Why We Cannot Return to the Gold Standard

The gold standard is a once-popular monetary system where goods and services are traded based on the value of gold. However, with the advent of fiat money, which is currency backed not by precious metals but rather by the government's promise to pay, it is less feasible to revert to this system. There are several compelling reasons why the gold standard is not a viable option for modern economies:

No Longer a Primary Cause of Inflation

Fiat money is often misattributed as a primary cause of inflation, but in reality, it is the excess supply of money relative to the amount of goods and services available that leads to price increases. Just as inflation occurred in the days of gold and silver money, modern fiat money can also lead to inflation, as the same fundamental principles apply.

Major Deflation When Returning to Gold Standard

Returning to a gold standard would result in significant deflation, which can be detrimental to economic growth. Deflation decreases consumer spending as people delay purchases, expecting prices to fall further. Moreover, it can lead to debt deflation, where the real value of debts increases, causing financial distress for individuals and businesses.

Social and Economic Advancements

Today's societies are more educated, more technologically advanced, and more efficient than those of the past. The gold standard, with its limitations, hinders economic progress. For instance, with modern digital payment systems, there is no need to carry heavy bags of gold coins or attempt to clean soiled paper currency. These advancements have made our financial systems more accessible and efficient.

Challenges and Impediments to a Gold Standard

The challenges associated with a gold standard are numerous. There is not enough gold to back the entire circulating US Dollar supply or even the issuance of electronic currency. A gold standard would require that every dollar in circulation and in existence is backed by gold, restricting the issuers' ability to create more money as needed for economic growth.

Furthermore, the introduction of hoarding would create an imbalance. Citizens would exchange their currency for gold, leading to a shortage of available gold for the economy. This would trigger a chain reaction of price hikes for materials that require precious metals as inputs, such as aluminum and copper.

Historically, during the 19th century when the US was on a strict gold standard, the Panic of 1837 occurred due to insufficient gold reserves. This economic calamity ultimately led to a fragmented monetary system, with different regions issuing their own currency. The consequences were severe, leading to regular depressions and financial instability.

Conclusion

In conclusion, the reasons why we cannot return to the gold standard are numerous and well-documented. The challenges associated with it, such as deflation, economic inefficiencies, and limitations on economic development, far outweigh the perceived benefits. Modern fiat money systems provide the flexibility and efficiency needed for a dynamic and growing economy.