Would using the gold standard as a basis for establishing the value of international currencies work today?

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Tamara K. H. eNotes educator| Certified Educator

It can be argued that the global economy is growing too fast to be able to successfully still use the gold standard as a monetary system to determine the monetary value of currency. What's more, the global economy is also too unstable, and it can be argued that using the gold standard only contributes to instability.

Economic growth refers to increases in the production of goods and services. As global population increases, so does the need for more goods and services. As technology improves, a country's ability to produce more goods and services also improves, leading to economic growth (Investopedia, "Economic Growth"). However, if we were to use the gold standard, then currency could only be produced based on the quantity of gold available. As the production of goods and services increases, the need to purchase these goods and services using currency also increases. The economy would crash if there was not enough currency available to purchase the goods and services needed based on population growth. Since the amount of gold is limited, returning to the gold standard would place limits on economic growth ("Gold Standard: Pros and Cons"). Other ways in which using the gold standard would lead to an unstable economy is through creating deflation and the inability to respond to inflation and other financial crises. Deflation especially becomes a problem because prices must be lowered as the supply of money lowers (Investopedia, "Deflation"). When prices are lowered, merchants are not payed the true value of the goods and services offered, which limits production and lowers the standard of living, harming the economy. Deflation was a strong contributing factor to the severity of the Great Depression. As Ben Bernanke, Chairman of the Federal Reserve (2006-20014), argued, "The length and depth of the deflation during the late 1920s and early 1930s strongly suggest a monetary origin, and he close correspondence ... between deflation and nations' adherence to the gold standard" (as cited in "Gold Standard: Pros and Cons"). If we return to the gold standard, we return to being incapable of being able to respond to financial crises of this nature as our production of money is limited by the amount of gold. Presently, while on our current fiat money system, the Federal Reserve can lower interests rates to help bring the economy out of recession. If we are on a gold standard, interest rates will always be determined by the amount and value of gold. The Federal Reserve can also respond to financial crises by raising interests rates when inflation has become too high in order to bring prices back down ("Gold Standard: Pros and Cons"). Using the fiat money system also insures the ability to respond to financial crises by allowing for the ability to respond to severe unemployment rates. In 2009, the Obama administration eliminated three million job losses by using the Fed to increase US money supply through purchasing treasury bonds. The money can then be used to create new jobs ("Gold Standard: Pros and Cons").