From my understanding, remove from the gold standard just allows government to arbitrarily make up the value of the now fiat currency, which is why we now struggle with inflation and soaring debt.
It seems obvious that you’d want your dollar to theoretically be fixed to another medium with a readily appraisable value simply to maintain stability and prevent government corruption through manipulation of the monetary supply.
But then again, I’m no economist.
In: Economics
>From my understanding, remove from the gold standard just allows government to arbitrarily make up the value of the now fiat currency, which is why we now struggle with inflation and soaring debt.
In fact, it’s the opposite. Precisely because they can make up the value of the currency, they can ensure inflation is kept in check.
The tool used to do this isn’t perfect (there are still periods of high inflation) but it’s far better than no tool at all, which is what they’d have if the dollar was pinned to a commodity price. Inflation in the US is back to normal now – prices might still be high, but they’ve stopped getting higher.
Most countries with advanced economies have a “central bank” (the US calls theirs the Federal Reserve). The central bank’s job is, basically to control money supply and interest rates. When inflation gets too high, they might raise interest rates. This discourages people from spending, bringing inflation down again. When inflation gets too low (yes, there is such a thing, and it’s not good), they lower interest rates (and, in extreme circumstances, pump up the money supply) in order to encourage people to spend, and so bring inflation back to a healthy range (typically between 2% to 4% per year).
Government debt is a different matter, and is far less serious than people sometimes think. Government debt accumulates when governments don’t collect enough tax to cover their spending. This might happen because they’re spending too much, or it might happen because they’ve cut taxes too much, but sometimes it just happens because the economy is lousy, and taxes automatically drop. None of this has anything to do with the gold standard. In fact, government debt is (like inflation) a bigger problem if the currency is tied to a commodity. After all, if you owe a ton of gold, you’ll always owe a ton of gold, but if the economy is growing in dollar terms (because of innovation, education, and also because there’s manageable amount of inflation), then $X billion dollars of debt slowly becomes a smaller and smaller amount of actual value. Or, if the economy is trash, and your dollar is pegged to a commodity, you can’t get out of the recession so easily – after all, the central bank doesn’t have the tools it needs to encourage people to spend.
Because being able to control the money supply is very important.
When an economic crash happens, say, due to a global pandemic, demand for goods and services absolutely craters and will lead to high unemployment and a lasting recession. By increasing the money supply we can stimulate demand to make that unemployment and lower spending last a few months rather than a few years.
When a supply shock occurs, say, do to a global oil shortage, and prices start rising it really helps to be able to shrink the money supply.
Price stability by way of a gold standard is not worth the complete inability to practice monetary policy.
Furthermore, gold doesn’t have a “readily appraisable value.” Governments just said, “$1 is worth x ounces of gold” arbitrarily.
Having a gold standard or a fiat currency also has next to nothing to do with the government’s debt, at least in countries with an independent central bank. The government’s taxing and spending powers and its use of those powers are what determine the debt.
Finally, it is not “government corruption” for an arm of the government to do the job laid out for it in a law passed by Congress.
The inflation is certainly a drawback, a disadvantage. However, we gained some other great advantages, including not limiting the size of our economies to how much gold there is in the world. Even accounting for inflation, the world’s economy has increased quite a bit because of increased gsp multiplyers and fiat currency.
Suddenly, one nation getting richer doesn’t have to be because it took more materials from another anymore, it’s not a 0-sum game anymore. The same thing happens within a nation, suddenly one portion of society can increase their standard of living without taking away from another.
Obviously, that’s a gross oversimplification. There mare also other advantages, but I don’t understand them as well as this one. There are also some drawbacks, such as how much easier it is to confuse a series of bubbles for real growth.
The first thing to understand in this is that the amount of money in circulation and the interest rate for borrowing and repaying money are inherently linked. The interest rate is the “price of money” (or really the price of money over time). The more money in your system, the lower the interest rate (the cheaper it is to borrow). The less money in your system, the higher the interest rate.
So the question is, what do you want to set the interest rate in your economy? One answer is to say it should be set by “market forces”, meaning you hold the quantity of money fixed, tied to the quantity of gold. But there are issues here. One is that the quantity of gold, and the value of gold, are not fixed, and change over time due to forces that are pretty arbitrary when it comes to financial stability (e.g. gold mining technology could improve and cause your interest rates to go way down — not the best).
But the broader idea is that governments want to be able to influence interest rates, and most people do, too. When an economy is crashing, it’s better for most people if you can lower interest rates and try to reduce the amount of unemployment that happens. When the economy is really heating up and prices are going way up, you want to be able to adjust interest rates up to try to get that under control.
There are a lot of debates about the extent to which governments should do this, but the real world experience is pretty clear that you want to be able to do this to some extent. For example, being able to lower interest rates at certain periods and for certain sectors was critical for the US to enable industrial development, development of the western territories, and middle-class home ownership. Unlikely that the US would have the middle class it has now without it.
That doesn’t mean that all monetary policies are good. Some governments are irresponsible with this, and some governments try to use this to control international exchange rates, which is very risky.
It is tied to something… confidence and government stability.
Tying it to a shiny rock can be as arbitrary as anything else. You don’t want the money to be convertable to anything. Then whoever owns that thing owns your economy. Someone stockpiking gold can ruin your system. Finding new sources can overload it. And if you’re forced to own that thing, you can’t revolutionize sectors of your life.
Apple can’t make phones worth a trillion, Microsoft can’t make operating systems for 3 trillion, Boeing can’t make airplanes for 125 billion if your economy can only be worth how much gold is in Fort Knox. If you’re just going to lower the value of the gold, and say each dollar is worth miniscule amount of gold, then why not admit it is arbitrary and that let’s you print money to fight inflation?
Well, in Americas case it was because the Nixon government was very corrupt and they wanted our economy to be based on the value of oil instead of gold because they were heavily invested in oil. Unlike gold, oil is consumed and was required for the basic function of the world, so it has a decent case for why it would be a good thing to base a currency off of…except then you have to do a lot of nasty things to control the world’s oil supply so you don’t get outcompeted by people who have more or similar oil reserves (See: every war the united states has been involved in since this happened).
And then there’s the whole thing were it also incentivizes the suppression of better energy technologies, promotes pollution and fuels climate change denial…I’m not sure if getting off the gold standard was good. It very well may have been, but getting onto the petrodollar was unequivocally Not.
Getting off the gold standard was not simply “good”. It had trade offs, just as the US Dollar being the global reserve currency has benefits and drawbacks for the USA today.
The big advantage of the gold standard is that it facilitates trade. No one has to worry about the value of the currency they’re trading with if they know it can be converted into a set amount of gold. So a currency on the gold standard improves confidence in trade. For about 200 years until 1917 the UK was on the gold standard and so its Pound Sterling became the global reserve currency. This was of benefit to the UK as people wanting to trade anywhere in the world more-or-less needed to have pound sterling, which to get they had to sell things to the UK. This enabled the UK to invest across the world and help enrich its asset-holding class. Other countries who were also on the gold standard had to control their policies in a way which also maintained it, which stopped a lot of otherwise radical measures.
The downside of the gold standard is that you cannot control your own money supply for domestic purposes. Because you if print too much money, inflation will happen, and suddenly your currency isn’t worth what it’s meant to be in gold and your gold standard collapses.
Controlling your money supply for domestic purposes has advantages as you can expand spending in lean times and devalue your own currency to stimulate exports, which benefits your workers.
So essentially, gold standard is good for trade, and good for the assest holding class, but bad for workers.
In the midst of WW1, the UK was spending so much that it could not maintain the gold standard and came off it. After the war was won, it wanted to return to the gold standard to uphold the Pound Sterling’s position as global reserve currency. But to do this it had to cut domestic spending – because it had to limit the number of pounds to the amount of gold it could be trusted to back it with. Eventually it rejoined the gold standard in 1925. However, reducing public spending affected people. Especially workers. This lead to hardship in the UK and the first and only general strike in 1926. In 1918 the UK had extended the vote to basically all men, and women over the age of 30. Giving all the workers the vote pushed the political balance in favour in the workers instead of the asset holding class and the pro-worker Labour party did better and better in elections. As a result in 1931 the UK left the gold standard forever.
we don’t struggle with inflation. The “high inflation” of the last 2-3 years wouldn’t even be average if you looked back at the late 60s through early 90s.
Inflation/deflation happens regardless of the type of money system. fiat currency just allows control of the money supply as others have said which is a tool to control it.
It’s not intuitive.
Prior to being able to control the money supply via fiat currency, financial crises were routine because central intervention essentially wasn’t possible. Since then, there have been two financial crises that were averted / solved with monetary policy. Both 2008 and COVID would have been massively disastrous, Great Depression type events with a fixed money supply.
It wasn’t particularly but economies grew so big there wasn’t enough gold to back them and more. A new way was necessary.
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