The gold standard is based on the promise of the government to exchange any unit of currency against a fixed amount of gold. For some bizarre reason the myth of the currency pegged to the gold price just refuses to die, although there is no rational economic argument to support the gold or any other commodity backed currency. Why gold anyway? Why not using other ecxchange traded commodities like oil, copper, orange juice, or pork bellies? The fundamental problem with a commodity backed currency (gold or any other commodity) is the Liquidity Problem: there has to be an increase of the money supply as the economy grows. The money supply should roughly grow at the same pace as the general economy grows. The Bretton Woods currency system, which was the last remnant of the gold standard, collapsed in the 1970s because there was simply no reliable mechanism to increase the available gold reserves to keep pace with the growing world economy. Even before most countries abandoned the gold standard before the World War II, the monetary policy was highly dependent of the discovery and the mining of new gold reserves, resulting in out of control monetary policies. The fact that the currencies were pegged to the gold price contributed significantly to the Great Depression in 1937, because it prevented the central banks from increasing the liquidity in the economy to ensure that credit markets continued to function. Today, no country in the world is using a gold backed currency; for good reasons: it simply does no longer work in today's economic environment. A return to the gold standard would throw the economy into cardiac arrest, into deflation and a recession far worse than what the world has seen so far.
I do not think so, and when I say that I am saying we should have ACTUAL gold and silver coins. Not a paper note that is "backed" by precious metals such as, gold and silver. I think that there would be no such liquidity problem. Our great grand parents did it so why can we not do that now?
I don't quite follow the reasoning against the use of precious metals as a backing for paper currency. According to the law of supply and demand, if demand exceeds supply, the price simply goes up. So when the demand for paper money exceeds the supply of precious metal to back it up, the value of money simply rises, doesn't it?
