The Gold Standard Policy

Answer

The Gold Standard Policy

Speculations that the gold standard policy could be restored during Trump’s presidency significantly centered on positive comments presented regarding the idea. The former president recommended that it would be astonishing to bring back the gold standard policy and a number of politicians and government officials supported this notion. The gold standard has never been used in the United States since the 1970s. However, when Trump was the president, there were rumors that he might return it (Abreu & Pinho 18). This paper discusses why the return of the gold standard, if implemented, would cause U.S’s value of paper money to fluctuate every time a new gold deposit is identified. For over a century, the U.S dollar was certainly backed by the prized metal gold, although dollar coins were regularly made from silver (Hansen 38). Before understanding the impact of the gold standard, it essential to understand what it means by gold standards.

Gold standard is a fiscal system where a nation’s currency or paper money has a value directly linked to gold. By using the gold standard, nations agree to change paper currency into fixed amount of gold (Abreu & Pinho 18).  A nation that utilizes gold standard sets a fixed price for gold and purchases and sells gold at that price. The fixed cost is used to distinguish the value of the currency. For instance, if the United State sets gold’s price at $500 an ounce, the value of the dollar would be 1/500^th of an ounce of gold (Hansen 40). Currently, there is not government that uses the gold standard. Britain seized using it in 1931 and the U.S. followed in 1933. During this period, the gold standard was entirely replaced by Fiat money, a phrase to define currency that is utilized due to a government’s order. Implementing the gold standard policy will have a significant influence on the United State’s economy. The instantaneous consequences of attaching the dollar to gold depends on the amount of the dollar selected (Hansen 41). If the cost at which gold is attached is too low, then United States will experience a long-run deflation as witnessed during the 1920s and the 1930s.  Consequently, the delightfully low cost of gold would cause individuals to trade in their dollars, and gold hoarding would deflate the price (Bouri et al. 150). However, if the gold’s price is set high, the United State would get a long-run price increases. 

Implementing the gold standard policy will make prices fluctuate widely. This is because, even if gold’s price is fixed, demand for it continues to increase and decrease (Abreu & Pinho 20).  When states withdraw money from the system by hoarding gold, it makes obtainable money competent to endorse transactions and monetary activity decrease. The less money in circulation signifies prices decrease and unemployment rises. Thus, the government is obliged to adjust interest rates in response to attempt stimulate economic activity (Bouri et al. 150). Moreover, with the gold standard, the monetary system will frequently encounter shocks and rapid inflation because of new gold discoveries. However, if the U.S. implements the gold standard policy and encounters economic crisis, the administration may not be allowed to use monetary policy to avoid disaster.

Conclusion

If the United States implements the gold standard policy and sets gold’s price at $500 per ounce, the value of the dollar will be 1/500^th of an ounce of gold. This will provide reliable price stability. By implementing the gold standard policy, transactions will no longer be conducted with heavy gold coins or bullions. However, if the U.S. implements the gold standard policy and encounters economic crisis, the administration may not be allowed to use monetary policy to avoid disaster.