Question

What was the purpose of abandoning the gold standard?

Would it make sense for the U.S. to return to the gold standard? What would be the benefit?

Identify two possible problems with a gold standard and explain why those problems are created by a gold standard.

Explain how shocks can spread among countries under an international gold standard.

Answer 1

Gold standard basically means monetary system which links value of national currency to gold.

Hence countries cannot exceed money supply without increasing gold reserves and gold being expensive commodity grows at slow pace in world which becomes biggest problem and hence US abandoned gold standard in 1993.

It doesn't make sense for US to return to gold standard as the pace of fiscal stimulus and money supply in US has grown at unprecedented rate which can not be matched by gold standard . If it is implemented the government would run out of cash and would not be able to lift economy in case crisis like recession takes place.

Gold standard creates basically two problems :

• Reduces economy to monitor recession and create enough money supply in market in case national disaster occurs
• Having gold standard can be very volatile as when supply increases dramatically the money supply of economy increases which can lead to stagflation or hyperinflation

Many international countries no longer peg their currency to gold. However if all countries are pegged to gold, any sudden decrease in supply of gold can lead to stagnated growth or sometime recession in worst case. It can results in bankruptcy and closure of large banks which can seriously hit world financial crisis and to lift such crisis would be simply nightmare.