Why did we abandon the gold standard?
In: Economics
Imagine you have a country with 30 million people and the economy is supported by 30 million gold dollars. Works great.
Now fast forward 100 years. You have a country with 300 million people and an economy 10x larger supported by 30 million gold dollars. At this point one gold dollar represents 10x as much economic power than one gold dollar did 100 years ago. A house that was bought for 100,000 gold dollars is now worth … 10,000 gold dollars. A gallon of milk that was 5 gold dollars now is 1/2 gold dollar. You can see the value of one gold dollar is 10x as much now than before, so each item costs the same in the underlying unit of “economic activity”.
When money becomes more valuable over time, this is called “deflation”.
If my gold dollar is going to buy more tomorrow than it does today, then I want to save that gold dollar. I won’t buy anything today; I won’t hire employees because I want to pay wages tomorrow, not today. I don’t want to take out debts because the 20 gold dollars I owe now will be a larger debt to pay tomorrow. The entire economy screeches to a halt because no one wants to spend gold dollars. The result is an economic crash and a depression.
This happened ALL THE TIME under the gold standard. The only way to fix this is to issue more dollars to match (or even better, slightly exceed) the growth of the economy overall. This requires that dollars are not restricted by the amount of a finite resource. Once everyone realized this, the gold standard was abandoned.
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