Gold Standard

Gold Standard Introduction

A Monetary system in which economic unit of account is a fixed weight of gold is called as gold standard.

A gold standard system can be classified in various kinds.

The gold specie standard: It is a system in which the monetary unit is linked with circulating gold coins, or with the unit of value defined in terms of one special circulating gold coin in combination with additional coinage made from a lesser valuable metal.

The gold exchange standard: This system normally involves the circulation of only coins made of silver or other metals, but where the (jurisdiction) guarantees a fixed exchange rate with another country that is on the gold standard. This creates in effect a gold standard, in that the value of the silver coins has a fixed external value in terms of gold that is independent of the intrinsic silver value.

The gold bullion standard: This is a system in which gold coins do not circulate, but in which the establishment is ready to sell gold bullion on demand at a fixed price in exchange for the circulating currency.

At present, no country currently employs the gold standard system as the basis of its monetary system, even as several hold large amount of gold reserves.

History

The Beginning of Gold Standard

The gold specie standard was not planned, but the system rather emerged out of a broad acceptance that gold was a valuable as a universal currency.While commodities compete for the role of money, the one that over the course of the times loses the least value takes on the role.

Throughout the world, and for over thousands of years gold has been extensively used a medium of exchange. In fact, the use of gold as money dates back thousands of years.  The earliest known gold coins were minted in the kingdom of Lydia in Asia Minor about 610 BC. In China, the first ever coins were minted in China are thought to date around 600 BC.

In the Middle Ages, the Byzantine gold Solidus, generally known as the Bezant, was circulated right through the Europe and the Mediterranean. However, as the Byzantine Empire’s financial clout declined, the European world started to use silver, rather than gold, as the preferred currency, resulting into  the development of a silver standard.

Silver pennies, based on the Roman Denarius, developed into the staple coin of Britain around the time of King Offa, round about AD 796, and similar coins, including Italian denari, French deniers, and Spanish dineros circulated all over the Europe. After the Spanish innovation of great silver deposits at Potosí and in Mexico during the 16th century, global trade came to depend on coins such as the Spanish dollar, Maria Theresa thaler, and, in the 1870s, the United States Trade dollar.

In contemporary times the British West Indies was one of the first regions to implement the gold specie standard. After Queen Anne’s declaration of 1704, the British West Indies gold standard was a in effect a gold standard based on the Spanish gold doubloon coin.

Few years later in 1717, master of the Royal Mint Sir Isaac Newton established a new mint ratio between silver and gold that resulted in driving silver out of circulation and putting Britain on a gold standard.

Nevertheless, it was only in 1821, when the gold sovereign coin was issued by the new Royal Mint at Tower Hill in the year 1816, the United Kingdom officially put on a gold specie standard, a first country among industrial powers.

After United Kingdom, Canada soon adopted this system in 1853, followed by Newfoundland in 1865, and the USA and Germany de jure in 1873.

While the USA used the Eagle as their unit, Germany issued the new gold mark, even as Canada implemented a twofold system based on both the American Gold Eagle and the British Gold Sovereign.

Later, Australia and New Zealand also adopted the British gold standard, followed by the British West Indies, while Newfoundland was the only British Empire territory to issue its own gold coin as a standard.

Royal Mint branches were founded in Sydney, New South Wales, Melbourne, Victoria, and Perth, Western Australia with an intention of minting gold sovereigns from Australia’s rich gold deposits.

The crisis of silver currency and bank notes (1750–1870)

During the end of the 18th century, amid wars and trade with China, which used to sell commodities in bulk to Europe but had little use for European goods, resulted in massive shortage of silver in the economies of Western Europe and the United States.

Coins dimensions were getting smaller and smaller numbers, and there was a sudden increase of bank and stock notes used as money.

United Kingdom

Between 1790s, the United Kingdom, was going through a severe shortage of silver coinage, stopped minting larger silver coins and issued “token” silver coins and over-struck foreign coins. By the end of the Napoleonic Wars, United Kingdom started a coinage program in big way that created standard gold sovereigns and circulating crowns and half-crowns, and ultimately copper farthings in 1821.

The replacement of silver coinage in United Kingdom after a long drought produced a burst of coins: United Kingdom produced about 40 million shillings between 1816 and 1820, 17 million half crowns and 1.3 million silver crowns.

The 1819 Act for the Resumption of Cash Payments decided on 1823 as the year for the resumption of convertibility; however it was reached by 1821. All through the 1820s, small notes were introduced by regional banks, which were ultimately restricted in 1826, while the Bank of England was permitted to set up regional branches.

By 1833, though, the Bank of England notes were declared as legal tender, and redemption by other banks was discouraged. Then in 1844 the Bank Charter Act acknowledged that Bank of England Notes, fully backed by gold, were the legal standard. Following the strict interpretation of the gold standard, this 1844 act marks the foundation of a full gold standard for British money.

US

In 1785, the US implemented a silver standard based on the Spanish milled dollar. Earlier in 1792, the Mint and Coinage Act had codified this act along with declaring the Federal Government’s use of the “Bank of the United States” to hold its reserves, and establishing a fixed ratio of gold to the US dollar. This was, in fact, a derivative of silver standard, because the bank was not obliged to hold silver to back all of its currency.

Subsequently, it prompted a long series of attempts for America to put a bi-metallic standard for the US Dollar, which would continue until the 1920s. Gold and silver coins were legal tender; along with the Spanish real which was a silver coin struck in the Western Hemisphere.

As the U.S. was under a huge debt after its Federal Government had to finance the Revolutionary War, silver coins struck by the government ceased in circulation, and in 1806 President Jefferson temporally halted the minting of silver coins.

The US Treasury had to follow a strict hard-money standard, conducting business only in gold or silver coin as part of the Independent Treasury Act of 1848, which officially separated the accounts of the Federal Government from the banking system.

Nonetheless, the fixed rate of gold to silver overvalued silver with regard to the demand for gold to trade or borrows from England. The massive use of gold in favor of silver led to the search for gold, including the California Gold Rush of 1849. After Gresham’s law, silver flooded into the US, which traded with other silver nations, and gold vanished. In 1853, the US lowered the silver weight of coins, to keep them in circulating in the financial system, and in 1857 lifted the legal tender status from foreign coinage.

Amid the final crisis of the free banking era of international finance, which began in 1857, American banks stopped payment in silver temporarily, moving away from the very young international financial system of central banks.  Subsequently, in 1861 the US government suspended payment in gold and silver, effectively putting an end on attempts to form a silver standard basis for the dollar.

International

Between the period 1860 and 1871, several attempts to revive bi-metallic standards were made, together with one based on the gold and silver franc; still, with the rapid flooding of silver from new deposits, the anticipation of scarcity of silver ended.

The interface between central banking and currency basis created the main source of monetary instability during this period. The combination that created economic stability was a ceiling on supply of new notes, a government control on the issuance of notes directly and, indirectly, a central bank and a single unit of value. Attempts of not following these conditions resulted in periodic monetary crises.

As notes were devalued; or silver disappeared from circulation as a store of value; or there was a despair as governments, demanding specie as payment, exhausted the circulating medium out of the economy. At the same time, there was a considerably expanded requirement for credit, and large banks were being licensed in various states, including, by 1872, Japan. The need for a solid basis in monetary affairs would create a rapid acceptance of the gold standard in the period that ensued.

Japan

Following Germany’s example from the Franco-Prussian War (1870-1871), where Germany decided to extract reparations to make an easy adoption to gold standard, Japan gained the required reserves after the Sino-Japanese War of 1894–1895. Still, the gold standard provided government adequate bona fides when it sought to borrow overseas is a matter of debate. For Japan, implementing the gold standard was considered imperative to gain access to Western capital market

The Gold Exchange Standard (1870-1914)

By the end of the 19th century, some of the remaining silver standard countries started to peg their silver coin units to the gold standards of the United Kingdom or the USA. In 1898, British India pegged the silver rupee to the pound sterling at a fixed rate of 1s 4d, followed by the Straits Settlements adopting to a gold exchange standard against the pound sterling with the silver Straits dollar being fixed at 2s 4d in 1906.

By the end of the century, the Philippines pegged the silver Peso/dollar to the US dollar at 50 cents. A comparable pegging at 50 cents emerged at around the same time with the silver Peso of Mexico and the silver Yen of Japan.  In 1908, when Siam adopted a gold exchange standard , only China and Hong Kong were left  on adopting  the silver standard.

Following the Adoption of the gold standard many European nations changed the name of their currency from Daler (Sweden and Denmark) or Gulden (Austria-Hungary) to Crown, as the former ones were historically associated with silver coins and the latter with gold coins.

Impact of World War I (1914–25)

Governments reeling under financial crunch together with need to fund high levels of expenditure, but with inadequate sources of tax revenue, temporally halted the convertibility of currency into gold on a number of occasions in the 19th century. The British authority also suspended convertibility (that is to say, it went off the gold standard) in the midst of Napoleonic wars and the US government during the US Civil War. In both cases, convertibility was recommenced after the war. The true test, though, came in the form of World War I, a test “it failed utterly” according to economist Richard Lipsey.

In order to fund the costs of war, most confrontational countries stopped implementing the gold standard during the war, and suffered massive inflation. The inflation levels differed between states, as several countries returned to the standard after the war at price determined by themselves (some, for example, decided  to enter at pre-war prices), with some countries’ goods were being undervalued and some overvalued.

Eventually, the system as it stood could not handle efficiently with the large deficits and surpluses created in the balance of payments; this has earlier been attributed to growing rigidity of wages (especially in terms of wage cuts) brought about by the beginning of unionized labor, but is now more likely to be thought of as an innate fault with the system which came to light under the pressures of war and rapid technological change. In any case, prices had not reached equilibrium by the time of the Great Depression, which served only to kill it off completely.

For instance, Germany had stopped implementing the gold standard in 1914, and could not successfully return to it as Germany had lost much of its remaining gold reserves in reparations. The German central bank issued un-backed marks almost without any restriction to buy foreign currency for further reparations and to support workers during the Occupation of the Ruhr eventually leading to hyperinflation in the 1920s.

The Gold Bullion Standard and the Decline of the Gold standard (19925-31)

At the outbreak of the First World War, United Kingdom alongside rest of the British Empire ended The gold specie standard.

Treasury notes substituted the circulation of both gold sovereigns and gold half sovereigns. Nonetheless, legally, the gold specie standard was not abolished. The end of the gold standard was successfully affected by appeals to patriotism when somebody would plead the Bank of England to exchange their paper money for gold specie. Then in 1925, when Britain went back to the gold standard together with Australia and South Africa, that the gold specie standard was officially terminated.

Following the British Gold Standard Act of 1925, the gold bullion standard was introduced while the gold specie standard was abolished.  The new gold bullion standard did not foresee any return to the circulation of gold specie coins.  Instead, the law prompted the authorities to sell gold bullion on demand at a fixed price, but only in the way of bars carrying about four hundred ounces troy of fine gold.

This gold bullion standard was implemented until 1931 when speculative attacks on the pound pressed Britain to discontinue gold standard. Loans borrowed from American and French Central Banks amounting to £50,000,000, were inadequate and exhausted in a matter of weeks.

Later on September 19, 1931, the United Kingdom exited from the revised gold standard,  forced to shelve the gold bullion standard owing to huge outflows of gold across the Atlantic Ocean. The British profited from the exit. They could now use monetary policy to stimulate the economy through the lowering of interest rates.  Both Australia and New Zealand had already been pressed to depart the gold standard by the same pressures connected with the Great Depression, while Canada soon  following the suit with the United Kingdom.

The interwar to some extent backed gold standard was inherently unstable, because of the conflict between (a) the ever increasing of sterling and dollar liabilities to foreign central banks, and (b) the resulting decline in the reserve ratio of the Bank of England, and U.S. Treasury and Federal Reserve Banks.  This volatility was increased by gold flows out of England, with its overvalued pound, to other countries such as France, which was trying to make Paris a world class financial center, in competition with London and New York.

It was speculations that wreck havoc, arising from lack of confidence in authorities’ commitment to currency convertibility that ended the interwar gold standard. In May 1931 there was a run on Austria’s leading commercial bank, and the bank ceased to exist. The run also spread to Germany, where another big bank also collapsed. The countries’ central banks lost large reserves; international financial support also came very late; and in July 1931 Germany decided to adopt the exchange control, followed by Austria in October. These countries moved away fom the gold standard.

The Austrian and German economic woes, along with British budgetary and political difficulties, were among the factors that shattered confidence in sterling, which occurred in mid-July 1931. Runs on sterling followed, and the Bank of England lost much of its reserves. Loans from foreign countries were inadequate, and in any event taken as a sign of weakness. The gold standard was dropped in September, and the pound rapidly and sharply devalued on the foreign- exchange market, as overvaluation of the pound would imply.

Depression and World War II (1932–46)

Prolongation of the Great Depression

According to some economic historians, such as American professor Barry Eichengreen, the gold standard of the 1920s was responsible for extending the Great Depression.  Since the gold standard prohibited the Federal Reserve from expanding the money supply aimed at stimulating the economy, fund insolvent banks and fund government deficits which could “prime the pump” for an expansion- the economy of the U.S. went from bad to worse at that time.

Once the US departed the gold standard, it became free to alter its policies regarding the money creation. The gold standard restricted the flexibility of the central banks ‘monetary policy by limiting their ability to increase the money supply, and consequently their capacity to lower interest rates. In the US, the Federal Reserve was needed by law to keep 40% gold backing of its Federal Reserve demand notes, and as a result, could not enlarge the money supply beyond what was permitted by the gold reserves held in their vaults.  Some noted economists including Federal Reserve Chairman Ben Bernanke and Nobel Prize winning economist Milton Friedman put most or the entire fault for the severity of the Great Depression at the feet of the Federal Reserve, mainly owing to the deliberate tightening of monetary policy.

The US economic downfall in 1937, the last gasp of the Great Depression, was blamed on tightening of monetary policy by the Federal Reserve leading in a higher cost of capital and fragile securities markets, a falling net government contribution to income, the undistributed profits tax, and a rising labor costs.As a consequence, the money supply peaked in March 1937, and ebbing in May 1938.

Higher interest rates exaggerated the deflationary pressure on the dollar and pulled down investments in U.S. banks.  Meanwhile, in 1931, commercial banks also converted Federal Reserve Notes to gold shrinking the Federal Reserve’s gold reserves, and prompting a corresponding decline in the amount of Federal Reserve Notes in circulation.

This speculative assault on the dollar resulted in widespread panic in the U.S. banking system. Suspecting looming devaluation of the dollar, many foreign and domestic depositors took out funds from U.S. banks to convert them into gold or other assets.

While people withdrew money in droves from the banking system due to panic, a reverse multiplier effect resulted in contraction in the money supply. Moreover, the New York Fed had loaned over $150 million (over 240 tons) to European Central Banks to help them out with their difficulties also exacerbated the money supply scarcity. This movement of gold out of the US started to shrink the US money supply. These loans became debatable once England, Germany, Austria and other European countries departed the gold standard in 1931 and undermined confidence in the dollar.

The forced tightening of the money supply due to people pulling out funds from the banking system during the bank panics resulted in deflation; and even as nominal interest rates dropped while inflation-adjusted real interest rates remained high, benefitting those that held onto money instead of spending it, forming the basis for a further slowdown in the economy.

Economic revival in the United States was slower than in Britain, mainly due to Congressional unwillingness to depart from the gold standard and float the U.S. currency as Britain had done.

During the early 1930s, the Federal Reserve shielded the fixed price of dollars in respect to the gold standard by hiking interest rates, attempting to increase the demand for dollars. Its commitment and continued implementation to the gold standard clarify why the U.S. did not involve in expansionary monetary policy.  In order to preserve competitiveness in the international economy, the U.S. maintained high interest rates. This helped drawing international investors who bought foreign assets with gold.

On January 30, 1924, Congress approved the Gold Reserve Act; the measure nationalized all gold as all the Federal Reserve banks were ordered to turn over their supply to the U.S. Treasury. In exchange the banks were provided gold certificates to be used as reserves against deposits and Federal Reserve notes. The act also endorsed the president to undervalue the gold dollar so that it would have simply 60 percent of its existing weight. Exercising his power, the president, on 31 January 1934, cheapened the value of the dollar, down from $20.67 to the troy ounce to $35 to the troy ounce, a devaluation of in excess of 40%.

Other factors that contributed towards  extension of the Great Depression include trade wars and the contraction in international trade created by trade barriers such as Smoot-Hawley Tariff in the US and the colonial Preference policies of Great Britain,  the reluctance and clumsy effort of central banks to act responsibly, government policies formed to prevent wages from falling, for instance, the Davis-Bacon Act of 1931, during the deflationary period leading in production costs dropping slower then sales prices and thereby hurting business profitability and swelling in taxes to trim down budget deficits and to support new measures such as Social Security. The US top marginal income tax rate climbed up from 25% to 63% in 1932 and to 79% in 1936.

The bottom tax rate also increased over 10 fold from .375% in 1929 to 4% in 1932. Unrelenting attacks on partially backed currencies which pressed many countries to depart from the gold standard and reduced confidence in the financial system, further harmed by the bank panics of the 1930s were also factors contributing to severe slowdown of the economy, as was rough weather such as the drought resulting in the US Dust Bowl.

Milton Friedman commented that “the severity of each of the major contractions — 1920-1, 1929-33 and 1937-8 is directly attributable to acts of commission and omission by the Reserve authorities”

He also pointed out that the US got out of the Great Depression because of the “natural resiliency of the economy and WW2, and not due to any acts of government, which in general were very destructive” , contributed to proliferation of the Great Depression.

Another renowned economist, Barry Eichengreen said that the Austrian School viewed the Great Depression as a product of a credit bust. Former, Federal Reserve Chairman, Alan Greenspan wrote that the bank failures of the 1930s were ignited by Great Britain abandoning the gold standard in 1931. This act “torn asunder” with little bit if confidence left in the banking system, said Greenspan. Financial historian Niall Ferguson observes that what made the Great Depression really ‘great’ was the European banking crisis of 1931.

British hesitate to return to gold standard

Between the period of 1939 and 1942, the UK exhausted much of its gold stock following purchases of munitions and weaponry on a “cash-and-carry” basis from the U.S. and other nations.  This scarcity of the UK’s reserve persuaded Winston Churchill of the uselessness of returning to a pre-war style gold standard.

John Maynard Keynes, who had a reservation against such a gold standard, suggested to transfer the power to print money in the hands of the privately owned Bank of England. Keynes, while cautioning about the perils of inflation, said, “By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some.”

Fairly possible, because of this, the 1944 Bretton Woods accord set up the International Monetary Fund and an international monetary system based on convertibility of different national currencies into a U.S. dollar that was in turn was convertible into gold.

Post-war international gold-dollar standard (1946–1971)

By the end of the Second World War, a system comparable to a Gold Standard and sometimes described as a “gold exchange standard” was founded under the Bretton Woods Agreements. In this system, many countries fixed their exchange rates compared to the U.S. dollar. The U.S. pledged to fix the price of gold at just about $35 per ounce. As a result, all currencies pegged to the U.S. dollar also had a fixed value in terms of gold.

France started to reduce its dollar reserves under the administration of the French President Charles de Gaulle which continued until 1970. The French Government used to trade dollar for gold with the U.S. government, thus reducing U.S. economic influence abroad. This practice, along with the fiscal deficit arising stemming from federal expenditures of the Vietnam War and persistent balance of payments deficits,  prompted President Richard Nixon to end the direct convertibility of the dollar to gold on August 15, 1971, leading in the system’s breakdown.

Theory

Storing and transporting commodity money is fairly inconvenient. Furthermore, it does limit a government to influence or control the flow of commerce within its dominion with the same simplicity that a fiat currency offers. Consequently, commodity money was substituted by representative money, and gold and other species were retained as its backing.

Gold was a universal form of money owing to its scarcity, sturdiness, divisibility, fungibility, along with ease of identification,often in concurrence with silver.  While Silver was generally the main circulating medium, gold was used more as a monetary reserve.

The gold standard differently specified how the gold backing would be implemented, together with the amount of specie per currency unit. The currency itself is merely paper and so has no inherent value, but is accepted by traders because it can be cashed in any time for the equivalent specie. A U.S. silver certificate, for instance, could be redeemed for an actual piece of silver.

Both representative money and the gold standard shield citizens from hyperinflation and other misuses of monetary policy, as were observed in some countries during the Great Depression. However, it will be wrong to say that both systems were not without their problems and critics, and so were partly abandoned via the international adoption of the Bretton Woods System. That system ultimately collapsed in 1971, at which time practically all nations had turned to full fiat money.

Keynesian analysis points that the earlier a country left the gold standard, faster was its economic recovery from the great depression. For instance, Great Britain and Scandinavia, which exit the gold standard in 1931, recovered much before than France and Belgium, which continued with  gold standard much longer.

Countries such as China, which implemented a silver standard, nearly avoided the depression entirely. The relationship between leaving the gold standard as a strong forecaster of that country’s severity of its depression and the time durations of its recovery has been shown to be constant for dozens of countries, together with developing countries. This may make clear why the experience and length of the depression varied between national economies.

Differing definitions

A 100%-reserve gold standard, or a full gold standard, subsists when a monetary authority possess sufficient gold to exchange all of the representative money it has issued into gold at the promised exchange rate. It is at times referred to as the gold specie standard to more easily classify it from other forms of the gold standard that have existed at different times. Those who oppose a 100%-reserve standard regard it as a difficult to implement, arguing that the amount of gold in the world is too small to sustain current global economic activity at current gold prices; implementation would require a many-fold increase in the price of gold.

However, those who are in favor of the gold standard have said that any quantity of gold can serve as the reserve. Their argument is that once money is established, any quantity of money becomes compatible with any level of employment and real income. According to them the prices of goods and services will adjust to the supply of gold.

Under international gold-standard system (which is essentially based on an internal gold standard in the countries concerned),gold or a currency that is convertible into gold at a fixed price is used as a means of making international payments. In this system, when exchange rates moves above or fall below the fixed mint rate by more than the cost of shipping gold from one country to another, great inflows or outflows take place until the rates go back to the official level. International gold standards time and again limit which entities have the right to exchange currency for gold. In the Bretton Woods system, these were called “SDRs” for special drawing rights.

Advantages

• Long-term price stability has been expressed as the biggest virtue of the gold standard.  The gold standard restricts the power of governments to increase prices through unjustifiable issuance of paper currency.  In the gold standard, high levels of inflation are uncommon, and hyperinflation is almost impossible as the money supply can only expand at the rate that the gold supply increases.  Economy-wide price inflation caused by rising amounts of currency chasing a steady supply of goods are rare, as gold supply for monetary use is restricted by the existing gold that can be minted into coin.  High levels of inflation in a gold standard system are usually witnessed only when warfare destroys a large portion of the economy, reducing the production of goods, or when a major new supply of gold becomes available. In the U.S. one of those periods of conflict was the Civil War, which shattered the economy of the South,while the California Gold Rush made large quantity of gold available for minting.
• Supporters of the gold standard maintain that its stability promote economic prosperity.
• The gold standard offers fixed international exchange rates between those countries that have adopted it, and consequently reduces uncertainty in international trade. Traditionally, inequity between price levels in various countries would be partly or wholly compensate by an automatic balance-of-payment adjustment method called the “price specie flow mechanism.  Gold used for import payments shrinks the money supply of importing nations, resulting in deflation and a decrease in the general price level for goods and services, making them more competitive, while the import of gold by net exporters tends to expand the money supply, causes inflation and a rise in the general price level, making them less competitive.
• The gold standard performs as a watchdog on government deficit spending as it restricts the amount of debt that can be issued. It also restrains governments from inflating away the real value of their already existing debt through currency depreciation. A central bank cannot be an unconstrained buyer of last resort of government debt. A central bank could not provide unlimited quantities of money whenever it like, as there is a limited supply of gold.
• A gold standard cannot be misused for what some economists describe financial repression. Newly printed money can be help purchasing goods and services, and to free debts, at no cost to the printer. This acts as a method to transfer the wealth of society to those that can print money, from everyone else. Financial repression is most effective in liquidating debts when accompanied by a solid dose of inflation, and it can be considered a form of taxation.
•  In 1966, Alan Greenspan noted down “Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.” John Maynard Keynes once said  “By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens”.Financial repression negatively affects economic growth.”
• The gold standard benefits savers by shielding their savings from being devalued or cleaned out through inflation, and by offering them with higher real (inflation adjusted) interest rates.  Between 1945 and 1980, both in the US and United Kingdom, negative real interest rates have typically cost lenders an estimated 3-4% of GDP per year.
• The gold standard is likely to limit credit booms and the subsequent boom bust cycle because of the inelastic supply of money

Disadvantages

•  The uneven allocation of gold as a natural resource makes the gold standard much more beneficial in terms of cost and international economic empowerment for those countries that produce gold.  By 2010 the leading producers of gold, in order, were China, followed by Australia, the US, South Africa and Russia.  The country with the biggest gold reserves is Australia.
• The gold standard tends to limit the economic growth.  While an economy’s productive capacity rises, its money supply should also increase. However, under gold standard, it is required that money be backed in the metal. Thus, should there be any scarcity of the metal; the ability of the economy to produce more capital will be constrained resulting in economic stagnation.
• Conventional economists believe that economic recessions can be mitigated effectively by expanding the money supply during economic downturns.  Adopting a gold standard would imply that the amount of money would be determined by the supply of gold, and thus monetary policy could not anymore  be employed to stabilize the economy in times of economic recession. This is the reason often emphasized to partially blame the gold standard for the Great Depression, citing that the Federal Reserve couldn’t increase credit enough to make up for the deflationary forces at work in the market.
• Even though the gold standard provided long-run price stability, it has also traditionally been linked with high short-run price volatility.  It has been disagreed by many, including noted economist Anna Schwartz, that this kind of volatility in short-term price levels can result into financial instability as lenders and borrowers become unsure about the value of debt.
• The total quantity of gold that has ever been mined has been estimated at approximately 142,000 metric tons and arguments have emerged that this amount is too small to serve up as a monetary base. While the value of this amount of gold is over 6 trillion dollars,  the monetary base of the US, with a around 20% share of the world economy, is estimated at $2.7 trillion at the end of 2011. Murray Rothbard argues that the quantity of gold available is not a bloc to a gold standard since the free market will decide the purchasing power of gold money based on its supply.
• Deflation hurts debtors financially more than anyone else.  Real debt burdens as a result rise, leading borrowers to cut spending to service their debts or to default. Lenders become richer, but may prefer to save some of their additional wealth instead of spending it all. By and large amount of expenditure is for that reason likely to fall.
• Monetary policy would basically be decided by the rate of gold production. Fluctuations in the quantity of gold that is mined could result in inflation if there is an increase or deflation if there is a decrease.  Some economists keep a view that this contributed to the severity and long duration of the Great Depression as the gold standard prompted the central banks to keep monetary policy too tight, causing deflation.
• Economist James Hamilton argued that the gold standard may be vulnerable to speculative attacks when a government’s financial position is considered weak, while some  others contend  that this very threat prevent governments’ involving in risky policy. For instance, some believe that the United States was pressed to shrink the money supply and hike interest rates in September 1931 to protect the dollar after speculators forced Great Britain off the gold standard.
• If a country intends to devalue its currency, a gold standard would usually bring about sharper changes than the smooth declines seen in fiat currencies, depending on the technique of devaluation.
• Nearly all economists favor a low, positive rate of inflation. Partly this negates the fear of deflationary shocks, but above all, they believe that central banks still have important role to play in dampening fluctuations in productivity and unemployment. Central banks can more carefully play that role when a positive rate of inflation gives them space to squeeze money growth without inducing price declines.
• It is not easy to manipulate a gold standard to adapt to an economy’s demand for money, providing practical constraints against the measures that central banks might otherwise employ to respond to economic crises.  The demand for money always matches the supply of money. Printing of new money lowers interest rates and thus increases demand for new lower cost debt, pushing-up the demand for money.

Advocates of a renewed gold standard

Adoption of a renewed gold standard is supported by many followers of the Austrian School of Economics, Objectivists, and free-market libertarians; also, in the United States, by strict constitutionalists mainly because they oppose to the role of the government in issuing fiat currency through central banks. A large number of gold-standard advocates also demand for a mandated abolishment to fractional-reserve banking.

Some politicians today argue for a return to the gold standard, other than adherents of the Austrian school and some supply-siders. Nevertheless, some eminent  economists have expressed support for a hard-currency basis, and have argued against politically-controlled fiat money, which includes former U.S. Federal Reserve Chairman Alan Greenspan (he had objected earlier)), and macro-economist Robert Barro.  Greenspan famously argued the case for implementing ‘pure’ gold standard in his 1966 paper “Gold and Economic Freedom”, in which he dubbed supporters of fiat currencies as “welfare statists” , aiming to misuse monetary policies to finance deficit spending.

Barro argues in support of accepting some type of “monetary constitution” that will provide consistency to monetary policy rather than setting aside decisions about monetary policy to be made on the basis of politics, but advises that what form this constitution takes—for instance, a gold standard, some other commodity-based standard, or a fiat currency with fixed rules for deciding the amount of money—is considerably less important.  U.S. Congressman Ron Paul has repeatedly argued for the restoration of the gold standard, but is no longer a strong supporter, instead supporting a basket of commodities that appears on the free markets.

For the moment, the international monetary system continues to rely on the U.S. dollar as a reserve currency by which key transactions, such as the prices of bullion along with other precious metals, are measured.  A series of alternative versions have been suggested, including energy-based currencies, and market baskets of currencies or commodities, gold being one of them.

In 2001, Malaysian Prime Minister Mahathir bin Mohamad argued in favor of a new currency that would be used primarily for international trade among Muslim nations. The currency he favored was known as the Islamic gold dinar and it was designed as 4.25 grams of pure (24-carat) gold. Mahathir Mohamad promoted the theory on the basis of its economic virtues of a stable currency unit and also as a political symbol to build greater unity between Islamic nations. The supposed intention of this move was thought reducing dependence on the United States dollar as a reserve currency, and to set up a non-debt-backed currency, in line with the Islamic law which is against the charging of interest. However, so far, Mahathir’s proposal of gold-dinar currency has failed to find any backers in the Islamic world.

In 2011, the governing body of the state of Utah passed a bill to accept federally-issued gold and silver coins as legal exchange to pay taxes; subsequently many other states in the U.S. started considering this legislation.

Gold as a Reserve

At present, in order to diversify foreign exchange portfolio, most countries hold gold reserves in significant quantity. Gold reserves not only help nations in defending their currency, but also hedging against the U.S. Dollar, which forms the major part of liquid currency reserves.