The Gold Standard is Fatally Flawed
The gold standard is a fatally flawed system since it ties any national price level to changes in the relative price of gold. Since the price of gold is fixed in terms of dollars, if the price of gold relative to bread goes up, then the price of bread in terms of dollars must fall. Therefore, any increase for any reason in the relative price of gold necessarily means deflation in the overall level of prices. We currently have some deflation in the housing sector of our economy and look at the havoc we are experiencing. The gold standard would bring such wonders to all sectors of the economy. Nevermind that the gold standard also trades internal economic balance for external balance and thus ties our economic growth, employment, and interest rates to the necessities of keeping the exchange value of the dollar fixed with other foreign currencies. The bias of the system toward deflation is far more than enough to indict the gold standard for the economic disaster that it was and would be if adopted.
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Could you please clarify how the gold standard causes deflation? If gold is pegged at $100 dollars and ounce and bread sells at $3 a loaf its 333 loaves for an ounces of gold. If gold rises to $1000 an ounce, wouldnt the price of bread increase.? im trying to wrap my head around the whole deflationary angle.
It seems like the biggest benefit of our present system is that all of our economies are tied together throughout the world. As the Greek crisis has shown, that creates a system where common financial standards need to be enforced, but can be difficult to enforce, and then when one relatively minor player stumbles, a continent can go with them.
Does this seem stable?
What keeps consumers and financiers from adapting financial products to handle deflation? Isn't it true that deflation with a metal backed currency is a net benefit for those who save? Won't savers benefit from increased purchasing power? Why is that a bad thing?
I completely disagree. While the gold standard is not perfect by any means, it is exponentially more stable than the fiat money system currently in place using fractional reserve banking. Fractional reserve banking helps to "create" money that doesn't actually exists. Also, the Federal Reserve's artificial manipulation of interest rate in order to keep the market from ever "losing" too much also attributes even more heavily to the "creation" of new money. This causes out dollar to become less and less valuable because we have more and more pieces of paper representing the same amount of assets. See the Cato Institute for more information.