Gold Standard Essay

Submitted By amyhoang
Words: 1515
Pages: 7

1. Is the gold standard still the GS among monetary system? (White, 2008)
(White mentioned that with recent fluctuations such as issuing money in the 2008 presidential race, the subprime crisis and the decline in the foreign exchange value of the dollar make the questions about the performance of Fed). Gold standard is “a monetary system in which we have to define how much dollars for per ounce of gold”. In this article, someone called GS is a crazy idea. They gave some key objections about gold standard, but White didn’t think that. Thus, he gave his opinions and gave evidences to debate GS is not a crazy idea. It means we should think about it seriously In the first key objection, someone talked that” A gold standard leaves the quantity of money to be determined by accidental forces.” It means under a GS, the quantity and purchasing power of money is determined by the forces of supply and demand in the market of gold. In the contrast, under fiat standard, supply of money is determined by Federal Open Market Committee. The question he gave “under which system is the quantity and purchasing power of money better behaved?” According to him, GS is better. He pointed out “The purchasing power of money under the gold standard was steadier and more predictable.” It means the price level could be predicted. Any sizable price changed caused by changes in demand and supply of gold. However, supply of gold can be controlled by the quantity of gold mined. It was a reason why he agreed with Rolnick and Weber that money growth and inflation are lower under a GS. The 2nd objection is “A gold standard would be a source of harmful deflation”. Under a gold standard, inflation rate was close to zero. He though it is not a harmful deflation, it is a benign deflation. (He said “the gold standard was a source of mild benign deflation in periods when the output of goods grew faster than the stock of gold.”) Technological improvement made the prices for good fall. Under a gold standard, “strong growth of real output cannot be considered harmful.” However, under fiat money, when the price level declines, CB will expand the quantity of money (it means CB will pump out money into the market) “in order to drive other prices upward, thus eliminating deflation “on average””. It can be the cause of inflation. The 3rd objection is the gold standard was responsible for the U.S. banking panic in the past. He said “gold standard should be not blame”. The responsibility belongs to CB. It did it by its bad policy “the combination of a weak banking system and a befuddled CB”. “The U.S. monetary contraction of 1929-1933 is the prime example of a harmful deflation.” Next, someone told that if fiat money can control the supply at less cost as gold standard did, it will be as good as gold standard. However, fiat money was “an inflation vehicle”, and it has “not accomplished price stability as fully as did the gold standard”. As we know, under the gold standard, the supply of money depends on the quantity of gold it has, but under the fiat money, nothing is an anchord, so Cb can print as much money as it wants. Thus, fiat standard cannot act like gold standard. And other objections, we will discuss later. 2. Making the transition to a New Gold Standard (White, 2011)
In this article, White had an argument that if the monetary regime could be changed with zero switching cost, people would prefer the US to be on a GS, but the question is given that which way to make the transition to a new gold standard is the least costly way for the US. He gave 2 transitional paths. One path is “allowing a parallel gold standard”. This path as Scar said many kinds of currency are more convenient for market. Consumers will be served better by competition than by monopoly. It means in case, USD decreases its value and the US inflation rate return to double digits, in order to protect their assets, consumers often move to less inflationary alternative currencies.