Imagine having to tell the economy it can only grow as fast as a specific rare metal is mined for money to continue to make sense. The gold standard was a system breaking up by its inherent contradictions, as another poster has phrased it, when Nixon went off it.
>Imagine having to tell the economy it can only grow as fast as a specific rare metal is mined for money to continue to make sense
This is only the case if you have full reserve banking.
Under gold-backed fractional reserve there is no requirement that there be enough gold to back all the notes in circulation promising gold.
There are certainly problems with fractional reserve banking but gold backing is not a fundamental weak point here. Even IRL if everyone demands real dollar notes there is not enough in the banks and the FDIC reserves to pay it all out on demand if everyone recalled their deposits, they could not even run the money printer fast enough to cover it.
Yet somehow world trade still goes on, despite there being more value of goods in trade than currency than can back it.
Side note for completeness: theoretically all trade of any size happen with even a single gold coin by increasing velocity of money.
The growth rate of the economy wasn't limited by the rate of gold mining - people would just adjust prices relative to gold. And by most accepted measures I'm pretty sure the US economy was growing faster when it was on a gold standard.
This isn't correct. The gold standard caused a lot of problems with money shortages; in the 1800s they were called panics. The shortages powered William Jennings Bryan to the Democratic presidential nomination after his "Cross of Gold" speech. https://en.m.wikipedia.org/wiki/Cross_of_Gold_speech
Were those panics ultimately bad for growth? The US in the 1800s was one of the fastest growing economies we've ever seen in all of human history; growing from ~0% to ~20% of the world economy. It isn't often someone outpaces that. The gold standard clearly didn't limit growth in any concerning way if you are associating it with one of the top 10 all time growing economies. In fact, dropping the gold standard has been associated with the economic weakness that characterises the modern US as they mean regress and the Asian powers regain economic ascendancy.
Panics and crisises aren't automatically a bad thing. If people are doing something wildly stupid they need to stop and undertake alternative activities. Something has to make them do that; if it is a panic then that is better than persisting with stupidity. Besides, the US still has regular crisises. There is one every 10 years or so. They just don't see as much upside between them as they used to.
> The shortages powered William Jennings Bryan to the Democratic presidential nomination after his "Cross of Gold" speech.
If Trump says something does that automatically make it true in 100 years? No. Politicians aren't automatically right and neither are voters. People get stuff wrong in policy all the time. Popularity and truth are different.
And Wikipedia suggests that most people disagreed with him regardless, he lost the election and the US proceeded to adopt a gold standard. Which still doesn't tell us much about its policy merits I might add.
If you don't think panics are a bad thing I don't know what to tell you. Can you point to a panic that was good?
My point about Bryan is that the gold standard was causing so much pain that he rode his solution to the nomination. That his solution (bimetallism) was terrible helps explain his loss.
All panics are "good" in the sense that they represent the economy reorienting themselves to maximise returns. As you accidentally stumbled over, they are associated with the period of US history with the highest growth rate. The argument is basically that they are a necessary mechanism to purge inefficient actors from having capital. It isn't pleasant if the market tags a person as inefficient, but that is how to get to high growth.
It isn't like getting rid of the gold standard has helped the US grow, since then we've have seen them mean regress from being an unchallengeable global colossus to arguably the #2 economy. The government printing money at will and handing it out to asset owners who by rights should be going broke is a component of that.
If you'd like a computer metaphor, possibly think a program unexpectedly spitting out a stacktrace. The stacktrace is not, in and of itself, the problem. The problem is the thing causing the stacktrace and the stacktrace is actually helpful for diagnosing. In the case of economies, panics don't draw attention to the problem but actually fix it directly.
> ...that he rode his solution to the nomination
A lot of nominees around that time thought the gold standard was a good idea, which doesn't prove anything either. The opinions of nominees more than a century ago aren't really evidence. It is an appeal to authority except he wasn't an authority in any meaningful way. He didn't know much about economics and turned out not to represent the consensus of ordinary citizens either.
The US has not actually put leaving the gold standard to a vote as far as I know. In fact I don't think the current situation is a result of big deliberations, at Bretton Woods people thought they were agreeing to a gold standard and as the US's economy is eclipsed we might easily see a rethink of the global trade system where it comes back.
> Imagine having to tell the economy it can only grow as fast as a specific rare metal is mined for money to continue to make sense.
It makes intuitive sense that the gold standard would have limited economic activity, but did it actually do? If the gold standard had been constricting economic activity, one would expect GDP growth to have accelerated after the gold standard was eliminated, but as far as I can tell that didn't happen.
Dollar bills under the circa pre-Nixon gold standard were IOU for gold, there was no need to have enough gold to cover them as it was a fractional reserve.
Not going to be answered in a one liner but the short answer is historically it had about the highest density of value that was relatively easy transport, divide, and the inflationary properties though highly imperfect were less susceptible than that of factories or railroads. Humanity came to it empirically.
Many people have suggested alternatives such as units of energy or baskets of goods but at the end of the day there is no perfect unit, dollars being backed by essentially largely threat of imprisonment if you don't pay your taxes and scarcity of how many the government decides to 'print' is yet another arbitrary choice of backing.
Developed real estate titles are notoriously one of the least fungible assets in existence.
Relatively uniform rural undeveloped farmland titles might work but I doubt it would get the same historical inertia since gold outlasts governments more reliably than land titles.
I've re-read your statement several times and I'm still not quite getting it. If your point is that railroads or factories are as valid a basis as 'can be used to bail someone out of IRS agents with machine guns shooting their dogs and putting them in a little cage' than I agree with you.
Although it brings me back to, you can see how maybe it was simpler historically for people to just settle in a fungible, transportable, easily dividable hard asset that had essentially as good inflationary properties as anything else they could find.
The point of backing currency with gold is to overcome low trust, or a potential future breakdown in trust. A claim to infrastructure that can simply be nationalized during a dispute / a military coup / etc, is not really serving the same purpose that a gold standard serves.
Plus, now you've somehow got to manage price controls on ports and infrastructure...
I've tried this point before but it always fails because the argument is, if I may contrive a straw man, that the government can simply machine gun everyone at the exits, take all the gold reserves, and cancel the notes. Therefore any government enforced asset is basically as good as gold in this regard because the government can and has (circa great depression) simply cancelled the trustless or bearer properties of gold.
Although you're right that this is historically a large element of gold exists it won't be accepted as reasoning, and it's not worth bothering on places like HN.
I think the hope that international bearers would have is that thet can get their gold out when the future is looking risky, but before a breakdown in trust comes to that level. Once the revolution actually happens, Fort Knox is in enemy hands.
> A claim to infrastructure that can simply be nationalized
If your currency is in such high demand that people still accept it, even knowing this, that's a feature not a bug. You hopefully never have to use but it remains as a nuclear option.
Dumping the gold standard was one of the best moves nixon made. The gold standard was directly responsible for untold economic suffering in the country.
Do you find Lyn Alden insightful? I remember studying her articles a few years ago on the inevitability of hyperinflation due to oil shortages, which never materialised.
