The Gold Standard: Why Get Rid of It?

Lila Carter

I often question the rationale behind abandoning the Gold Standard. Would backing currency with a tangible asset resolve economic challenges and eliminate inflation? Would basing a nation's wealth on its gold reserves simplify economic analysis? This line of inquiry emerged during a class discussion on economic indicators. Initially, the gold standard appeared to offer a perfect solution: gold is tangible, retains value, and provides a stable anchor for currency. However, further analysis revealed complexities beyond this initial impression. 

Prior to 1971, when President Richard Nixon ended the convertibility of the US dollar to gold and fundamentally altered global monetary policy, the world operated under the Gold Standard. In this system, currency values were directly linked to a fixed quantity of gold. A dollar could be exchanged for a specific amount of gold, which provided a nominal anchor for price levels. Although the currency itself resembled a standard dollar bill, it represented a claim on actual gold reserves. The prospect of exchanging cash for precious metal underscores the tangible nature of this monetary system. 

Despite offering stability through predictable exchange rates and protection against hyperinflation due to the fixed money supply, the Gold Standard imposed significant constraints. It provided minimal flexibility in monetary policy. During recessions, central banks were unable to adjust the money supply to stimulate aggregate demand (AD). Expanding the money supply required acquiring additional gold, a process that was nearly impossible during economic downturns characterized by rising trade deficits and declining tax revenues. 

From a microeconomic perspective, gold mining is an inefficient allocation of scarce resources. It demands substantial labor and capital, which could be more productively utilized in other sectors of the economy. Likewise, the absence of counter-cyclical monetary policy—expanding the money supply during recessions and contracting it during booms—limits central banks' ability to address economic crises. During recessions, increasing the money supply lowers interest rates, stimulates borrowing and investment, and supports employment, thereby aiding recovery. Conversely, contracting the money supply during economic booms helps prevent overheating. Without these policy tools, economies struggle to moderate business cycles and recover from recessions. 

Abandoning the gold standard reintroduced the concept of fiat money, a system with historical roots. Evidence shows its use in 10th century China during periods of copper shortages and even in the United States with greenbacks during the Civil War. But, after 1971, fiat currency became the standard rather than a temporary measure. Fiat money derives its value from government authority and collective trust, rather than from physical assets. While this system introduces inflation risk due to the absence of a gold anchor, it offers essential flexibility. For example, during the 2008 financial crisis, aggressive monetary stimulus prevented a deflationary spiral, an intervention that would have been impossible under the constraints of the gold standard. 

Although the gold standard appears attractive and functions effectively during periods of economic stability, I would prefer to accept moderate inflation rather than forgoing the capacity to expand the money supply in times of national need. In the context of today's interconnected global economy, monetary flexibility is more valuable than the perceived security of a gold backed currency.

About the author

Lila Carter is an undergraduate student in the London Scholar Program at Northeastern University, majoring in International Business with a concentration in Supply Chain Management and a minor in Global Fashion Studies. She holds a certificate in Luxury Supply Chain with LVMH, reflecting her commitment to understanding high-end fashion operations. Her academic focus centers on advancing sustainability and ethical practices within the fashion industry, exploring how supply chain innovation can drive meaningful change. For questions and inquiries, she can be reached at: carter.lil@northeastern.edu LinkedIn: Lila Carter | LinkedIn