How Would a Return to the Gold Standard Affect the U.S. Economy?

The government can only print as much money as its country has in gold. This discourages inflation, which is too much money chasing too few goods. It also discourages government budget deficits and debt, which can't exceed the supply of gold.

In addition, more productive nations are directly rewarded. As they export more goods, they can accumulate more gold. They can then print more money, which can be used for investing in and increasing these profitable businesses.

The gold standard discourages government debt and budget deficits, as well as trade deficits. Countries with any deficit lost gold from their reserves in order to pay their creditors.

The gold standard has also spurred exploration. It is why Spain and other European countries discovered the New World in the 1500's - to get more gold and increase the country's prosperity. It also inspired the Gold Rush in California and Alaska during the 1800's.

However, this is an advantage to the U.S., which is the world's second largest gold mining country behind South Africa. Most U.S. gold mining occurs on federally owned lands in twelve western states, with Nevada being the primary source. Australia, Canada and many developing countries also are major gold producers. (Source: National Mining Association)

The gold standard causes countries to become obsessed with keeping their gold, rather than improving the business climate. For example, during the Great Depression, the Federal Reserve raised interest rates to make dollars more valuable and prevent people from demanding gold. However, the Fed should have been lowering rates to stimulate the economy. (Source: Econlib, The Great Depression)

Government actions to protect their gold reserves caused large fluctuations in the economy. In fact, between 1890 and 1905, when the U.S. was on the gold standard, the economy suffered five major recessions for this reason. (Source: Federal Reserve, Remarks by Governor Edward M. Gramlich,, 24th Annual Conference of the Eastern Economic Association, February 27, 1998)

Returning to a gold standard, however it is done, would constrict the government's ability to manage the economy. The Fed would not longer be able to reduce the money supply by raising interest rates in times of inflation, or increase money supply by lower them in times of recession. In other words, the money supply would have to remain constant. In fact, this is why many advocate a return to the gold standard. It would enforce fiscal discipline, a balanced budget, and limit government intervention.

However, a fixed money supply, dependent on gold reserves, would limit economic growth. Many businesses would not get funded for lack of capital.

The U.S. could not unilaterally convert to a gold standard if the rest of the world didn't. If it did, everyone in the world could demand that the U.S. replace their dollars with gold.

The U.S. does not even have enough gold, at current rates, to pay off the portion of its debt owed to foreign investors. For example, China, Japan and other countries own $3.2 trillion in U.S. Treasury debt - but there is only $223 billion (at $914 per ounce) total in gold reserves at Fort Knox. (Source: U.S. Treasury Major Foreign Holdings of U.S. Debt; Office of Inspector General, Audit Report, November 2007)

Today, the U.S. economy is an important partner in an integrated global economy. Central banks work closely together throughout the world to manage monetary policy. The U.S. could not unilaterally adopt an isolationist economic stance, and abandon its ability to manage its economy using monetary policy, by returning to a gold standard.