What exactly is the argument against gold?

Mark Thorson has a request:

I’ve heard it said that there isn’t enough gold in the world to make it the only form of currency, but the gold bugs say that’s because gold is underpriced. If gold were priced appropriately, there would be enough gold to replace all of the world’s currency. What’s wrong with that argument?

The most fundamental argument against a gold standard is that when the relative price of gold is go up, that creates deflationary pressures on the general price level, thereby harming output and employment.  There is also the potential for radically high inflation through gold, though today that seems like less a problem than it was in the seventeenth century.

Why put your economy at the mercy of these essentially random forces?  I believe the 19th century was a relatively good time to have had a gold standard, but the last twenty years, with their rising commodity prices, would have been an especially bad time.  When it comes to the next twenty years, who knows?

Whether or not there is “enough gold,” and there always will be at some price, the transition to a gold standard still involves the likelihood of major price level shocks, if only because the transition itself involves a repricing of gold.  A gold standard, by the way, is still compatible with plenty of state intervention.

Here is one earlier post on the gold standard, you can enter “gold standard” into the MR search function for dozens more.


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