The US should go back to a gold standard

Introduction Until Ron Paul and a few well-funded libertarian think tanks came to power, the gold standard was actually a non-issue as many conceded the fact that it didn’t work. And that’s what I am arguing today. My main points are how gold standards cause recessions, or at least slow its recovery. And I will also talk about inflation. Gold standard and deflation What’s all the hype about inflation? Deflation is worse and small inflation is traditionally good for the economy. The amount of money is actually equilibrium; there should not be too much money in the system, but not too little. Deflation hurts this as it causes too little money in the system. When inflation begins to rise, one must cut back the amount of money supply. When unemployment begins to rise, the money supply should be [slowly] expanded. This way the amount of money is not too far off and this will prevent disaster. Insufficient money supply is linked to recessions, and is a large factor in depressions (discussed later). The gold standard itself is deflationary. The money supply is then determined by the amount of gold production, to increase the money supply one must increase mining of gold. In other words, economic growth is constrained by the gold supply. Limited gold supply means massive deflation would occur. The annual production of gold is 2500 metric tons of gold. In other words, out GDP would not be able to pass 80 billion dollars if we kept the system today. If we adapted the system now we would have to get gold from other countries, like China and Africa, then they would literally have our economy on a thin string. Unless gold is mined, the economy will not grow. If the gold stock were fixed to prevent inflation, massive deflation would occur. (^M = 0 = ^P + ^Y). Therefore in a growing economy the gold standard would end economic growth. In an economy with a lot of trade, like ours, it would develop trade deficits. Although the above applies, the quote I am about to cite applies a great deal to the US, “a balance of payments deficit is followed by a gold outflow. Thus, a single country's ability to expand money supply is limited by its balance of payments position. An expansion of money supply causes a trade deficit. A gold outflow would set off deflation.”[1] Village analogy The village analogy helps show how the gold standard creates deflation on a more simple scale. Now there are two versions of this, so lets look into both of them. (1)We assume the theory that gold will not be able to fuel a world economy is correct, and there is a village. A man has the one gold nugget, the only currency. The other nine people have items willing to sell for the nugget, as it’s the only way to get other items. And everything costs one nugget, so you can only use it once. So once the man buys an item he begs for it back as it’s the only way he can purchase things. But he cannot get it back as there is a line of people waiting for access to the nugget through sales. The constriction of money supply would mean economic activity would be almost zero, the activity would be literally double the amount by just using inflation and splitting the nugget in half.[2] (2)Now suppose the village has 100 units of work, and 100 units of gold. Now suppose the economy grows to 120 units of work. If the money supply I not increased, deflation occurs. So they have two options, increase the monetary count so now they have 120 units of gold, or increase the worth of the unit. So lets assume there are three villagers. One of the three made all of the 20 extra units of work and he wants to sell his product, but with gold prices stable at the time the money worth does not increase so there is insufficient money. The other two villagers want to buy the product but can’t as there is insufficient money supply. So the only option they have is to lower prices from five coins for the product to four. This is called inflation. This seems good, lower prices right? Wrong. This process of deflation is horribly inefficient so the dilemma would last for a long time and therefore leads to an economic bust before the situation can adjust itself. Going down is hard for money, going up slowly via inflation is efficient and is therefore good for an economy. Gold standard cannot inflate therefore deflates and hurts the economy.[2] Gold and the great depression 13 countries abandoned gold in 1931 in attempt to hinder the current gold monetary problems. Countries that stayed on gold experienced a 15% decline in economic output. The countries that left gold, however, saw all positive outputs in the next year of 1932 and for many years after. Then most countries caught on and left gold, all saw increases in economic output and therefore economic growth. Areas they stayed on gold, however, saw a 6% decrease in productivity. In other words, gold hurt countries that kept gold because of its deflation effect.[3] Large bodies of economic research agree with this point that gold is bad for the economy and has actually lengthened the great depression. The fixed rate it caused made financial disturbances and made it harder for governments to prevent the monetary crisis. Many blame the U.S. for causing the monetary crisis, though new evidence leads scholars to think France, who kept the gold standard, created the problem for exactly that reason; that they had a gold standard to begin with. Most economic historians agree deflation was the cause of the monetary crisis. Although the U.S. and France lead to the deflation in the 20’s, when both had the gold standard, France continued the trend in the 30’s which kept the international deflation continuing therefore leading to much of the economic peril. “Many of the international monetary difficulties of the late 1920s can be traced to the decisions made to resume the gold standard in the mid-1920s after World War I.”[4] As we can see, the deflation effect of the gold standard hurts recoveries, makes the severity of economic downturns worse, and makes it harder for economies to grow as they are limited to the amount of gold production. Conclusion: The gold standard does stop inflation, and if inflation occurs it is very temporary. But it causes deflation, which is much worse. It retards economic growth as we are now constrained by gold production, which would be a GDP of 80 billion dollars (and that’s all of worlds production, so the actual number would be even lower as we would not have access to it all). Gold standard does little help to an economy, but almost always hurts it causing recessions, depressions, making recovery harder, and making the downturn worse, and therefore hurting the overall economy.[2] My opponent as PRO has the BOP, and for being against the status quo. Lets see if he can fufill it. (Word makes spacing all weird) Sources: [1] http://www2.econ.iastate.edu... [2] http://www.huppi.com... [3] http://www.econbrowser.com... [4] Douglas A. Irwin “Did France Cause the Great Depression?” Dartmouth College & NBER (November 15, 2010)