Is the Gold Standard Still the Gold Standard among Monetary Systems?

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Critics have raised a number of theoretical andhistorical objections to the gold standard. Somehave called the gold standard a "crazy" idea.

The gold standard is not a flawless monetarysystem. Neither is the fiat money alternative. Inlight of historical evidence about the comparativemagnitude of these flaws, however, the goldstandard is a policy option that deserves seriousconsideration.

In a study covering many decades in a largesample of countries, Federal Reserve Bank economistsfound that "money growth and inflationare higher" under fiat standards than undergold and silver standards. Nor is the gold standarda source of harmful deflation. Alan Greenspanhas testified before Congress that "a centralbank properly functioning will endeavor to,in many cases, replicate what a gold standardwould itself generate."

This study addresses the leading criticisms ofthe gold standard, relating to the costs of gold,the costs of transition, the dangers of speculation,and the need for a lender of last resort. Onecriticism is found to have some merit. TheUnited States would not enjoy the benefits ofbeing on an international gold standard if it werethe first and only country whose currency waslinked to gold.

A gold standard does not guarantee perfectsteadiness in the growth of the money supply, buthistorical comparison shows that it has providedmore moderate and steadier money growth inpractice than the present-day alternative, politicallyempowering a central banking committee todetermine growth in the stock of fiat money.From the perspective of limiting moneygrowth appropriately, the gold standard is farfrom a crazy idea.

Lawrence H. White

Lawrence H. White is the F. A. Hayek Professor of Economic History at the University of Missouri–St. Louis and an adjunct scholar of the Cato Institute. He is the author of Competition and Currency, Free Banking in Britain, and The Theory of Monetary Institutions.