It is very important for us to determine what the gold standard stands for. Pros and cons have to be carefully evaluated now that U.S. political leaders are planning to re-use the model in their future governing plans.
It was particularly Republican candidate Ted Cruz, who suggested everyone during his recent political debate on Tuesday to return to gold standard. Before we hurry to accept his suggestions, we should first find out what the gold standard is and whether it will be a good decision for our economy or not.
The gold standard is officially defined as a monetary system that takes the national gold stock as the standard economic unit. Thus, the value of all other assets, money included is established in relation to the value of gold.
While some economists, very few of them, to be honest, claim the correlation between the two can have a good outcome, the general belief is that setting the value of money based on gold has predominantly negative consequences. After all, the Great Depression was caused precisely by the gold standard, fact which inspired Franklyn D. Roosevelt never to mix the two together again.
After the Great Depression, U.S. rulers have agreed that the wisest decision would be to make money a standard on its own. Its value was subsequently established based on individuals’ needs.
It is for this reason that most economists fear a return to the gold standard and, consequently reject Mr. Cruz’s plan. They have looked at people’s general beliefs on the future of the country – the only criteria that can determine the future evolution of the economy.
If we do the same, we can clearly see that the gold evolution doesn’t look too promising. Quite the opposite, gold resources are diminishing and skyrocketing prices do not convince customers.
It is also important to estimate how much gold amount does the U.S. have. Countries that trade gold have a larger stock of gold assets and, consequently, higher purchasing power for money. Even so, gold transactions are under constant pressure and this would only worsen the situation.
Taking these two facts into account, we estimate it is not at all advisable to return to the gold standard, now that we can still feel the effects of the Gold Recession.
Image source: www.www.gtreview.com