Returning to the gold standard would be better
The overwhelming consensus among mainstream economists is that returning to the gold standard would be harmful, citing its role in deepening the Great Depression, the deflationary pressure it creates, and its inability to accommodate modern economic needs. A small minority of economists favors reconsidering it.
What we know
The gold standard tied the money supply to the amount of gold held in reserve, preventing central banks from expanding money during economic downturns. The United States left the gold standard domestically in 1933 under Roosevelt and internationally in 1971 under Nixon. Ben Bernanke and Harold James published influential research (NBER) demonstrating that adherence to the gold standard deepened and prolonged the Great Depression, and that countries that abandoned gold recovered faster.
The Federal Reserve's own historical research confirms that the gold standard's rigid constraints prevented monetary expansion during the 1930 banking panics, worsening the downturn. The Philadelphia Federal Reserve's researchers have noted that gold-based monetary systems transmit productivity shocks internationally, meaning a crisis in one country spreads more rapidly to others. Economist Tyler Cowen has argued that rising gold prices under the standard would create deflationary pressure harmful to output and employment.
Proponents argue that the gold standard constrained government profligacy, prevented inflation, and provided currency stability. The U.S. total gold reserves are approximately $405 billion, wholly inadequate to back the $23 trillion U.S. money supply, meaning a return to gold would require a massive and economically disruptive currency revaluation. The consensus is that the gold standard's benefits (inflation discipline) can be approximated by independent central banks with inflation targets, without the destabilizing constraints that historically accompanied gold.
Common claims
- The gold standard would prevent inflation and government overspendingPartially true but incomplete. The gold standard did constrain inflation but also caused deflationary depressions and amplified economic crises.
- The gold standard caused the Great DepressionContested but substantial evidence exists. NBER research by Bernanke and James documents how gold standard adherence deepened and prolonged the Depression.
- Most economists favor returning to the gold standardFalse. The mainstream economics consensus is strongly against returning to the gold standard.