Pros And Cons Of The Gold Standard

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The gold standard was the old monetary system used whereby paper money was backed in gold. The value of a country’s currency was fixed in terms of the quantity of gold. It set the money supply and determined the price level. The problem of the gold standard arose after the subsequent world wars and the great depression, when countries had to incur enormous expenses. Post World War II , US had an enormous trade surplus while all the other countries were in huge debts. It meant that US had every country’s gold and remained on the gold standard until 1971, when then president Richard Nixon ended it. Up till then, every country had been pegged to the US dollar which was the only currency backed by gold. As the other countries’ economies begin…show more content…
I especially like the idea that it can be run without a central bank. Without intervention, there is less likelihood for shocks and uncertainties that are tied to it. I feel that this is important because it takes away a lot of speculative expectations when the economy is left on its own and able to self-correct. However, it is also important to note that it would require a lot of effort to change the system again. The gold standard should be left as a benchmark for what is expected of a central bank. Since it requires international cooperation for this system to work, it could possibly work if major central banks like the European Central Bank, Bank of Japan and the Federal Reserve can be persuaded to collaborate. As can be seen with the good track record that the gold standard has in peacetime, it is guarantees to be economically stable in the years to…show more content…
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Discussion Questions:

1. Why was classical gold standard more successful than interwar gold standard?
- classical: hegemonic system, Great Britain at the center
- interwar: Britain declined while new potential hegemon (USA)
- after war, not many countries were able to switch back
- ineffective cooperation among central banks

2. Which system (fiat or gold standard) is better at limiting inflation?
- fiat has been in place for quite some time, it has gradually improved
- gold standard has a value attached to it so it can be more predictable in terms of pricing
3. What are the challenges to return to Gold Standard?
- government like to intervene and mess up system
- requires government restraint and intelligence
- problem for any reform if government don’t live by the rules
- resistant to change, slow to implement throughout
- international cooperation, if not only the country’s currency would move up and down with the value of
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