The Not-so-golden Gold Standard

For many libertarians, Austrians, whatever group you want to call the dogmatic believers in laissez-faire economics, the gold standard would make the United States system much better.

For them, competing currencies is the goal, the best, but most think the gold standard would be an improvement on the current system and a good middle ground before the implementation of the competing currencies (even though the gold standard is seen as a bad idea by almost all professional economists, literally zero in a recent poll).

What is the Gold Standard?

Well, basically, the gold standard means the money supply cannot exceed the stock of gold. Paper money is attached to a fixed amount of gold. Proponents believe that this helps curb inflation and government manipulation of the money supply.

Problem #1: Potential Implementation

Currently, the money supply of the United States completely exceeds the amount of gold reserves the United States have. So how do we implement the gold standard, even if it is beneficial? We could try to mine more gold, but that takes time and resources, and there is no chance the reserves would still equal the quantity of money. We could charge an exorbitant amount of money for gold, but that wouldn’t be optimal either. For example, in 2012, the money supply was about $2 trillion dollars including bank deposits, and the US had $434.6 billion dollars in gold. A requirement of charging about $10,000 for an ounce of gold to implement a gold standard is, for lack of a better word, crazy. Another potential implementation of the gold standard would be to let the quantity of money contract and let the economy suffer a recession. This potential recession would make The Great Recession of 08′ and The Great Depression of the 30s seem like blips in the economic radar. The US economy would be potentially crippled for years, and that’s just the short run. Lastly, you could just devaluate the dollar, meaning that the implementation of it would just lead to the very situation goldbugs try to prevent.

Problem #2: “Lender of Last Resort”

Austrians say “no one just hides money under their beds” when talking about time-preference, and I completely agree. However, hiding money under beds might just happen under a gold standard. It limits actions to prevent people from losing distrust in the banking system, leading to people not putting money in banks along with the big banks failing and leading to smaller, sketchier banks as the forefront.

Problem #3: The Fluctuations

In a gold standard system, inflation basically depends on the rate that gold is mined since prices are linked to the supply of gold. Fluctuations in the market price of gold basically replace fluctuations in dollar prices of goods, and these fluctuations tend to be much worse. I’ve already explained the dangers of deflation, but there’s more to it then that:

The standard deviation of inflation during the 53 years of the gold standard is nearly twice what it has been since the collapse of the Bretton Woods system in 1973 (denoted in the chart by the vertical red line). That is, even if we include the Great Inflation of the 1970s, inflation over the past 43 years has been more stable than it was under the gold standard.

Money and Banking

Economic growth tended to be equally as volatile, and so were the amount of recessions and banking crises. Recessions every 3.5 years were replaced by recessions every 6 years, according to business cycles. There also happened to be more banking crises within the half century of the gold standard versus the time there wasn’t (five full-fledged banking crises versus two).

Deflation is also a much bigger problem:

  • 1879 to 1933 (Full Gold Standard): inflation-adjusted price of gold fluctuated from $700 range in 1890s to $200 range in 1920s
  • 1934 to 1970 (Partial Gold Standard): inflation-adjusted price of gold went from $563 to $201

The inflation-adjusted price of gold used to be much higher than it is now, like the 1980s market price being almost 66% higher than it is now. If real output outpaces the quantity of money, increased liquidity and deflation are going to be the effects, and the economy will be at the mercy of those fluctuations. Because the gold supply is finite, it is reasonable to assume it will grow slower than the economy, leading to deflation over time. When the United States was on some form of gold standard, there were 12 years of deflation, reaching high percentages like -10.5% in 1921, -9.0% in 1931, and -9.9% in 1932. Without the gold standard, there’s been one year of deflation, -0.4% in 2009 because of The Great Recession.

The gold standard can become deflationary during a time of economic expansion due to its inelasticity and ultimately put a damper on growth. As population, the workforce, and overall economic output grow, if the money supply under a gold standard remained static, the demand for new money would outstrip existing stocks. Hence the cost of money, and things like payrolls, would become increasingly difficult to maintain over time.


A common argument that pro-gold standard people put out is that gold standard has real value, while fiat currency doesn’t. Obviously, this is pretty much a vacuous point as shown by these volatile cycles and the fact that gold can lose value, too.

We’ve looked at the volatility from all of those graphs and statistics, yet just for some additive proof I will insert some more, comparing CPI inflation under the gold standard and under the current practices, including quantitative easing.

Problem #4: Transmitting Financial Shocks

The gold standard was a global arrangement that formed the basis for a virtually universal fixed-exchange rate regime in which international transactions were settled in gold.

Money and Banking

This basically means that a country with a trade deficit had to transfer gold to countries with trade surpluses, reducing the quantity of money and leading to strict deflationary pressures. Countries with trade surpluses didn’t have to deal with this, and this led to a transmission of shocks back in the 30s, where countries with surpluses that were absorbing this gold had to choose between overheating their economy or tightening monetary policies, both bad options that would hurt the overall global economy, and this was what set the stage for the 1929 contractionary period that would late be known as the Great Depression. Monetary policies were tightened everywhere all because of this, leading to less money available and more real debt, defaults, and bank failures. Fixed exchange rates under the gold standard basically transmit negative demand shocks.

There is no question that switching off from the gold standard helped recovery, shown by the difference in industrial production of Sweden, who got off of the gold standard in 1931, and France, who got off of the gold standard in 1936. Currency depreciation stimulated the economy, with stable prices and increased employment, output, investment, and exports.

Temin’s Analysis on Problem #4

  1. “The asymmetry between surplus and deficit countries in the required monetary response to gold flow”

Temin explains this point much better. In theory, central banks with trade surpluses are supposed to help the “price-specie flow mechanism” by expanding domestic money supplies and inflating, while deficit countries reduced money and deflated.

In practice, the need to avoid a complete loss of reserves and an end to convertibility forced deficit countries to comply with this rule; but, in contrast, no sanction prevented surplus countries from sterilizing gold inflows and accumulating reserves indefinitely, if domestic objectives made that desirable. Thus there was a potential deflationary bias in the gold standard’s operation.


While the gold standard seems alluring, in reality it causes a ton of economic volatility and instability, while also hurting the central bank’s ability to help recover from recessions through countercyclical policies.

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Chris is socially moderate and economically left-leaning, aligning most with one-nation conservatism social views and social democratic economic views. He is extremely interested in economic issues, yet holds strong beliefs in many social issues regarding abortion, immigration, the environment, and more. Chris has his own website called and co-admins an Instagram page called @keynesiankids.

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