A question from Yahoo! Answers:
I have been doing a lot of research on the gold standard. Since hearing Ron Paul talk about it, I have been a supporter of it. Even though this is the case, I still have questions about it.
Let’s say we went to a gold standard, where would we get the gold to back the dollar and how would we pay for it?
Would the dollar be indexed to population growth? I am asking this because over the last century our population has grown substantially. Are we supposed to keep the amount of gold notes in circulation the same as our population grows? Wouldn’t this put a strain on the working class? Take for example there are 10 people that are in a market with $100. They each work to compete to get a hand at the $100. Let’s add two more people. This makes the access to wealth more difficult. Let’s add 30 more people with a $100 market. That would be 42 people in the market of only $100. As the population grows the ability to access the $100 lessens. Am I right?
You’ve got to be kidding… The gold standard is the fastest way to the next world war.
Under the gold standard, a nation can expand its money supply only as far as its gold stock allows. To expand its gold stock, a nation must have a trade surplus. So expanding the money supply under the gold standard is only possible if a nation has a trade surplus.
Now recall that expanding money supply is the quickest way of ending recessions and thus keeping the population gainfully employed and reasonably happy. But under the gold standard, it is only possible if a nation has a trade surplus, so governments, much like they did between 1880 and 1913, would start working on ensuring that their nations always have a trade surplus.
In practice, just like 100 years ago, it would take the form of pressuring other countries into opening their markets for your exports while keeping imports off your domestic market. The pressure tactics would gradually escalate from diplomacy to the threat or war, until everyone is threatening everyone else.
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Another poster interjects:
I have some issues with the idea that a de-monetised currency such as the USD with an open money supply leads to a stable economy. It leads to debasement and government theft of national wealth from it’s people.
The fact that you “have some issues with the idea that a de-monetised currency such as the USD with an open money supply leads to a stable economy” attests only to your unwillingness to look at history. Stupid games with a rare metal doubling up as a currency led to two great depressions (the one of 1929 and the one of 1873, which was even worse) and two world wars, which is exactly why J.M. Keynes called the gold standard “a barbarous relic”.
You say, “it leads to debasement”. But of course it does! A mild debasement is absolutely necessary to give the private sector some inducement to invest rather than hoard money. You really should read up on deflation…
As to “government theft of national wealth from it’s people”, it’s no worse than taxation and way better than having to fight world wars…
As a concluding thought, you might consider the idea that the gold standard is an arrangement that benefits the leisure class (by ensuring that the value of their precious metal holdings goes up) at the expense of the working population (deflation discourages investment and thus drives up unemployment).