History

There are a lot of advantages to use gold standard such as long-term price stability has been described as the great virtue of the gold standard.  The stability of the gold standard fosters economic prosperity. The gold standard provides fixed international exchange rates between those countries that have adopted it, and thus reduces uncertainty in international trade.  Historically, imbalances between price levels in different countries would be partly or wholly offset by an automatic balance-of-payment adjustment mechanism called the “price specie flow mechanism.”  A gold standard cannot be used for, what economists call, financial repression.  The gold standard benefits savers by preventing their savings from being devalued or destroyed through inflation, and by rewarding them with higher real interest rates.

The disadvantages are the total amount of gold that has ever been mined has been estimated at around 142,000 metric tons and arguments have been made that this amount is too small to serve as a monetary base. The unequal distribution of gold as a natural resource makes the gold standard much more advantageous in terms of cost and international economic empowerment for those countries that produce gold.  Mainstream economists believe that economic recessions can be largely mitigated by increasing money supply during economic downturns.  Following a gold standard would mean that the amount of money would be determined by the supply of gold, and hence monetary policy could no longer be used to stabilize the economy in times of economic recession.  It is difficult to manipulate a gold standard to tailor to an economy’s demand for money, providing practical constraints against the measures that central banks might otherwise use to respond to economic crises.