Debates and Contemporary Issues

General Terms

There are essentially two types of money. Remember that money is defined by Webster’s dictionary as “something generally accepted as a medium of exchange, a measure of value, or a means of payment.”[1] When most people think of money, they think of cash – a dollar bill or coins. Cash is actually fiat money, its value comes from the fact that is accepted as a universal form of payment as guaranteed by the government in which the currency is issued. For example, if I mowed someone’s lawn and they paid me with a ten-dollar bill, I would accept it, as I would be able to use that same ten dollars as a form of payment anywhere I wanted and the value would not change. In contrast, commodity money is a kind of currency where the value of the money comes from the material in which the currency is made. For example, if someone gave me a gold coin to mow their lawn, the amount of money that I would have earned would be equal to the market price for that amount of gold at the time.


[1] “Money.” Accessed March 26, 2018.

Advantages of Commodity Money
  1. A fixed asset backs the money’s value, so the money has intrinsic value and will always be worth something.
  2. As resources are finite, it limits the amount of total currency in circulation at any time, preserving value.
  3. It leads to less inflation (too much money chasing too few goods) because the amount of money in circulation is limited to the available amount of a particular resource.
  4. It discourages budget deficits and government debt because governments can only spend as much money as they have in their supply of that particular resource.
  5. It rewards productive exporting nations. As nations export more, they receive more gold as payment which allows them to invest further in their production capabilities.
Disadvantages of Commodity Money
  1. Countries’ economies are dependent on that country’s supply of the commodity (gold, silver, oil, etc.) rather than the economies’ actual productive capabilities.
  2. Countries without large commodity reserves are at a competitive disadvantage, which results in inequality between nations
  3. It creates incentives for countries to hoard their supplies of the commodity rather than to invest in their businesses and peoples. Brief explanation: the Federal Reserve is an independent agency in charge of the United States’ monetary policy. One way the Federal Reserve can control the supply of money in the economy is by raising or lowering interest rates. At the most basic level, if the Federal Reserve raises interest rates, it lowers the amount of borrowing in the economy, which reduces the amount of money in circulation. This makes the existing amount of money in circulation more valuable as the supply of it is limited. In contrast, if the Fed were to lower interest rates, the cost of borrowing money goes down, and people will be more likely to borrow money and spend it in the economy. However, when governments are using commodity money, they are unable to control the amount of currency in circulation (the money supply). This means that in difficult times such as the Great Depression, when governments ought have to been pushing more money into circulation to encourage borrowing and lending, they instead chose to hoard their supply of the commodity, which only worsens economic conditions.
  4. Using commodity money creates more volatility in the economy as governments take action to protect their gold reserves. During the time of the gold standard, for example, the world saw five major recessions in the years between 1890 and 1905.[1]

[1] Ibid.

Contemporary Issues

The Gold Standard: A Brief History

One contemporary issue that was touched upon earlier is whether the world should go back to using the gold standard. The gold standard was a monetary system where the value of a country’s currency was linked to the amount of gold it had in its reserves at the time. During the gold standard, countries promised to convert paper money into a set amount of gold based on the fixed price of gold.

While the history of the gold standard spans centuries, the time most people refer to when they are talking about the gold standard is during the period from 1871 to 1914. Germany was the first nation to adopt the gold standard in 1871, and by 1900, the majority of developed countries had done the same. World governments got along well during this period and believers in the gold standard attribute this to the monetary system at the time. However, in 1914, World War I broke out, and the gold standard quickly fell apart. [1]  Governments urgently needed money to pay for the war, and as it was not possible to quickly and easily accumulate more gold, European countries suspended the gold standard and began printing money to pay for military equipment. This led to hyperinflation and made people lose trust in the gold standard. This made them reluctant to spend their money, which hurt global economies.

Note: Hyperinflation refers to a sudden and drastic rise in prices for goods and services, defined as more than 50 percent per month. One instance inflation happens is when governments print money to pay for spending. As they add more and more money to the economy, the existing money in circulation is worth less, so prices have to go up in order to reflect the cheapening of the currency. For example, if milk cost $1.00, but the value of a $1.00 bill fell by half, the farmer would now need to charge $2.00 to earn the same amount.

After World War I, economies around the world faced the Great Depression. While there were many factors that led to the Great Depression, sticking to the gold standard definitely did not help things at the time. Typically, in times of a recession, governments want to encourage borrowing and spending in order to stimulate the economy. One of the major ways they do this is by lowering interest rates (making it cheaper to borrow money). However, during the Great Depression, governments actually raised interest rates in order to discourage people from exchanging their cash for gold and depleting countries’ gold reserves.[2] However, this made it too expensive for people and businesses to borrow, and spending quickly ceased.

England was the first country to suspend the gold standard in 1931. In 1933, President Franklin Delano Roosevelt followed suit and removed the dollar from the gold standard. This allowed the government to cut interest rates and stimulate the economy. A year later in 1934, the United States government changed the price of gold from $20.67 to $35.00/oz. This meant more paper money was necessary to purchase gold from the government. Countries then began to convert their gold holdings into dollars (as they would receive more money for this gold than before) and the United States’ gold reserves became the largest in the world. In 1944, the Bretton Woods Agreement was signed, which valued global currencies in relation to the U.S. dollar (the dominant reserve currency). This dollar could be converted to gold at a fixed price of $35.00/oz. This continued until 1971, when President Nixon stopped allowing the conversion of dollars into gold.[3]

[1] Lioudis, Nickolas. “What Is the Gold Standard?” Investopedia. March 02, 2018. Accessed March 27, 2018.

[2] “Why Did the U.S. Abandon the Gold Standard?” Mental Floss. October 05, 2012. Accessed March 27, 2018.

[3] Lioudis, Nickolas. “What Is the Gold Standard?” Investopedia. March 02, 2018. Accessed March 27, 2018.

Could We Return to the Gold Standard?

Recently in US politics, there has been talk of returning to the gold standard. Republican candidates have argued a return to the gold standard as a way of ensuring fiscal discipline for governments. Is that really the case? Economists say no. Here’s why:

  • US federal debt is currently above $18 trillion. In comparison, when Nixon severed ties to gold in 1971, US federal debt was at $400 billion. That is forty-five times the historic government debt[1].
  • While the United States does have the largest gold reserve in the world at 8,133.5 tons, at the current market price, this would only be worth about $456 billion.
  • If the United States decided to sell all of its gold (liquidate it), it would only bring its debt down to about $17.5 trillion. To tie the dollar back to gold, gold prices would have to go up by around 400-500 percent.
  • It is a generally accepted principle that the supply of money (total amount of money in circulation) grows with the growth of the real economy. For the last 160 years, the global economy has grown at around a rate of 2.5%. The supply of gold, on the other hand, has not grown at such a rate, and is unlikely to.
  • Going back to the gold standard would mean the supply of money would remain relatively fixed. This would mean lending would have to slow down, which would therefore slow down the global economy. Currently, banks can loan about $10-15 for every dollar they have in reserves. If banks had to convert those dollars into gold, they couldn’t afford to lend in the way they currently do.
  • If businesses couldn’t borrow money, job growth would slow down, prices would have to rise, and consumers could not afford those prices because they wouldn’t be able to borrow (think credit cards, mortgages, auto loans, etc.)
  • Additionally, a return to the gold standard would make dollars currently in circulation worth less (as they would be tied to a fixed amount of gold). For borrowers, paying back debts would become increasingly expensive.[2]

In conclusion, while a return to the gold standard may seem like a nice idea in theory, in practice, it would have devastating consequences for the global economy and consumers alike. The nostalgia for the idyllic years between 1871-1914 should be attributed to global coordination and not to the gold standard.

[1] Amadeo, Kimberly. “The Pros and Cons of the Gold Standard, and Why We Can’t Go Back.” The Balance. March 23, 2018. Accessed March 26, 2018.

[2] “What Would a Return to the Gold Standard Mean?” OpenMarkets. November 11, 2015. Accessed March 27, 2018.