The Gold Standard

First and foremost, it would be impossible for the United States to intervene in the gold market to cause the price of gold to be constant for some marketbasket of goods. Thus, under the gold standard, our monetary policy would be subject to the vagaries of the international price of gold. Inflation and deflation will be the result.

One of the worst disasters that can befall a nation is deflation. It destroys the credit market and the economy. Suppose we had a gold standard now. With the price of gold rising (and not just because of what is going on in our economy), we would have a deflation. With a gold standard, we will be able to look forward to running a deflation and a recession every time risk rises internationally.

Suppose that new gold is discovered in Canada or elsewhere or that risk declines internationally so that the demand for gold subsides (supply increases or demand decreases), then we would have an inflation. This would be bad, real bad, but not as bad as deflation. In any event, “debasement” is not eliminated by having a gold standard.