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Gold Standard Pros vs Cons

Advantages of the Gold Standard The gold standard limits the power of governments to inflate prices through excessive issuance of paper currency. The gold standard makes chronic deficit spending by governments more difficult, as it prevents governments from ‘inflating away’ the real value of their debts. High levels of inflation are rare and hyperinflation is impossible as the money supply can only grow at the rate that the gold supply increases.  (However, the Great Depression began while USA was still on the gold standard). Disadvantages of the Gold Standard A gold standard leads to deflation whenever an economy using the gold standard grows faster than the gold supply.  Deflation rewards cash savings and punishes debtors.  Real debt burdens therefore rise, causing borrowers to cut spending to service their debts or to default. That undermines the financial system. Deflation also robs a central bank of its ability to stimulate spending. Deflation is difficult to control, and is a serious risk to a growing economy. The total amount of gold that has ever been mined has been estimated at around 142,000 metric tons.   Assuming a gold price of US$1,000 per ounce, or $32,500 per kilogram, the total value of all the gold ever mined would be around $4.5 trillion. This is less than the value of circulating money in the U.S. alone, where more than $8.3 trillion is in circulation or in deposit. Therefore, a return to the gold standard would result in a significant increase in the current value of gold, which may limit its use in current applications. For example, instead of using the ratio of $1,000 per ounce, the ratio can be defined as $2,000 per ounce effectively raising the value of gold to $9 trillion. Following a gold standard would mean that the amount of money would be determined by the supply of gold, and hence monetary policy could no longer be used to stabilize the economy in times of economic contraction. Monetary policy would essentially be determined by the rate of gold production. Fluctuations in the amount of gold that is mined could cause inflation if there is an increase or deflation if there is a decrease. The gold standard may be susceptible to speculative attacks when a government’s financial position appears weak.     Free Market Currency A currency is a truer measure of countries worth because it includes the value of land, commodities, all assets of perceived value and statist value of a central government’s policies. A Currency is easier to conduct trade between nations. The value of one countries currency in relation to another country is known instantaneously due to trading activity in the currency markets. Statists use monetary policies to finance deficit spending in the mistaken belief that the unit of monetary measure never changes.  In actuality; the value of a currency changes in the market place making the markets a better judge of the true value of a countries financial strength in comparison to other countries. Interesting thoughts Fairness is a little understood concept which recent research in primate behavior is demonstrating itself to be part of the social fabric.   This research is showing that fairness is a driving force for social interaction.  As a species, man creates laws and regulations to create fairness.   The financial markets are an attempt to create fairness in monetary value.  Interestingly, there is no way to truly define fairness because of the complexity of the issue as a man-made perception and all attempts to do...