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In the 1930s, during the Great Depression, a large conflict concerning the gold standard occurred. On the one hand, the gold standard had reasonable benefits and could be maintained. The gold standard was a tradition and a part of civilization. It was powerful for both real and symbolic reasons. Saving and investing were encouraged by the monetary system that traditionally was associated with stability of money values. Moreover, the gold standard limited financial power of governments. This monetary system stabilized international economies and trading, because it was introduced worldwide. However, many countries in Latin America and Eastern Europe tried to introduce the gold standard and failed. Asian and African societies did not try it at all (Eichengreen & Temin, 1997).
After World War 1, the reconstructing of the gold standard was essential to recover some positive aspects of the prewar society. It could encourage economic stability and delimit the range of the society. Because of the Great War, the gold standard was changed due to high wartime expenses and risks of ocean shipping. Nevertheless, countries returned to traditional standard after the war, but it was problematic for some countries. It was difficult to cut prices according to the gold value. Countries with the gold standard could not devalue their currencies and allow the demand for exports to determine foreign exchange rate. They could not expand the money supply to stimulate domestic demand, because it would increase prices, encourage gold exports, and make the exchange rate less stable. Therefore, cost of production was lowered through lowering wages. Social problems arose. European countries limited their exports. As a result, Great Britain denied the gold standard (Eichengreen & Temin, 1997).
The Great Depression had a strong influence on economies of the world and gold standard. The economic policies provided were a mistake they only intensified the Depression in the early 1930s. Policies were negative because they were aimed to preserve the gold standard, not employment. The collapse of production and prices and the loss of savings because of bank closing were opposite to the promises of the gold standard. Louis Germain-Martin, a French minister of finance, argued that the gold standard was a way to stimulate depression. Prices and expenses had to fall to cover growing domestic and international transactions because of an inelastic supply of monetary gold. The gold standard was a dogma that was not changed. In France and Germany, leaders realized that maintaining the gold standard was a bad decision. In Great Britain, Keynes proposed many economic ways to cope with depression, but not the gold standard (Eichengreen & Temin, 1997).
Finally, the gold standard was not abandoned. However, its support was not strong. The rise of unemployment made the governments to abandon the gold standard. It became a way to deflation. Supply of money and credit was connected with the gold and foreign exchange reserves of central banks. However, central banks liquidated their foreign exchange balances in order to maintain their gold reserves. Mentality of political leaders was a barrier to abandoning the gold standard, and the results were very negative (Eichengreen & Temin, 1997).
The prevailing wisdom about the gold standard was a morality tale. The gold standard was just such a hegemonic ideology, a tradition, and a mentality. Due to the gold standard maintenance, many ordinary people suffered. The mentality of the gold standard was unable to change even during the most pressing economic crisis. The gold mentality was spread among the high authorities of the world’s Central Banks. Due to tradition, leaders were unable to make modern decisions in order to cope with economic problems. The worlds payment for outdated gold standard was high. Only new authorities helped many countries to abandon the gold standard (Eichengreen & Temin, 1997).
There are many discussions concerning the gold standard today. Some researchers argue that it can be successfully introduced by modern democratic countries. The gold standard is neither an ideal system nor the fiat money alternative. The Federal Reserve Bank economists discovered that money supply growth and inflation rates are higher when the paper money is used than under the gold standard. Purchasing power of money is more predictable and stable under the gold standard. However, some researchers argue that this monetary system has drawbacks because of the cost of gold and transition, and the risk of speculation (White, 2008).
The gold standard does not guarantee economic stability. However, it has always provided more stable money supply growth and moderate inflation. Some people argue that the price for gold is not stable and can be determined by accidental forces. However, it is not right. In most periods, gold price remains stable and is a subject to the supply and demand forces. It can change unpredictably only sometimes, for example, when gold is discovered somewhere. One more objection is that the gold standard would lead to deflation. However, under this monetary system, prices were relatively stable. There was a slight deflation or a slight inflation. However, the reasons for that were different, for example, technological changes which leaded to the change in the cost of production. There is an opinion that the gold standard caused the Great depression. However, the main reasons in the USA were a befuddled central bank and a weak banking system. Other countries with gold standards, including Canada, did not have such problems (White, 2008).
Some researchers state that the lower inflation under the gold standard can be maintained with fiat money, too. However, it is almost impossible in practice. Under the fiat money standard, there is no serious limit to the general price level. In fact, even stable modern economies do not maintain stable price levels and inflation. Some people state that this monetary system is not a solution, because the government would be able to manage the gold redemption whenever it wants. Decision can be limited in the Constitution. At the same time, it is more problematic to control money supply under the fiat money. Money issue made by private banks reduces this option. Some researchers state that gold is vulnerable to speculation. However, the gold standard does not need a central bank. With private money issue, no speculative attacks will take place. The transition costs would be small, because the dollar currency would remain (White, 2008).
Under the gold standard, the prices cannot be fixed by the government. They depend only on the value of gold. In the modern world, there is plenty enough gold to introduce the gold standard. However, it should be introduced worldwide, not by a single country, in order to provide benefits. The gold standard would be beneficial to all countries that use it. The purchasing power of gold would be stable. The gold demand would become transactional, not speculative one. The international gold standard would provide stable exchange rates, and that would be beneficial for international trade and investing. Therefore, re-introducing the gold standard by the modern democratic countries would be positive, because its benefits are more reasonable than its drawbacks (White, 2008).