Question

Explain how a gold standard, as monetary policy, would work.

Answer 1

The gold standard is when a country binds its money's value to the amount of gold it owns. Anyone who holds paper money from that country must show it to the government and obtain an agreed-upon amount of gold from the gold reserve of the country. The sum of gold is referred to as "par value." In 1973, the United States abolished the gold standard.

The benefit of a gold standard is that a fixed commodity protects the value of the money. Gold standard supporters argue it provides the economy with a self-regulating and stabilizing effect. The Government can only print as much money as its country has in gold under the gold standard. It discourages inflation, something that happens when too much money is chasing too few items. It also discourages budget deficits and debt that can't surpass the gold supply.

The more productive nations are rewarded with a gold standard. For instance, when they export, they receive gold. They can print more money out with more gold in their reserves. This stimulates investment in their profitable export companies. Exploration spurred the gold standard. It is why the New World was found in the 1500s by Spain and other European countries. To increase their wealth they had to gain more gold. It also sparked the California and Alaska Gold Rush during the 1800s

If we were to return to the gold standard First, the capacity of the Government to manage the economy would be limited. During periods of inflation, the Fed would no longer be able to reduce the money supply by raising interest rates. Nor could it increase the money supply in times of recession by lowering the rates. This is in fact why many are advocating a return to the gold standard. It would impose fiscal discipline, balance the budget, and restrict interference by governments. The policy analysis of the Cato Institute, "The Gold Standard: An Analysis of Some Recent Proposals," presents an assessment of the methods for returning to the gold standard