The United States Should Return to the Gold Standard

C1) The Gold Standard is deflationary Under a gold standard, the growth of the gold supply must keep up with economic expansion. If gold mining fails to keep up with economic growth, we will experience deflation. Economic growth needs to match the growth of the money supply. If the money supply grows too fast, we experience inflation. If it increases slowly in comparison (or falls), we experience deflation relative to economic growth. Both of these are bad things. The rate at which we mine gold is slower than average economic growth, which would lead to deflation. To increase the money supply, we must increase the amount of gold being mined. We do not know how future mining practices will keep up with economic growth. If mining does not keep up with economic growth, we have deflation. “To increase its money supply, the government must mine more gold. … Limited gold supply stifles economic growth and causes deflation. … According to the World Gold Council, annual production of gold is about 2,500 metric tons or 80 million troy ounces. This implies that world GDP cannot grow more than about $80 billion (at $1000/oz), had we been on the gold standard today. Thus, the gold standard would cause a severe deflation in the world economy.” [1. http://tinyurl.com...] Indeed, the gold reserves often do not grow at the same rate as money demand. As the money supply cannot grow at the same rate as economic growth, the same amount of money is forced to chase around more goods. This is especially bad during depressions and recessions. When the economy shrinks, depositors are less likely to trust banks and banks are less likely to trust borrowers. During recessions, the demand for money from banks increases as they are trying to save their companies. During this time, it is advisable to increase the money supply in order to reduce the economic turmoil. Under a gold standard, this does not occur. “If the money supply does not rise to meet [money demand] because it is tied to gold, a deflationary spiral can occur. Furthermore, the money supply can shrink even with a fixed gold supply, as the deposit-expansion cycle collapses. Most money is deposits, not cash, but if banks stop lending and depositors stop depositing, the money supply drops like a stone as it did during the Great Depression.” [2. http://tinyurl.com...] As noted above, the Great Depression offers a good example as to how the gold standard fails in times of economic depression. Many economists suggest the gold standard made deflation almost inevitable. The gold standard is empirically linked to deflation, not just theoretically like I argued above. And has also been empirically proven that the gold standard worsened the Great Depression. In the countries which were the most linked to gold there existed the greatest deflationary patterns. Countries which left the gold standard actually had much better economic outcomes during the Great Depression [3. http://tinyurl.com...]. Denying the link between the gold standard and deflation would fly against the face of all economic evidence. Arguably the strongest case suggesting the gold standard is deflationary is, not surprisingly, deflation rates before and after the gold standard was adopted. The only years deflation occurred was prior to the end of the gold standard. In other words, deflation only occurred when the gold standard was around [4. http://tinyurl.com...]. s://lh4.googleusercontent.com...; alt="" width="624px;" height="312px;" /> 2009 was a year which had some deflation occur, but the inflation rate averaged to 0.1% throughout the course of the year [5. http://tinyurl.com...]. Using prices as another metric of inflation/deflation, it has been found that in the short term “prices can change violently under the gold standard”. In fact, the gold standard on short time scales was bad at avoiding both inflation and deflation--worst of both worlds. Interestingly enough, the current monetary system offers 23 times less price variation. The arguments for the gold standard--inflation is rampant--is untrue. The gold standard is “a problem in search of a problem” [11. http://tinyurl.com...]. Deflation is bad because it discourages investment. People will hold onto their gold (or currency) rather than invest in deflation scenarios. So the fact deflation occurs under a gold standard is a fact, and it is also a fact that it does not occur under any other monetary system. Unless my opponent is willing to argue deflation is a good thing, he essentially concedes the gold standard would significantly harm the US economy. It is impossible to deny a gold standard-deflation link. C2) Transitioning to gold is impractical About 5.3 billion ounces of gold has been mined in the entire world history--this, in monetary terms, is about $8.5 trillion [6. http://tinyurl.com...]. The US has about 225 million ounces of gold in it’s reserves, or about 4.26% of the total [7. http://tinyurl.com...]. The US money supply (M2) is at about 11 trillion dollars [8. http://tinyurl.com...]. So, in order for the US to cover every dollar with it’s current reserves, the price of gold in the US treasury would have to be set at $48,888 per gold ounce. Compare this to the market price, $1234.5 per ounce. But this would cause the opposite of what my opponent wants: it would cause inflation. The US cannot maintain a higher price of gold over the market equilibrium. As conservative AEI economist John Makin explains, “if the money price of gold is set too high—above a market equilibrium level—then gold flows to the government offering a higher price and, under the rules of the gold standard, the central bank is forced to increase the money supply.” [9. http://tinyurl.com...] Now, you could tailor the gold standard to reduce inflation--set the gold price below the market price. However, you would have to either (1) significantly increase the gold stock, or (2) shrink the money supply. The first option would cost trillions of dollars, whereas the second option would lead to massive deflation. This entire scenario is set for disaster. If you set the price of gold below the market standard people will also purchase their gold from the government. The government’s stock would fall--and, as explained, so would the money supply. As Makin argues, “That kind of a deflationary shock would be disastrous in the current environment” [9]. R1) Stability and Growth To suggest gold is ‘stable’ is really an economic fairy tale. If the government avoided price fixing and somehow tied the dollar to the market price of gold, we would enter massive swings of deflation or inflation as the price of gold is not stable. As I previously argued, the current system actually provides 23 times less variance in prices than the gold standard does [11]. If anything, the gold standard is actually less stable. Conservative economist John Makin argues, “gold standards … [deliver] high volatility in real output and tends to be associated with more financial crises” [9]. As I proved in the graph above, the gold standard was extremely unstable and either had too much inflation or deflation. To suggest it will spur economic growth is insane. Research has proven that the gold standard caused large deflationary episodes, and during those episodes of deflation there was less economic growth [12. https://research.stlouisfed.org...]. Thus, the gold standard reduces growth. R2) History My opponent makes many weak comparisons. Past economies cannot be compared directly to today as globalization had not yet occurred. I provided examples of the gold standard failing utterly (WW2) when the economy globalized. Economic growth did not occur because of the gold standard--it happened in spite of it. The gold standard led to many issues. Spain, for example, suffered hyperinflation when they began to obtain gold at an extremely fast rate from their new world colonies. But to apply the past examples (UK, Civil War) to now really does not make sense. The economic growth under the gold standard does not prove it works. “the gold standard was the symptom and not the cause of this peace and prosperity [in the 1800s]” [13. http://www.investopedia.com...]. The civil war example is arguably the worst. The largest war in US history ended--soldiers entered the workforce and people stopped dying at high rates. An economic boom was inevitable, gold standard or not. We had not yet entered globalization. Slavery also ended, extractive economic institutions inhibiting growth were abolished. The UK is also a weak example as the industrial revolution was beginning, technology was booming, and England was the superpower. My opponent points to points where economic growth occured in spite of the gold standard (not because of it), but there are many examples where the gold standard exacerbated economic woes. Under the gold standard, there were banking panics in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933 [14. http://krugman.blogs.nytimes.com...]. Under the current system, there have been zero banking panics. History is only favorable to the gold standard when you cherry pick a few instances. When the entire time period is looked at, it isn't so perfect. This entire argument is extremely weak. These economies are not comparable to the modern economy which is much more complex. Growth occurred for other reasons, not because of the gold standard. And other historical examples serve to oppose my opponent’s point.Conclusion (1) The gold standard is deflationary(1a) Deflationary episodes contrain growthC: Gold standard reduces growth(2) Moving onto a gold standard is impractical(2a) It would cost billions and cause a large deflationary episode, reducing growthC: Even if the gold standard was a good thing, transitioning to it would murder our economy(3) The gold standard is far from stable(4) History does not support the gold standard