Could modern economies ever revisit the Gold standard?

This is the stuff I think about when I'm not overwhelmed with work. Could modern economies like the United States revisit the Gold standard we long abandoned?

The gold standard is the idea that a certain amount should back a country's currency. This would mean that a country's currency would be directly linked to the amount of gold it held (or a guaranteed percentage). As such, it would theoretically make the currency's value more stable and resistant to inflation.

The gold standard was used in many countries worldwide until the early 20th century when more flexible currency management systems gradually replaced it. There is much debate about whether a modern economy could return to the gold standard.

Firstly, it would make the value of a currency more predictable, as it would be based on a physical, finite asset such as gold. This would mean that people would be more confident in investing in the currency and that the government could better control the money supply.

Furthermore, the gold standard would make it much easier for countries to manage their debt. This is because a country's gold is finite, so it cannot be printed or created out of thin air.

While the Gold standard makes sense on the surface, there are downsides too.

Reduced Economic Flexibility

A gold standard can limit a country's ability to respond quickly to economic crises or take advantage of economic opportunities. It can also limit the ability of a central bank to adjust the money supply and use monetary policy to influence economic activity.

As we saw during the uncertainty of the pandemic, countries had to hit the monetary accelerator to stimulate the economy because of the fear of them stalling due to lockdowns and mandates.

Volatility in Gold Prices

The price of gold can be volatile, which can cause currency values to fluctuate significantly in a short period. This can create uncertainty in the economy and can also lead to inflation or deflation.

Gold is often touted as a haven investment, but precious metals like gold are not always a sure bet in short to medium term.

High Cost of Holding Gold

It is expensive to store and transport gold, which can reduce the amount of gold that a central bank can effectively hold. This can reduce the ability of a central bank to influence economic activity through monetary policy.

The Problem of Deflation

Since the money supply is tied to the amount of gold held, a decrease in the gold held by the central bank can lead to deflation. This can lead to decreased economic activity as prices fall and people have less incentive to spend.

On the one hand, a currency backed by gold can prevent inflation but can have the downside of causing deflation because of gold inventories. On the upside, the gold standard provides stability but is not immune to price swings in gold.

But, there is another problem. Developed nations. Could developed nations go back to a gold standard? The simple answer is no.

Developed nations could not afford to go back to the gold standard. This is because the gold standard requires that a certain quantity of gold backs a nation's currency. This expensive endeavour requires a nation to acquire a large quantity of gold. Additionally, the value of gold fluctuates, and it is difficult to predict its future value. Therefore, it is not a viable option for most developed nations.

And you see the problem with this approach. As developed nations buy gold, the demand causes the price to increase. This means developed nations buying large quantities of gold would be subjected to immense price volatility.

An alternative to traditional gold stores

Could a cryptocurrency like Bitcoin be used as a backing store of value for traditional fiat currency? The Bitcoin standard. This question has been raised before, although, besides El Salvador embracing Bitcoin as legal tender, no country has even put their hands up to express interest in such an idea.

While a fiat currency backed by something (whether gold or Bitcoin) is a great idea from a stability perspective, it also reduces the ability of countries to manipulate and inflate their currency (despite nothing good ever coming from inflation). The lack of flexibility to print more money when you need it is one of the reasons any kind of standard wouldn't be popular amongst many countries.

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