gold standard VS value of money

Traditionally, the gold standard has been used to tie the value of money to something more constant and stable than the capricious desires of government officials. Such an impersonal protection is needed to restrain the actions of those who hold a legal monopoly on the creation of money. Under the gold standard, the quantity of the money supply is independent of the policies of government bureaucrats and politicians. Gold represents value uncontrolled by government. The gold standard takes decisions regarding the quantity of money out of the hands of politicians.

Making paper money redeemable in gold keeps the government from arbitrarily increasing the money supply. Not only does full redeemability of the currency unit restrict government power, it also supports public confidence in money, allows market forces to work, and protects citizens from disguised taxation through monetary inflation.

The gold standard provides a market-based medium of exchange and stable monetary system through which men can exchange and save the results of their labor. This monetary stability will force the government to abstain from monetary depreciation. Not only would the government have to stop inflating, it would also be forced to balance its budget and eliminate many welfare programs. Under a gold standard, politicians cannot spend more unless they raise taxes.

Under the gold standard, all claims to gold (i.e., dollars) are receipts for gold and are fully convertible into a specific amount of gold. Money and credit expansion is brought to a sudden halt when government and banks have to redeem their notes in gold. Redemptions would be a chief obstacle to government's unlimited money creation and spending.

Under the gold standard, banks and individuals would be able to make loans, but they would be limited to the amounts savers had accumulated and were making available for lending purposes. The gold standard's requirement of fully convertible money would keep more than one claim to the same money from occurring.

Because of its natural attributes and relative scarcity, gold has long served as a dependable medium of exchange. The quantity of gold changes very slowly over time. Consequently, currencies fully backed by gold are susceptible to only a negligible rate of inflation. There has been a gradual increase in the store of gold with the annual increase in the world stock usually amounting to between 1.5 and 3 percent. Over time, the total gold stockpile held by central banks and individuals has always increased and has never decreased.

If gold was money, there would be a negligible price level increase when more gold is mined, refined, and processed and an even slighter decrease as some gold is removed from the monetary realm to be used in industry, dentistry, jewelry, etc.

Some are concerned that new annual supplies of gold will be insufficient to carry on the growing amounts and value of world trade. Gold, a hard currency, may have a new production rate that may not keep pace with economic growth. This really presents no problem. The existing quantity of money is always enough to conduct the existing volume of trade. Some deflation may be inevitable, but this simply means that overall prices will be lower.