University of Chicago
Type of paper: Thesis/Dissertation Chapter
If the gold standard was in use today, would it hinder economic growth
The gold standard refers to a monetary system in which the unit of account of money will be fixed with the weight of gold. There are many people who argue that the gold standard should be implemented to bring down the inflation. By fixing the supply of money with gold, the government will not be able to issue money without having gold in reserve. However, on the other hand, there are experts who argue that by fixing the supply of money with gold, economic growth will be hindered as the amount of gold available on Earth is limited (Mises, 2009).
This paper will show that the gold standard will hinder economic growth. I’ll firstly argue that there is a limited amount of gold in this world. Secondly, economic growth is seen as limited. Lastly, the amount of commerce will eventually reach a level equal to the gold holdings by the central bank of the country. Economic growth will be hindered if the gold standard is applied as there is a finite amount of gold in the world. Economic growth requires that there should be sufficient liquidity in the system.
By adhering to the gold standard, economic growth will be hindered as to supply more money, the government will first need to buy gold. (Skousen, 1997) Secondly, economic growth is seen to be unlimited. This doesn’t complement with the gold standard, as the amount of gold is limited in the world. If economic growth is to be unlimited, then there must be enough money supply to finance it. The gold standard makes to difficult for governments to issue money, which in fact limits economic growth. (Cagan, 1982)
Lastly, if the value of the dollar is limited by the amount of gold, then amount of commerce would reach a level equal to the gold holdings. In order for more money to be issued, the government would have to purchase more gold to back the increase in dollars issued. All the three points written above are influenced by the single factor that the supply is limited, while the demand for gold seems to be unlimited. (Cagan, 1982) Another problem with the gold standard is how to determine what weight of gold will equal to one unit of account.
Furthermore, the gold standard can be suicidal for developing economies. Developing economies will need to buy gold to finance their economic growth, which might already be to expensive to buy for them. Currently, these economies are able to finance it through a budget deficit. Moreover, how will the gold standard be able to handle the speed and complexity of today’s financial transactions? Lastly, if the world shifts to a gold standard, then all the governments will need to burn huge amount of fiat money to make sure that the money supply equals to the amount of gold in the economy. Eichengreen & Marc, 1997) In conclusion, I believe that although by adhering to the gold standard the level of inflation will come down. However, the economic growth of a country will be hinder. The major reason for this is the limited supply of gold. Furthermore, if the gold standard is implemented the prices of gold will shoot up, making it more difficult for developing economies to grow up. Lastly, the government will need to burn huge amounts of fiat money to make sure that the there is no extra money in the economy.