Pros Essay Example

trillion is in circulation or in deposit (M2).

Therefore, a return to the commodity standard, if also combined with a mandated end to fractional reserve banking, would result in a significant increase in the current value of commodity like gold, which may limit its use in current applications. However, this is specifically a disadvantage of return to the gold standard and not the efficacy of the standard itself.Some gold standard advocates consider this to be both acceptable and necessary the amount of such base currency (M0) is only about one tenth as much as the figure (M2) listed above. * Deflation rewards savers and punishes debtors. Real debt burdens therefore rise, causing borrowers to cut spending to service their debts or to default. Lenders become wealthier, but may choose to save some of their additional wealth rather than spending it all.

The overall amount of expenditure is therefore likely to fall. Deflation also prevents a central bank of its ability to stimulate spending.However in practice it has always been possible for governments to control deflation by leaving the commodity back standard or by artificial expenditure. * Mainstream economists believe that economic recessions can be largely mitigated by increasing money supply during economic downturns. Following a commodity back standard would mean that the amount of money would be determined by the supply of commodity, and hence monetary policy could no longer be used to stabilize the economy in times of economic recession.

Such reason is often employed to partially blame the commodity back standard for the Great Depression, citing that the Federal Reserve couldn't expand credit enough to offset the deflationary forces at work in the market.

Opponents of this viewpoint have argued that gold stocks were available to the Federal Reserve for credit expansion in the early 1930s, but Fed operatives failed to utilize them. * Monetary policy would essentially be determined by the rate of commodity production.Fluctuations in the amount of commodity that is mined could cause inflation if there is an increase or deflation if there is a decrease. Some hold the view that this contributed to the severity and length of the Great Depression as the commodity standard forced the central banks to keep monetary policy too tight, creating deflation.

Milton Friedman however argued that the main cause of the severity of the Great Depression in the United States was the Federal Reserve, and not the commodity standard, as they willfully kept monetary policy tighter than was required by the commodity standard.Additionally, three increases by the Federal Reserve in bank reserve requirements occurred in 1936 and 1937, which doubled bank reserve requirements * Although the commodity standard gives long-term price stability, it does in the short term bring high price volatility. In the United States from 1879 to 1913, the coefficient of variation of the annual change in price levels was 17. 0, whereas from 1943 to 1990 it was only 0.

88. It has been argued by, among others, Anna Schwartz that this kind of instability in short-term price levels can lead to financial instability as lenders and borrowers become uncertain about the value of debt.James Hamilton contended that the gold standard may be susceptible to speculative attacks when a government's financial position appears weak, although others contend that this very threat discourages governments' engaging in risky

policy. For example, some believe that the United States was forced to raise its interest rates in the middle of the Great Depression to defend the credibility of its currency after unusually easy credit policies in the 1920s. This disadvantage however is shared by all fixed exchange rate regimes and not just limited to gold money.All fixed currencies that appear weak are subject to speculative attack.

* If a country wanted to devalue its currency, it would generally produce sharper changes than the smooth declines seen in fiat currencies, depending on the method of devaluation. * Another shortcoming is its cost. To get gold, silver or any other commodity, a nation must devote part of its productive power to mining and refining or it must exchange part of its output of other goods and services for the metal of other nations. Credit money can be obtained more cheaply.