Round 1
Pro: A minority of economists believe that a return to the gold standard is in order after the great recession as a way to make the business cycle less violent, the vast majority, however, think otherwise. According to an IGM poll of top economists, nobody from the top 10 universities (Oxford, MIT, University of Chicago) believes that a gold standard would be more stable than our current system. Under a gold standard, there has been documented phenomena of both supply and demand shocks in the economy due to a sudden increase in the demand of gold, e.g. if there was an increase in the demand for jewelry, or if a new vein of gold was uncovered. These shocks can make the gold standard incredibly unstable in the short run, such as what happened in the great depression, which was largely due to a rapid contraction in the money supply and a large increase in the demand for gold from abroad.
Con: Of course any system would have shocks on occasion, but according to economists, such as Larry White, who advocate for the gold standard, the inflation and deflation were relatively minor compared to our current fiat system. Even events such as gold rushes in the U.S. only caused an inflation of a small percentage. As for the Great Depression, it can be argued that the gold standard itself wouldn’t have been so unstable if it weren’t for central banking systems that made it so. According to economist George Selgin, politics influenced the central banks to the point where they no longer held true to the gold standard. These systems influenced others to create the rapid contraction in the money supply and the large increase in the demand for gold.
Round 2
Pro: Now, we are arguing about a hypothetical gold standard versus a real fiat currency. In reality, central banks can abuse money on the gold standard just as well as on a fiat currency. The stability of a gold standard could easily be replicated by a price level target as advocated for by Ben Bernanke, or a NGDP level targeting rule by Scott Sumner. And as for the political concerns, those can be remedied by maintaining the separation of the federal reserve and the normal political process.
Con: Though one could argue that the gold standard is susceptible to supply and demand shocks, what one must take into account is the relative minority of them. Advocates of the gold standard point out that the gold standard is far more predictable than fiat money in terms of deflation and inflation. According to Larry White, one could invest in something 100 years down the road and still be relatively assured of its value, whereas, now, it’s unlikely that someone will invest for such a long time because there is no way to assure that it will be worth anything then. By having an economy based on a relatively unchanging standard, it makes it easier for the public to spend and earn money in confidence.
Round 3
Pro: And while in the long run gold can have an expected value that is very accurate, the volatility of the price of gold in the short run is incredibly high, as any gold investor will tell you. This makes price level swings in the short run inevitable. Now imagine, what if you had a massive downward swing in the price of gold during a normal business cycle downturn, that combination of events is what creates a depressionary spiral, which the central banks would be powerless to stop. In more left wing terms, this would mean a sharp decrease in living standards and an increase in inequality. In more libertarian terms, this means that the policy reaction of the populace would favor incredible levels of government intervention in the market. Either outcome can be avoided by having a central bank with a “do whatever it takes” attitude to stabilizing the economy which is by far the lesser of the two evils.
Con: The interesting thing about the volatility of the price of gold, as George Selgin points out, is that it currently tends to be used as a way to hedge against the depreciation of fiat money. So by not having our currency connected to the gold standard, we make the value of gold fluctuate as the dollar fluctuates in value. And, yes, central banks can cause havoc with both systems, but with a system that provides a consistent backing to our currency, such as the gold standard or perhaps even one of the other systems you named, we could be more assured of the value of our currency. Thus, we could more freely participate in economic exchange rather than holding back from investing since we have no assurance of the value of our money.
Pro side debated by MTU Econimics Club president John Ruf
