Question

In 1971 the US government removed the dollar from the gold standard, because of this the dollar became a “fiat” currency. A currency backed by only the full faith and credit in the issuing government. Given the uncertain economic outlook of the last few years, there’s been a growing chorus of voices that had been arguing for a return to the gold standard. One of the main beliefs here is that government spending (and issuance of currency) will be naturally constrained by the need for a gold backup.

How workable is this idea? If money is only paper, then shouldn’t some asset like gold be used to prop up its value? Or is a precious metal standard a thing of the past?

Answer 1

I think the precious metal standard a thing of the past. This is because today the global economy is progressing towards a more digitized economy, and thus holding on to a metal would mean constraining any financial innovation. Besides this, pegging currency against gold would mean that there will be a restriction on the free flow of cross-border trade because now the government will have excessive control over trade policies due to its monopoly over the gold reserves. The demand and supply of even foreign currency would then get dependent on the amount of gold reserves held by a country instead of the free market determination of exchange rate. This will severely affect foreign trade.