<blockquote>
<p>But as for the concerns of that official, would not gold just go up in value as necessary to make up for the growth in the value of a country's economy?</p>
</blockquote>
<p>It would. Virtually all mainstream economic theories say that value of money (inverse of price level) depends on real economic production. This is because higher economic production increases demand for money (regardless of whether they are made from gold or stones or paper or bits).</p>
<blockquote>
<p>My question basically is, Is the gold (or any precious metal or metals) standard tenable for simpler economies but not tenable -- perhaps would severely limit economic development -- in complex and changing economies? And if not precious metals, is then fiat necessary for complex economies?</p>
</blockquote>
<p>That depends how the 'advanced economy' you envision would look like.</p>
<p>First, gold standard is not tenable if you want to have large government involvement in the economy. Active monetary management is more cumbersome under gold standard, since gold standard is akin to having monetary policy on semi-autopilot (see Handbook of Monetary Economics by Friedman &amp; Woodford). Furthermore, gold standard makes it harder for government to fund various programs. Government budget constraint is given by <span class="math-container">$G-T=\theta+B$</span> where <span class="math-container">$G$</span> is government spending, <span class="math-container">$T$</span> taxes, <span class="math-container">$\theta$</span> high powered money and <span class="math-container">$B$</span> bonds. Under fiat currency <span class="math-container">$\theta$</span> can be easily changed whereas under gold standard it cannot. This restricts government ability to spend as much as it would like to.</p>
<p>Second, gold standard if pursued by more than one country, de facto makes two countries having fixed exchange rate or monetary union (see <a href="https://www.nber.org/papers/w16202" rel="nofollow noreferrer">Tamin and Eichengreen 2010</a>) even if there are no laws about it. A fixed exchange between two countries creates problems if those two countries experience asymmetric macroeconomic shocks (that is one country has economic boom while other is in recession). If there is fixed exchange rate countries have to either have free mobility of factors of production to restore balance (unrestricted migration and no capital control) or they have to create fiscal union (in essence join into federation), like in US where some states subsidize another (US states are all on fixed exchange rate as all states use dollar).</p>
<p>Third, depending on how the system would be set up it might create problem if the gold standard is deflationary. An economy needs some small rate of inflation year after year because prices and wages are rigid downwards so economies have trouble adjusting when prices or wages have to be lowered. Inflation reduces this issue and deflation makes it worse. Technically, gold standard could be set up in a way where the rate at which you can exchange banknotes for gold at central bank continuously erodes as to provide inflation but this sort of goes against the whole idea of gold standard and eventually you would end up with virtually fiat currency at some point in future.</p>
<p>Fourth, another drawback of gold standard is that it is extremely wasteful. You dig gold from the ground just do put it in a vault under the ground. Money does not need to be backed by commodity to have value, so  this is just waste of perfectly good gold that could be used to build advanced electronics (gold goes into production of a lot of modern gagets).</p>
<p>To sum it up. Modern economy probably could work with gold standard, provided it is a society that keeps government spending low, does not have much appetite for macroeconomic management via monetary policy and is willing to either be completely open or integrate together with other gold standard countries. There would still be an issue of deflationary bias which would make the economy often work below full employment but I reckon the economy could still operate and grow over time. However, at the same time modern gold standard economy would not operate as well as modern economy based on fiat currencies (ceteris paribus). This is because of all the issues above.</p>
<p>In addition it would be complete waste. Under our modern understanding of economics we know that backing by gold is not necessary for money to have value or even stable value. Even proponents of gold standard acknowledge that and advocate for gold standard rather as a sort of constraint on government adopting bad monetary policy and serious arguments against fiat virtually always revolve around complaints on bad monetary management by governments. However, this can be avoided by other ways. For example, having technocratic politically independent central banks.</p>

CC BY-SA 4.0
2022-12-01T00:36:45.007Z
Thanks, I wanted to acknowledge ur thoughtful and detailed answer -- now I have to think about it carefully. I think without even looking that u must be an economist or have that educational background.
releseabe
CC BY-SA 4.0
2022-11-30T23:57:35.767Z
2022-12-01T00:02:36.057Z
2022-12-01T00:02:36.057Z
1muflon1
<p>I know about the gold standard and how that seemed to work for many years. I also read that some government official and/or economist in the late 19th or early 20th century asked something to the effect, How there could be enough gold to be able to cover the value of businesses like railroads and telegraphy that created wealth much more rapidly than had ever been created before. I think, whether he said it or not, this wealth was created not only very fast but in an unpredictable way: No one could have foreseen how the telegraph would be used, what processes it would streamline (including the economic system itself where I guess for the first time money could be transferred across the world without  physically moving it from origin to destination).</p>
<p>But as for the concerns of that official, would not gold just go up in value as necessary to make up for the growth in the value of a country's economy?</p>
<p>I have searched for who said this and what exactly he said but unfortunately can't find it.</p>
<p>My question basically is, Is the gold (or any precious metal or metals) standard tenable for simpler economies but not tenable -- perhaps would severely limit economic development -- in complex and changing economies? And if not precious metals, is then fiat necessary for complex economies?</p>

<gold-standard>
Is the gold standard tenable for a "high-tech" economy?
releseabe
# Is the gold standard tenable for a "high-tech" economy?

(Asked by: username_0 on 2022-11-30)

I know about the gold standard and how that seemed to work for many years. I also read that some government official and/or economist in the late 19th or early 20th century asked something to the effect, How there could be enough gold to be able to cover the value of businesses like railroads and telegraphy that created wealth much more rapidly than had ever been created before. I think, whether he said it or not, this wealth was created not only very fast but in an unpredictable way: No one could have foreseen how the telegraph would be used, what processes it would streamline (including the economic system itself where I guess for the first time money could be transferred across the world without physically moving it from origin to destination).

But as for the concerns of that official, would not gold just go up in value as necessary to make up for the growth in the value of a country's economy?

I have searched for who said this and what exactly he said but unfortunately can't find it.

My question basically is, Is the gold (or any precious metal or metals) standard tenable for simpler economies but not tenable -- perhaps would severely limit economic development -- in complex and changing economies? And if not precious metals, is then fiat necessary for complex economies?

**Tags:** gold-standard


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## 1 answers

### Answer by username_1 on 2022-11-30. Score: 1 | Accepted answer

> But as for the concerns of that official, would not gold just go up in value as necessary to make up for the growth in the value of a country's economy?

It would. Virtually all mainstream economic theories say that value of money (inverse of price level) depends on real economic production. This is because higher economic production increases demand for money (regardless of whether they are made from gold or stones or paper or bits).

> My question basically is, Is the gold (or any precious metal or metals) standard tenable for simpler economies but not tenable -- perhaps would severely limit economic development -- in complex and changing economies? And if not precious metals, is then fiat necessary for complex economies?

That depends how the 'advanced economy' you envision would look like.

First, gold standard is not tenable if you want to have large government involvement in the economy. Active monetary management is more cumbersome under gold standard, since gold standard is akin to having monetary policy on semi-autopilot (see Handbook of Monetary Economics by Friedman & Woodford). Furthermore, gold standard makes it harder for government to fund various programs. Government budget constraint is given by $G-T=\theta+B$ where $G$ is government spending, $T$ taxes, $\theta$ high powered money and $B$ bonds. Under fiat currency $\theta$ can be easily changed whereas under gold standard it cannot. This restricts government ability to spend as much as it would like to.

Second, gold standard if pursued by more than one country, de facto makes two countries having fixed exchange rate or monetary union (see [Tamin and Eichengreen 2010](https://www.nber.org/papers/w16202)) even if there are no laws about it. A fixed exchange between two countries creates problems if those two countries experience asymmetric macroeconomic shocks (that is one country has economic boom while other is in recession). If there is fixed exchange rate countries have to either have free mobility of factors of production to restore balance (unrestricted migration and no capital control) or they have to create fiscal union (in essence join into federation), like in US where some states subsidize another (US states are all on fixed exchange rate as all states use dollar).

Third, depending on how the system would be set up it might create problem if the gold standard is deflationary. An economy needs some small rate of inflation year after year because prices and wages are rigid downwards so economies have trouble adjusting when prices or wages have to be lowered. Inflation reduces this issue and deflation makes it worse. Technically, gold standard could be set up in a way where the rate at which you can exchange banknotes for gold at central bank continuously erodes as to provide inflation but this sort of goes against the whole idea of gold standard and eventually you would end up with virtually fiat currency at some point in future.

Fourth, another drawback of gold standard is that it is extremely wasteful. You dig gold from the ground just do put it in a vault under the ground. Money does not need to be backed by commodity to have value, so this is just waste of perfectly good gold that could be used to build advanced electronics (gold goes into production of a lot of modern gagets).

To sum it up. Modern economy probably could work with gold standard, provided it is a society that keeps government spending low, does not have much appetite for macroeconomic management via monetary policy and is willing to either be completely open or integrate together with other gold standard countries. There would still be an issue of deflationary bias which would make the economy often work below full employment but I reckon the economy could still operate and grow over time. However, at the same time modern gold standard economy would not operate as well as modern economy based on fiat currencies (ceteris paribus). This is because of all the issues above.

In addition it would be complete waste. Under our modern understanding of economics we know that backing by gold is not necessary for money to have value or even stable value. Even proponents of gold standard acknowledge that and advocate for gold standard rather as a sort of constraint on government adopting bad monetary policy and serious arguments against fiat virtually always revolve around complaints on bad monetary management by governments. However, this can be avoided by other ways. For example, having technocratic politically independent central banks.

> **Comments:**
> **username_0**: Thanks, I wanted to acknowledge ur thoughtful and detailed answer -- now I have to think about it carefully. I think without even looking that u must be an economist or have that educational background.  

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