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ETpro's avatar

Does a gold standard really protect us from inflation?

Asked by ETpro (34216 points ) February 8th, 2012

During and shortly after the colonies won the Revolutionary War, the US looked as if it might become a failed state. Inflation was as high as 47%. During the Civil War, Union inflation hit 40% and the Confederate dollar inflation ran between 100% to 9,000%; depending on the state and city involved. This was with a gold standard. In fact, the gold standard and the lack of a fractional reserve system and national bank did not ensure against runnaway inflation. Quite the opposite, it made controlling the money supply as the country grew difficult to impossible.

Given these historical facts, where does the confidence in the magic of the gold standard come from? What history teaches us that nations with no central bank and no way to control their supply of money vis-a-vis the supply of goods and services are inflation proof; whereas countries (like all those in today’s developed world) that have a fractional reserve banking system and some form of central bank fare much worse? Are the regressives basing their beliefs in history of fantasy?

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6 Answers

DaphneT's avatar

The magic likely comes from the concept of cold hard gold. It’s easier to understand that which you can hold in your hand, it’s easier to abuse the bits and bytes that fly around the world banking system electronics. The fact that gold is a finite resource and therefore only a few can ‘hold’ it doesn’t change the concept of it being holdable.

ETpro's avatar

@DaphneT True, but if stranded on a desert island, Gold isn’t very good food/ It does little to treat an infected cut, or keep you warm on a cold night.

dabbler's avatar

“Gold isn’t very good food” Neither are bits and bytes, or paper with numbers in the corners and pictures in the middle.
This all points to the fact that money is an invention and a convention, that can be so useful it’s almost completely ubiquitous.

A gold standard is one of countless ways that folks who control wealth do so.

Paradox25's avatar

The potential problem with a gold standard is the mining and supply fluctuations. Depending upon cycles of a gold supply surplus or shortage we could get either inflation or deflation. A gold standard obviously has some benefits, especially for those with savings, and most proponents consider gold to be relatively stable enough to be considered a viable alternative to our current monetary system. However there are risks involved and I think I would worry much more about deflation than inflation. I’ve read some interesting articles about this and it appears that not all libertarians support a gold standard themselves either.

DaphneT's avatar

@ETpro, true, but whoever believes in the gold standard as the solution to our ills doesn’t believe they are on a desert island. Now I believe they are on a different planet, but still they don’t. Maybe we should have a pine tree standard, under most conditions at least pine trees are a renewable resource, therefore not necessarily finite, but not fast growers so not trade-able easily. Sigh, I suppose that’s why commodities are no longer the standard on which we base an economy.

ETpro's avatar

@DaphneT A tree standard would be a great way to deal with the very real problem of deforestation. And I would argue that trees have far more intrinsic value than gold, and certainly should not be destroyed without replacement just to make paper money.

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