Before 1971, the U.S. appeared to have discrepant kinds of the gold standard, which presupposed that the dollar value was connected to and sustained by the quantity of gold reserves, at the same time when the paper money could be changed and converted for gold on demand. Nevertheless, in 1971, the U.S. dollar transformed into a fiat currency, which meant the currency was produced merely by permission and authorization, being not convertible into, backed by, or valued in gold or any connected commodity. It is the main reason why the fiat currency is believed to be sustained by plain “credit and faith.” The opponents of the gold standard stipulate that returning to a metallic monetary standard, such as the gold or silver one, would merely lead to an even more unsteady and unstable economy spurring infrequent economic curtailment and deflation. In addition, they state that it might most significantly obstruct and impede the government’s capability to induce the economy via capital injections and incentive packages. Moreover, it is believed that returning to a metallic monetary standard would be highly difficult, if not impossible, giving the insufficient quantity of gold reserve. Thus, it might negatively affect the already fragile and weak U.S. economy. On the other hand, the supporters of the gold or silver standard state that it might yield long-range economic evolvement and firmness. In addition, it might also help in decreasing the government’s influence and prevent hyperinflation arising from worsening and materializing. The gold standard thus would help to address the issue of the government’s capability of printing money uncontrollably at the same time increasing the deficit and the national debt. The history and statistics reveal that the U.S. economy has performed at its best being under a gold standard.
The history demonstrates that advancing and lodging monopoly power over the nation’s stock of currency in a completely discretionary central bank unrestricted by any monetary constitution appears to be highly hazardous. In fact, the money-supply procedure is expected to become political in nature with monetary policy changing from deferential and obsequious to fiscal policy while the monetary authorities exhibit partiality and bias toward inflation. For instance, Bryan states that the analysis of approximately 30 currencies vividly demonstrates that there has not been a single case of a currency affected and manipulated by its central bank or government since 1700, which could benefit from and enjoy price firmness for approximately 300 years of operations (125). This is also the case of the Federal Reserve. Despite the fact that the Federal Reserve has obtained discontinuous price solidity since its commencement in 1913, its long-range performance and accomplishments have been dissatisfactory, particularly when contrasted to the commodity-grounded norms, including the classical gold and silver standards (Foster 114). Specifically, allowing the money supply to shrink by one-third during the period between 1929 and 1933, the Federal Reserve provoked the worst depression in U.S. history (Foster 114). In addition, allowing the money supply to increase by more than tenfold in the last 30 years, the Federal Reserve caused stable and tenacious inflation, which in turn quadrupled the price levels (Foster 114). It is surprising that the Federal Reserve’s reputation has remained mainly unblemished with the average annual inflation rate apparently stuck between 4.0% and 4.5% (Foster 114). Thus, the facts demonstrate that there are no other major institutions in the U.S., which exhibit such a poor performance record over such a long performance period and have a similar reputation as the Federal Reserve.
Furthermore, the present government fiat money standard should be viewed in the form of an inept system, which does not allow relying on money’s future purchasing power. However, the general public together with numerous economists continue regarding the existent monetary system as sacrosanct (Bryan 127). The facts demonstrate that the Federal Reserve can be viewed as a solid case proving that the present fiat money regime appears to be internally unstable. Tucker believes that the history of monetary institutions vividly demonstrates that every specific governmental intervention to regulate the monetary system leads to the institutional changes that both restrict the freedom of the enterprise in the production of money and reduce efficiency (68). Therefore, leaving banking and monetary arrangements to the market would have resulted in more satisfactory outcomes in contrast to what was practically obtained via governmental involvements.
As a result, the Federal Reserve’s monopoly over currency issuing combined with the fact that the U.S. dollar is a fiat money has led to price instability. Prices have a tendency to soar and then fall slowly at first but with elevating pace, especially because of stocks’ decreasing (Radford 195). Despite the fact that the tactics of the Federal Reserve’s policy have changed periodically, the fundamental institution together with the general monetary strategy remains unchanged (Tucker 68). There are still several objectives, which the Federal Reserve is supposed to adhere to while executing and realizing the monetary policy. In fact, the Reserve’s policy continues drifting without any fixed legal pre-commitment to the long-range price solidity when the amount of money is still defined by numerous central bankers on the Federal Open Market Committee (FOMC) whose personal tenure and wealth are mainly detached from their performance (Tucker 124). It is the main reason why the characterization of U.S. monetary law as chaotic and ambiguous continues to appear genuine.
Contrary to gold or silver, no paper currency has survived in its original form as it typically becomes inflated until it is worthless. Gold, silver, or even cigarettes as a currency exhibit specific peculiarities because they perform all functions of a unit of account as a measure of value and as a store of value (Radford 194). One of the main advantages and benefits of a metallic monetary standard is the fact that it guarantees a relatively decreased level of inflation. Economists around the globe have reached a consensus that inflation appears to be stimulated by the amalgamation of numerous factors. They include the occurrences when the supply of the goods decreases, the supply of money increases, the demand for goods elevates, and when the demand for money diminishes (Bryan 26). Due to the fact that the gold supply does not change extremely impetuously and violently, the money supply actually remains relatively firm and solid. Taking into account such rational and logical analogy, the gold or silver standard allows keeping the country from printing superfluous fiat money (Bryan 26). In the case when the money supply increases unexpectedly and accidently, the individuals and companies would exchange their money for gold due to the fact that cash has become in short supply. If the aforementioned situation proceeds for a long period of time, the treasury will ultimately face the lack of gold reserves (Bryan 27). Therefore, the analysis demonstrates that the gold or silver standard system has the ability to restrict the Federal Reserve from designating and ascribing policies, which significantly alter the increase of money supply. Thus, it can also curb the country’s inflation rate (Bryan 27).
Furthermore, the gold or silver standard can also be helpful in altering the façade of the foreign exchange market. The facts demonstrate that the enlarged usage of the gold or silver standard system can also entail a system of standardized and stable exchange rates. Thus, if all countries and nations adopt a metallic monetary standard, then gold or silver might change into the only actual currency due to the fact that all other currencies would acquire their value from it (Paul 141). It is the main reason why stability, which a metallic monetary standard can provide in regards to the global trade, might be regarded as its chief advantage and benefit.
Consequently, eliminating the Federal Reserve would allow private agents in the free market to meet the needs of the commercial banking system more efficiently. The facts demonstrate that one of the main methods, in which the Federal Reserve guarantees the insurance against fiscal panics, presupposes the possibility to operate in a form of the last resort lender. In addition, the interest rate that the central bank charges the commercial banks, which require borrowing additional services, is the discount rate. This rate represents the administered interest rate, which is appointed by the Federal Reserve, and not the market rate (Tucker 174). It is the main reason why the importance of the rate appears from the signals, which the Federal Reserve actually gives the financial markets. When it is viewed as decreased, the Reserve actually stimulates spending, and vice versa. Therefore, when the Federal Reserve has a desire or an objective of providing banks with a higher quantity of reserves, it appears to be the one who is capable of lowering the changing interest rate. It practically tempts banks to borrow larger amounts. The Federal Reserve can easily use all reserves through the rate increase, which stimulates banks to lower borrowings (Tucker 174). Currently, the Federal Reserve appears to be the one that engages in the campaign against any attempts of creating gold-based pecuniary instruments for commercial transactions or deals. Therefore, it is highly important to restrict the fiscal operations, which appear to be covered and therefore subsidized by the government’s safety net, as this will practically help in securing the country’s economy and finances (Tucker 174). The facts demonstrate that the current U.S. safety net incorporates central bank loans to creditworthy but liquidity restricted banks, which has been evolved in order to secure commercial banks due to the fact that they are highly significant for the economy’s overall growth and wellbeing (Tucker 178). Thus, the major activities of commercial banks ensure important payments, liquidity, and credit intermediation services.
To conclude, the United States requires a fundamental reform in its present monetary standard and policy. In general, the review and idea of returning to a metallic monetary standard, such as the gold or silver one, or even to the bi-metallic standard might be viewed as a good advantage helping to solve the economic issues in the country as well as assisting in stabilizing the international market and trade. Moreover, it may allow private agents in the free market to satisfy the needs of the commercial banking system more productively. The supporters of the idea demonstrate that the gold or silver standard might ensure price solidity and help in controlling inflation. Moreover, this standard does not allow specific types of financial repression. It can be also highly helpful in reducing the trade deficit of the U.S. restricting the government desires to further elevate the present national debt at the same time. In addition, price stability is believed to be one of the major advantages of such standard. In fact, the dollar value will not oscillate as solidly as now being dependent on the gold or silver amounts in the reserve. Thus, the prices of goods, services, and commodities in the market will not change rapidly and violently. As a result, the standard can help in creating a competitive, healthy, and free-flowing market.