The Advantages and Disadvantages of the Gold Standard
Angelina Di Mauro
BUS 450
Wendy Achilles
July 14, 2012

The Advantages and Disadvantages of the Gold Standard The Gold Standard is a historic monetary system in which the standard unit of account is a fixed weight of gold, and though the main benefit is that it insures a relatively low level of inflation, economies on the gold standard are less able to avoid or offset either monetary or real shocks. Gold has been known as the currency of choice throughout history, and at one point in time the country that had the most gold was known to be the wealthiest. By the eighteen hundreds many countries began to seek new ways to produce wealth through standardized transactions. As a result the gold standard was adopted as means to exchange currency in a new world market, and means to regulate the production of paper money in world economies. The following will highlight both the advantages and disadvantages of the historic gold standard monetary system. The paper will come to a conclusion with an emphasis on why many countries had to abandon this momentous means of exchange. According to one source, “the gold standard was a commitment by participating countries to fix the prices of their domestic currencies in terms of a specified amount of gold. National money and other forms of money, i.e. bank deposits and notes, were freely converted into gold at a fixed price” (Bordo, pg 1 ¶1). In a new world market the gold standard was a way to determine the value of one country’s currency in terms of other countries’ and their currencies. Holding paper currency in a perspective country meant one could present it to the government and receive an agreed upon value from that country’s gold reserves. The benefit of utilizing the gold standard in a new world market was governments could only print as much paper money as its country had in gold. The advantage of the gold standard and the regulation of printed currency was it discouraged and presented low inflation and it stabilized world trade by making currency a fixed asset. For instance, if a nation began to print excess paper money it would flood the economy with extra currency, the currency would eventually become worthless because each unit of currency would buy less and less. At any point in time under the gold standard if the supply of money were to rise too fast, one could exchange money for gold i.e. that for which has become less scarce for that which has not. In other words, paper currency always had “real” value because it was backed by gold and unlike paper currency it could not be replicated. Under the gold standard all nations were placed on equal playing field. Since all currencies were backed by gold then trading partners were reinsured that world currencies had worth and they can redeem the gold without devaluation. The disadvantage of this system however, is that there is indeed a limited supply of gold, and gold is not equally measured between nations. Seeming that nations could only print as much currency as they had in gold, some nations began to experience shortages in wealth because of gold’s unequal weights and measures throughout the globe. In other words, the value of a country's money was tied to the amount of gold the country possesses, and not every nation has the same amount of gold resources. Therefore, the size and stability of a country's economy found itself dependent upon its supply of gold, rather than the resourcefulness of its laborers and goods. In attempts to create “equal” footing between nations through the gold standard system meant that if one country/economy was experiencing hardship others did as well, this created a domino effect. Another disadvantage of the gold standard system according to one source was that “government’s had very little discretion to use monetary policy” (Eichengreen & Timen, 1997). In order to get through economic hardship governments had to increase money supply in order to stimulate the economy. Stimulating the economy by printing more currency would not be possible under the gold standard since currency supply is limited by the gold supply. Currency could only be increased if more gold was mined or purchased. As a result, countries that produced the most gold remained the wealthiest, and therefore the stability set by the gold standard handicapped trade between advantageous and disadvantageous nations. In order to protect their growing economies from countries that were not on “equal footing”, many nations began to abandon this historic monetary system. The Gold Standard is a historic monetary system in which the standard unit of account is a fixed weight of gold, and though the main benefit is that it insures a relatively low level of inflation, economies on the gold standard are less able to avoid or offset either monetary or real shocks. The gold standard was created to maintain stability between nations and as means to standardize transactions; it presented much advantageous, i.e. lowering inflation and creating a form of equality. However, the stability caused by the gold standard could have also been to its demise. Under the gold standard system not all nations were created equal in terms of having gold as a resource. When one country was doing poorly due to lack of gold, it affected others as well. Through the years countries, such as the U.S, chose to abandon the gold standard because it did not present them with the opportunity to stimulate their economy during tough economic times. Nonetheless, the gold standard worked quite well when governments throughout the world worked together to trade with the “gold” standard, seeming there was always an ample supply of gold for the size of the world economy. However, the gold standard worked poorly during times of hardship and money shortages. Therefore, governments began to seek new forms of monetary policy.
References:
Bordo, M. D. (2008). "Gold Standard." The Concise Encyclopedia of Economics. 2008. Library of Economics and Liberty. Retrieved July 16, 2012 from the World Wide Web: http://www.econlib.org/library/Enc/GoldStandard.html Eichengreen, B. & Timen, P. (June 1997) The Gold Standard and the Great Depression. National Bureau of Economic Research. Retrieved July 16, 2012 from the World Wide Web: http://www.nber.org/papers/w6060.pdf?new_window=1 Eun, Eun, C. S., & Resnick, B. G. (2012). International financial management. (6th ed.). New York, NY: McGraw-Hill.