The chosen form of currency for trade has been changing over the years. Before occurrence of any type of currency, people used barter trade as a form of exchange. One would get what he or she wanted in exchange for something that the other person wanted. One of the disadvantages of this form of trade was the fact that it was hard to find a person who had exactly what one wanted, and an individual was in possession of what the other party desired. As a result, people moved to the metallic monetary standards such as gold and silver one. Currently, they use different forms of fiat money, which the Central Banks of their countries control. The federal banks serve as a means of stabilizing prices of fiat money and controlling inflation. Returning to the metallic monetary standard would, therefore, not cause price stabilization in the world as well as would not inhibit inflation.
Money can be defined as any component, which the population has accepted as a form of exchange to pay for products or repay debts and can be easily converted into this form (Blumen). Money has different properties that enable it to be widely accepted in trade operations. These properties include being a standard of deferred payment, a store of value, a unit of account, and a tool for exchange. Therefore, for an item to be considered money, it has to possess all the above characteristics. Money exists in many forms including fiat money, commodity money, and representative money. Commodity one refers to the items that have been used as cash for the value that they hold. They include scarce metals such as silver, diamonds, and gold among others. On the other hand, fiat money is a form of money, which value has not been derived from any guarantee that it can be transformed into a valuable commodity. Instead, their value determines fiat (government order). It is important to note that the sort of money mostly being used today is the fiat money but different commodities are still being utilized to store value.
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The first reason for why a metallic monetary standard would not lead to price stability is the fact that gold in today market is not an accepted form of exchange by different people. Money should be any commodity that circulates widely as a means of payment. It means that money should be liquid (Andolfatto). 66% of people strongly disagree with the claim that a return to the gold standard can stabilize prices (IGM Forum). In the modern world, whatever form the gold takes, it cannot be considered liquid money. Most people just do not have this metal; hence, a return to the gold standard would not ensure price stability. As a result, due to the liquidity of today fiat money, which the Federal Reserve System set, price stability is ensured.
Another reason for why gold cannot stabilize the prices is the fact that it does not have much value and is not procreative. Gold has a low demand, and people who require this metal cannot be able to take all the gold being produced in the world. It can only be used as a means for storing value or as a unit of account. When it comes to other industrial needs for money, for example, investment, commodity money such as gold cannot be used as its tools. The value of gold when it is stored does not change. If a person owns one ounce of gold today, ten years later, he or she will still has the same one ounce of gold. The main reason for why people buy gold today is the belief that the number of individuals who have lost confidence in the current fiat money system will continue to grow. For the last decade, it has been a trend. As a result of the rising demand for gold, the prices have increased. Therefore, this sudden growth of prices has attracted more purchasers who view it as a valid reason to buy gold. Over the last few years, Internet stocks have demonstrated how extraordinary excesses can be developed by combining valid reasoning with rise in prices (Ivanhoff). In such cases, investors are encouraged to put more money in the market demand and the pool of ready buyers. When the bubble surrounding this market finally bursts, the investors are left suffering. From the information provided above, it is clear that the gold standard cannot stabilize prices.
The Federal Reserve System controls the stability of prices, the inflation level and all of its effects. It is done by controlling the amount of money, which the Federal Reserve prints. During inflation period, the unemployment level rises. The Federal Reserve, therefore, produces more new money or holds them depending on inflation or deflation. These acts of the mentioned governmental body control the amount of money that the population has and uses. For the past few decades, the inflation level has been low. Since the mid60s, the unemployment rate has been significantly small averaging at 6.2% (Putnam and Norland). Gold standard applying would mean the absence of institution, which controls the circulation of gold among the population. As a result, there would be limited amount of gold that people could hold. During the recession, President Franklin D. Roosevelt banned people, different corporations, and institutions from holding gold since the first had developed a trend to hoard it (Tepper). Hoarding gold means that the prices start fluctuating. It also implies that they would not be stable. Therefore, the return to the gold standard would only do more harm to prices than the current fiat money system does.
Consequently, the gold standard cannot provide price stability in the country since the world does not have enough gold to be used today as a form of exchange. It is not practical to utilize gold for payment since there is no appropriate amount of this precious metal. If all the gold in the world was melted together, it would be estimated that there is about 170,000 metric tons of gold (Wagonner). Its value would be $9 trillion. Only the GDP of the US consists about $15 trillion (Wagonner). It means that the gold available today cannot satisfy even the US economy. A lack of gold would lead to the fact that the price of its each ounce would increase substantially due to the rise of demand for it. Therefore, the gold standard system would not bring stable prices.
The Federal Reserve System was created to ensure market efficiency. A well-managed fiat monetary system is the most appropriate way to reduce inflation in the country and not reinstate the gold standard. In 1981, the inflation for year rose to 10.3% (U.S. Department of Labor Bureau and Statistics). The Congress asked the US Gold Commission to investigate whether the reinstatement of the gold standard system could serve as a tool to reduce the inflation level. After the investigation, the Commission reported that return to the gold standard was not the best way to handle continued rise in the inflation. By 1982, the decisions, which the Chairman of the Federal Reserve Paul Volker made, had significantly lowered its level. In 1983, the consumer prices decreased from 10.3% and 13.5% to 3.2% (U.S. Department of Labor Bureau and Statistics). It is the evidence that the best way to provide market efficiency is to ensure that the Federal Reserve System is managed in an productive manner instead of reinstating the gold standard.
Another role of the Federal Reserve System is to help the economy of the US during recessions and depressions. It is provided by the power given to the mentioned governmental body to control the existing flow of money through the monetary policy instruments. Actually, it means that Federal Reserve seeks to control processes occurring in the market when it is possible. Under the current fiat money system, it can respond to financial crises through monetary policy by reducing the interest rates during any recession and increasing them in cases of inflation. The organization also puts money into the economy if it is needed. Using the gold standard would halt this process. The work that the Federal Reserve does can be seen on the example of 2008, after busting of the housing bubble. It created developed $700 billion to help banks and stabilize the economy (U.S. Department of Treasury). If the Federal Reserve did not intervene, this housing bubble would have transformed into a huge depression in the economy.
A shift from the fiat monetary system to the gold standard one can lead to the shaking of the economy. The current economy of the US and the world one are fragile. Shifting from the fiat system would destabilize it even more. In the case of the US, in 1879, the country moved from the fiat monetary system to the gold standard (Eichengreen). This move caused huge deflation in the economy of the state. In modern conditions, moving from the existing monetary system to the gold standard one would hurt the economy heavily if not crash it. As a result, the fiat monetary system should not be changed.
Lastly, the reason for why the gold standard does not ensure the stability of prices is the fact that they fluctuate in the gold market. A shift in the demand for gold changes the prices as well. In addition, the growth of the economy can surpass the supply of money to it. As a result, for more money to be created in the economy, more gold would has to be produced. Bearing in mind that currently, the gold base has a growth rate of about 1.5-2%, it becomes clear that the economic deflation would occur (Waggoner). Therefore, the gold standard does not provide any solutions to price stability or market efficiency problems due to fluctuations in its market. As a result, the country fiat monetary system where the Federal Reserve System controls the flow of money in the economy should remain unchanged.
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In conclusion, a shift from the fiat monetary system to the gold standard does not stabilize prices. Several reasons can be attributed to it. First, gold is not currently acceptable as a form of exchange due to its illiquid form. Another reason is the fact that it does not have much value and is not procreative. The Federal Reserve System is tasked with controlling the flow of money in the economy. Without such an instrument, the inflation or depression effects would lead to the collapse of the economy. Reinstatement of the gold standard would mean the abolition of the Federal Reserve; thus, the gold market would solely control the economy. Fluctuations in it mean that there would be instability in the economy; hence, the prices would be unstable too. The Federal Reserve System is, thus, important in controlling the economy of the country.