One of the most difficult questions to answer about economics is what type of monetary policy should we have? Should we have a system that resembles our current system, or should we go back to the gold standard? There are issues with both systems, but I will talk about the gold standard today. Many people will see the issues with our current monetary system and so they will think that we should go back to the gold standard so we can battle inflation. The problem is that it doesn’t solve the problem, it just lessens it, and there are other problems that make the gold standard just as bad as our current system
People act as if with the gold standard comes price stability, but that is horribly incorrect. For example, in the graph above it shows that from 1919 to 1933 there was no price stability at all, and this was a time that we were under the gold standard. I will also use a historical example to prove my point, during Spain’s exploration of North America they amassed lots of gold, and this caused extreme inflation in Spain. This goes to show that the gold standard does not actually promise price stability so it’s a bad point to say that we should support the gold standard over our current monetary policy because of inflation. However, there were other reasons for the lack of price stability in the 20s, such as monetary growth without the backing of gold, but the gold standard still did play a part in this and the chart goes to show that there isn’t price stability under the gold standard.
A paper titled “The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison” written by Ben Bernanke and Harold James it was noted that 14 countries including the UK had decided to abandon the gold standard in 1931. Their data for the average growth rate of industrial production in these countries was positive in every year from 1932 on. However, countries that stayed on the gold standard experienced an average output decline of 15% in 1932. The United States abandoned the gold standard in 1933 and that’s also whenever their recovery immediately began. This also happened in Italy whenever they abandoned the gold standard in 1934 and for Belgium in 1935. The three countries that continued the gold standard through 1936 (France, Netherlands, and Poland) experienced a 6% drop in industrial production in 1935 while everyone else was experiencing growth. This goes to show that the gold standard stifled growth. This is the main issue with the gold standard.