Many economists see an international return to a gold-backed currency as a solution to many countries’ financial woes. With a true gold standard, the decline of money’s purchasing power would slow, the government would have less control of our currency, and, ideally, central banks would be abolished, putting to bed the Keynesian pipe dream of steering an economy. But, in a world of globalization and intertwined national economies, many argue that the current state of the world renders the switch impossible. economic fallacies abound in the gold standard discussion, the most common being that there isn’t enough gold to serve the needs of the world. This argument remains untrue, regardless of how often it is made.
In a gold standard system, the quantity available is unimportant when determining if it will satisfy consumers’ needs. Any amount of money, when agreed upon as a means of exchange, will serve all of society. Though many people obsess with their account balances, they care more about the purchasing power of that money than the actual quantity. The supply of a form of money directly influences its purchasing power, increasing it when the supply decreases and vice-versa. Therefore, even in a hypothetical shortage of gold, the purchasing power of even a small amount of gold would be quite high. We may nominally have “less” money, but each individual unit would have the ability to purchase a greater amount of goods and services. When its value is allowed to be determined by the market, the actual quantity of gold cannot be too small to serve society.
However, a commodity can be too scarce for practical exchange. If only one bar of gold existed in the world, the purchasing power of one speck of gold dust may be astronomical, but no sane person would capture that speck and expect to use it to purchase goods. Therefore, monies are determined by humans interacting in the marketplace. Gold and silver became widely circulated due to their perfect balance between availability and rarity, in addition to their inherent use value in jewelry. This fact renders hypothetical gold shortages pointless. Thousands of years of market interaction determined gold to be the superior means of exchange, not the flawed whim of a ruler or the intentions of some “inventor of money.” The actors in the economy, the ones who utilize money, mutually determined gold functioned best.
This is not to say that a better, more efficient means of exchange cannot emerge. Bitcoin technology is a fascinating attempt to create an untraceable electronic currency, and, if government were to stay out of its way, it may eventually replace a hypothetical gold standard as the best form of money. However, until then, most Austrian economists will continue to praise the gold standard and call for its return. Its biggest obstacle? The ignorance of basic macroeconomics.