- 6,743
- 16,431
- Joined
- Jun 28, 2004
The problem with going to a gold standard is that you become much more vulnerable to inflation as well as deflation.Originally Posted by gko2408
Econ. guys, what would be the impacts/effects of getting rid of the Fed and moving back to the gold standard?
If a large deposit of gold is discovered anywhere in the world then your gold backed money is worth less. That causes inflation and when you have inflationthat's larger than three or four percent, people's savings will be eroded and interest rates will rise.
Conversely you can have deflation with a gold standard. If an economy grows for several years, the demand for money to carry out transactions will increase. Ifno additional gold is discovered that means that the supply of your money has not changed. An increase in demand and no change in supply means that your moneybecomes worth more with time. The problem with deflation is that people will simply hold onto there money instead of investing it. If your money goes up invalue by 10% per year. why take the risk of lending it out in the form of bonds or CDs? When people do not invest, economic growth slows because businessescannot expand or get started up in the first place and we are made worse off.
This risk of inflation and deflation makes a gold standard unreliable in my opinion. What you want is very mild inflation, somewhere between one to threepercent. That way your money is worth close to the same from year to year but there is no incentive to not invest at all.
A central bank can control the supply of money and therefore it can do a pretty good job of insuring the right rate of inflation.