Stability of Gold Standard and Its Selected Consequences
DOI:
https://doi.org/10.52195/pm.v4i2.323Abstract
The gold standard was quite stable in the past: the price level changes were relatively small, and trade cycles mild. However, its past stability does not guarantee stability nowadays. We show that the stability of the gold standard to shocks stemming from the world gold market depends critically on the size of the monetary stock of gold relative to the extent of these shocks. Every change decreasing the relative size of the monetary stock of gold lowers its stability. We discuss some consequences of the thesis too: first, any system economizing on its gold reserves (e.g. the mature fractional reserve free banking system of the Scottish type) may undermine the stability of the gold standard. Second, an attempt to reestablish the gold standard may have to include a collective action of many countries of a great economic power. If a single small country tried to resume to the gold, its monetary stock of gold would probably be tiny relative to the world gold market shocks, and the economy could be destabilized by these shocks. It makes the return of the gold standard rather improbable in the near future.
Key words: Gold Standard, Stability, Inflation, Trade Cycle.
JEL Classification: E31, E39, E42, N10.
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