With that in mind, maybe I shouldn't consider a return to the gold standard a loony idea. It's one of tenets of Ron Paul's long campaign to return the US to the straight-and-narrow of the constitution or die trying. But the drive to reestablish the gold standard is a poster child for the blindness of adherents to the disadvantages and risks of an idea.
Here are the highlights for the advantages of the gold standard:
- Paper currency has no intrinsic value because it isn't gold and isn't convertible to gold.
- Governments, politicians, and central banks often cause massive inflation of the currency.
- A gold standard makes it impossible for politicians or a central bank to inflate currency. The value of our national currency can stay stable for decades or longer.
- A gold standard forces the government to behave soundly, to avoid budget or trade deficits, in order to preserve the country's gold store.
- If there's a gold standard, we can return to using gold coins, which have intrinsic value in the precious metal.
- The gold-based currencies are subject to attack by currency speculators. That's why there are no longer any gold-based currencies.
- A gold-based currency doesn't necessarily stop governments from misbehaving. Governments have been known to run deficits and ended up bankrupting their precious metal reserves.
- The gold standard favors one kind of wealth over all others. Gains in non-gold wealth (agriculture, housing, infrastructure, a varied economy) are devalued unless there is also significant growth in gold holdings. That was possible during the mining boom in the 1800's, but not likely now.
- The inflexibility of the gold standard can lead to deflation, which has much worse economic effects than slight inflation rate of 1-2%.
- The history of financial panics in the 19th century doesn't support the idea that the gold standard promotes economic stability.