. [44]
After the 2008 financial crash, the Federal Reserve’s TARP (Troubled Asset Relief Program) created $700 billion to bail out financial institutions and stabilize the economy. According to Nobel Prize-winning economist Paul Krugman, without that intervention a “powerful deflationary forc[e]” would have been created. Without the Federal Reserve’s intervention, the 2008 crash could have led to another Great Depression. [46] [45] [47]
Former Federal Reserve Chairman Ben Bernanke stated a gold standard “means swearing that no matter how bad unemployment gets you are not going to do anything about it using monetary policy.” [44]
Under our current fiat money system, the Federal Reserve can expand the US money supply by purchasing treasury bonds and the government can use this money to help put the unemployed to work through public spending as the Obama administration did with the $787 billion fiscal stimulus. The 2009 Obama stimulus prevented the loss of an estimated three million jobs. [55] [110] [111]
During the COVID-19 pandemic, the Federal Reserve took similar measures: lowering interest rates to near zero, supported financial market functioning, corporations, and small businesses, and cushioning money markets. Under a gold standard these stimulus actions could not have occurred. [116]
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Con 3
A gold standard would increase the environmental and cultural harms created by gold mining.
In the first quarter of 2019, mining one ounce of gold cost $1,000. The average wedding band contains three to seven ounces of gold. [123] [124]
See AlsoPro and Con: Gold StandardAll the human labor used for mining, refining, and storing gold is time and energy diverted from the real economy. The direct costs associated with a fiat paper money system (paper and printing costs) are much lower because a paper bill only costs between 7.7 and 19.6 cents in Apr. 2020. [125]
Returning to a gold standard would create increased demand for gold and mining activity would increase. Many gold mines use a process called cyanide leach mining that creates large-scale water pollution and massive open-pit scars on the land. Producing one ounce of gold creates 79 tons of mine waste. [55] [56]
Further, nearly 50% of global gold mining occurs on indigenous lands, where the communities’ land rights are often violated. [56] [57] [58]
In Brazil, the Yanomami, a tribe of about 26,700 people who remain relatively isolated, are being threatened by illegal gold mining on their reservation in the Amazon rainforest. In addition to forest destruction and poisoned rivers, the Yanomami saw two of their communities wiped out by the flu and measles brought in by illegal gold mining operations in the 1970s. In 2020, COVID-19 was brought by miners. [126]
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Con 4
Returning to a gold standard could harm national security by restricting the country’s ability to finance national defense.
A gold standard would prevent the sometimes necessary quick expansion of currency to finance war buildup. In order to help finance the Civil War, President Lincoln authorized the printing of $450 million in fiat currency known as “greenbacks.” [63]
During World War I, the United States and many European countries stopped using a gold standard to finance war efforts by temporarily printing more money [131] [132]
As Kimberly Amadeo, President of World Money Watch, noted, “The Great War proved to be the first nail in the coffin for the international gold standard… [as it] was causing deflation and unemployment to run rampant.” [132]
The United States financed its involvement in World War II in large part by having the Federal Reserve print money, selling war bonds, and running large deficits. [64]
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As an enthusiast deeply versed in economic history and monetary policy, I can draw upon a wealth of knowledge to dissect the intricacies of the gold standard, its implications on economies, and the counterarguments presented in the provided article.
The first argument against the gold standard revolves around its purported lack of price stability. Indeed, historical evidence, such as the 1848 gold finds in California, suggests that large discoveries could lead to inflation, affecting trade balances. The argument extends to the notion that economic growth can be constrained under a gold standard, as the money supply is tied to gold production. The claim gains weight when considering the deflationary periods between 1913 and 1971 in the United States.
Moreover, the article posits that financial panics and economic contractions between 1879 and 1933 were exacerbated by the gold standard, hindering the stabilization of the economy after the 1929 stock market crash. The departure from the gold standard in 1933 is attributed to contributing to economic recovery.
The second argument contends that a return to the gold standard would limit the Federal Reserve's ability to navigate recessions and address unemployment. The flexibility of the current fiat money system is emphasized, citing examples like the 2008 financial crisis and the COVID-19 pandemic, where interventions prevented severe economic downturns. The article suggests that a gold standard would tie the hands of the Federal Reserve, making it unable to inject money into the economy during crises.
The third argument raises environmental and cultural concerns associated with gold mining. The costs, both monetary and environmental, of extracting gold are highlighted. The article points out that the human labor and resources invested in gold mining could be better utilized in the real economy. Additionally, the environmental and social impacts of mining, such as water pollution and violation of indigenous land rights, are emphasized.
Lastly, the fourth argument suggests that returning to a gold standard could jeopardize national security by limiting the country's ability to finance defense. Historical examples, such as President Lincoln's issuance of fiat currency to fund the Civil War and the departure from the gold standard during World War I and II, are presented as evidence that flexible monetary policies are crucial for national defense efforts.
In conclusion, the arguments against the gold standard are multifaceted, encompassing economic stability, the role of central banks, environmental concerns, and national security. Evaluating these points requires a nuanced understanding of historical events, economic theory, and the intricacies of the gold standard itself.
