Ending Fiat Money Woes: A Return to the Gold Standard

Cato paper considers the advantages of the gold standard

February 8, 2008

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WASHINGTON – Though the idea does not currently have much traction, returning the U.S. dollar to the gold standard could prove superior to the current fiat money system. Lawrence H. White, professor of economic history at the University of Missouri-St. Louis, explains why in the Cato Institute Briefing Paper “Is the Gold Standard Still the Gold Standard among Monetary Systems?

White argues that the gold standard is a viable monetary policy capable of limiting inflation more reliably than the Federal Reserve. “Under a gold standard, the price level can be trusted not to wander far over the next 30 years because it is constrained by impersonal market forces,” White writes. And as former Fed chairman Alan Greenspan himself has said, “A central bank properly functioning will endeavor to, in many cases, replicate what a gold standard would itself generate.”

White challenges the idea that the gold standard was responsible for the banking panics in the late 19th century, monetary contraction in the 1920’s, and ultimately the Great Depression. White contends these crises were brought on by excessive regulation and notes that the Great Depression occurred under the watch of the Federal Reserve. Other nations on the gold standard, such as Canada, did not suffer these problems.

“A gold standard does not guarantee perfect steadiness in the growth of the money supply, but historical comparison shows that it has provided more moderate and steadier money growth in practice than the present-day alternative, politically empowering a central banking committee to determine growth in the stock of fiat money,” White concludes. “From the perspective of limiting money growth appropriately, the gold standard is far from a crazy idea.”