What the Gold Standard Is

June 14, 2011

courtesy The Lehrman Institute

The classical gold standard is simple and it works.

It means that the American government defines its currency as a fixed amount of gold of a certain weight and purity. Under a gold standard you could go into the bank and bring in a tenth of an ounce’s value of gold—say $100 under a gold standard—and receive a $100 gold coin. Alternatively, you could bring in that gold coin and either deposit it in your bank or checking account receiving a deposit credit for $100 convertible to an ounce of gold on demand or get $100 in gold certificates (paper money).

History shows decisively that with purely paper money we experience a chronically eroding dollar and lower job creation. The country and the world are less prosperous, recessions are longer and steeper, and the vast majority of families and businesses are much worse off than they are under a classical gold standard. The classical gold standard is not perfect. It is not some romantic utopian notion. It is, as the Institute’s Founder Lewis E. Lehrman notes, the “least imperfect” of monetary systems.

The classical gold standard does not mean that we will be carting around gold pieces in a purse like the nobles of Merrie Old England. We will still carry around currency, use bank accounts, checks, and credit cards. The classical gold standard simply means that you can, for any reason or no reason at all, cause your paper dollars and bank deposits to be exchanged for an equal value of gold dollars. That legal option keeps the currency honest, and valuable, causing no long term inflation or deflation, not least because the government is bound by the same law of convertability.

Many kinds of money have been tried over thousands of years. The classical gold standard — where you can go into a bank and exchange your bank deposit and paper dollars for a specifically defined amount of gold coin, and vice versa, is the one system that has, over time, worked best.

The classical gold standard works.

© 2011 The Lehrman Institute