Due to increasing deficits and a constantly rising national debt, many financial pundits in the U.S. have raised the question of whether or not the nation should return to a gold standard. Indeed, many of the most successful nations in history, such as Imperial Rome and the English Empire, thrived for centuries due to using gold coins or backing their currencies with it. Below is an overview of this financial system, and the benefits and challenges it brings to countries that utilize it.

The Golden Track Record

Between 1870 and 1914, the world experienced some of the highest growth ever witnessed.  Part of this was due to the incredible technologies that were being developed, but it was also a time in which gold was widely traded internationally. Furthermore, historians consider it to be one of the most peaceful times in history, occurring right before the outbreak of World War 1. Budgets were balanced, capital flowed freely, and the only thing central banks had to do was exchange paper for gold and gold for paper.

Alan Greenspan, former chairman of the Fed, has stated that some mechanism must be used that can control the amount of currency which is printed, whether this be the currency board or gold, because otherwise inflation is practically guaranteed, and with it comes all sorts of maladies. He admits that the international prosperity that occurred between 1870 and 1914 was largely due to having a global gold standard.

Gold Standard Benefits

Using a gold standard would bring about a number of benefits. Unemployment would be greatly reduced, since capital encourages businesses to hire additional labor. Equally important, it would force the government to be fiscally responsible. Unlike the current financial system, they would be limited to the gold they have in their vaults, and would not be able to expand the money supply beyond it.

It would also bring about peace, because governments could no longer finance conflicts by printing money; they’d have to tax the citizens directly or be restricted to the gold in their position. This would greatly limit the ability of states to wage war and would in fact discourage many from doing so.

Gold Standard Disadvantages

However, the gold standard is not without its flaws. Implementing it could possibly result in a stock market crash and perhaps the crash of bonds since many investors use it to offset American debt. Another possibility is excessive deflation. Still, most experts agree that these risks pale in comparison to the alternative, which is a scenario in which the U.S. or other governments attempt to escape economic ruin by mass printing. This has already occurred in places such as Zimbabwe, which saw its currency go into hyperinflation, and Venezuela, which has also experienced a currency collapse in recent years. The plight of both nations highlights the dangers of not backing a currency with something tangible.