Advantages and Disadvantages Of The Gold Standard

The gold standard disappeared a long time ago, and it represents the idea that a country has to tie its money based on stockpiled reserves of gold in Central Bank it possesses. Anyone holding paper’s money agreed that his gold is entering the reserve.

The amount of gold is called par value, but the USA ended this particular format back in 1971. Even though investing in gold and silver is still interesting for most investors, countries backed from the golden standard and allowed a new form of monetary policy.

If you wish to become an investor, you should check out silver Bullion prices so that you can determine whether it works for you or not. We decided to present you the advantages and disadvantages of the gold standard.

Advantages

The main benefit of the gold standard is that you will get fixed asset backing due to the value of the paper money. This particular idea is excellent because money will self regulate itself which tends to stabilize the economic effects.

The government will be able to print as much money as they have in gold, which is the best way to fight inflation and raising prices, which is the common problem in today’s economy.

It is also the best way to discourage government budget debt and defections, mainly because you will not be able to print money without the supply of gold that will back everything up.

According to most economists, the gold standard can reward rich nations. For instance, they receive gold when they export, and with more of it in reserves, they will be able to print more money as a result.

That leads to increased investments and the ability to support profitable export industry. The gold standard created the idea of exploration, which is why European countries such as Spain discovered the New World because they needed more gold.

They needed it to increase the prosperity, which leads to Gold Rush in Alaska and California during the 19th century.

Disadvantages 

The main problem with this particular idea is that gold standard tends to reflect the country’s economy and health and everything depends on the supply of gold you have.

The economy will not rely on the resourcefulness of businesses and people around, and countries without gold would be in a disadvantage.

Of course, the U.S. never had this particular issue, since they were the world’s second-largest gold mining country only after South Africa.

Most gold mining across the USA started as federally owned lands, and according to the National Mining Association, Nevada was the primary source.

Developing countries such as Canada and Australia are also major gold producers. The government started with actions that wanted to protect the gold reserves and that created fluctuations in the economy.

For instance, between 1890 and 1905, the economy of the United States suffered five significant recessions.

Should We Return To Gold Standard?

The question is how the return of the gold standard would affect the current U.S. economy. At first, it would reduce the ability of government to manage the economy.

The FED will not be able to reduce the money supply by creating interest rates, which is a common solution during the times of inflation. At the same time, they will not be able to increase the money supply by lowering rates during the time of recession.

The fact is that numerous people and experts around the world are advocates for the return of gold standard. They state that it would enforce fiscal discipline, limited government intervention and balance the budget.

When you have a fixed money supply, which depends on gold reserves that could quickly boost economic growth, at the same time, the United States could not convert to a gold standard unless the entire world decides to do it.

If the USA would do it alone, everyone in the world could demand the USA redeem his or her dollars by using gold supply. Therefore, reserves would soon deplete as a result. Defense of gold supply brought the Great Depression, and everything ended with a new perspective in the economy.

The United States do not have enough gold to pay off its debts; even when it hit the price, there was not enough gold to reduce the overall deficit.

The U.S. economy is the vital partner of the global economy, and since central banks tend to work together to manage monetary policy, we would say that it is too late to get back to gold standard as before.