In some of the discussions, some have taken the position of arguing in favor of either a restoration of the gold standard or some softer variant e.g., allowing gold to function as a "liquid" asset. Before one succumbs to the buzz of the "gold bugs," one should bear in mind the caveat that history has shown that a gold standard can be harmful to a nation's economic wellbeing.

Following the end of World War I, some prominent economists in the United States called for a full restoration of the gold standard. Representative of those advocating such a position, Dr. B.M. Anderson, Jr., economist of the Chase National Bank, argued, "No safe monetary system is possible which is not based on the redemption of paper money, on demand, in precious metals, and practically, for the great commericial nations of the world today, this means gold."

That argument rested on a premise that overturned the harsh lesson of less than 50 years earlier concerning the viability of any specie redemption arrangement. Following the Panic of 1873, there was the ominous hint of the inability of the U.S. Government to maintain a set guarantee of gold redemption. That indication was relevant to any specie-based redemption policy. For example, the November 28, 1873 edition of The New York Times revealed:

At present the Government had about $366,000,000 worth of greenbacks out, and $80,000,000 of specie in the Treasury. Of the $80,000,000, about $30,000,000 or $40,000,000 did not belong to it. How could the Government redeem $366,000,000 in greenbacks with $30,000,000 or $40,000,000 worth of specie.

That situation raised a grave dilemma should public confidence in a specie-backed currency falter: Either the government would exhaust its gold reserves or it would have to undertake measures to induce a sharp contraction in the money supply. In the former case, inflation or even hyperinflation could explode with devastating economic consequences. In the latter, a deflationary economic crash could occur and spread beyond U.S. boundaries.

That latter scenario unfolded with a vengeance during the Great Depression. That harsh experience shattered the renewed notions that a gold standard was key to an optimal monetary policy. In a keynote address at Washington and Lee University in March 2004 entitled, "Money, Gold, and the Great Depression," now Federal Reserve Chairman Ben Bernanke, highlighted the destructive role the gold standard played in proliferating and prolonging the effects of the Great Depression.

Excerpts follow:

With an international focus, and with particular attention to the role of the gold standard in the world economy, scholars have now been able to answer the questions regarding the monetary interpretation of the Depression that I raised earlier.

First, the existence of the gold standard helps to explain why the world economic decline was both deep and broadly international. Under the gold standard, the need to maintain a fixed exchange rate among currencies forces countries to adopt similar monetary policies. In particular, a central bank with limited gold reserves has no option but to raise its own interest rates when interest rates are being raised abroad; if it did not do so, it would quickly lose gold reserves as financial investors transferred their funds to countries where returns were higher. Hence, when the Federal Reserve raised interest rates in 1928 to fight stock market speculation, it inadvertently forced tightening of monetary policy in many other countries as well. This tightening abroad weakened the global economy, with effects that fed back to the U.S. economy and financial system.

Other countries' policies also contributed to a global monetary tightening during 1928 and 1929. For example, after France returned to the gold standard in 1928, it built up its gold reserves significantly, at the expense of other countries. The outflows of gold to France forced other countries to reduce their money supplies and to raise interest rates. Speculative attacks on currencies also became frequent as the Depression worsened, leading central banks to raise interest rates, much like the Federal Reserve did in 1931. Leadership from the Federal Reserve might possibly have produced better international cooperation and a more appropriate set of monetary policies. However, in the absence of that leadership, the worldwide monetary contraction proceeded apace. The result was a global economic decline that reinforced the effects of tight monetary policies in individual countries.

The transmission of monetary tightening through the gold standard also addresses the question of whether changes in the money supply helped cause the Depression or were simply a passive response to the declines in income and prices. Countries on the gold standard were often forced to contract their money supplies because of policy developments in other countries, not because of domestic events. The fact that these contractions in money supplies were invariably followed by declines in output and prices suggests that money was more a cause than an effect of the economic collapse in those countries.

Perhaps the most fascinating discovery arising from researchers' broader international focus is that the extent to which a country adhered to the gold standard and the severity of its depression were closely linked. In particular, the longer that a country remained committed to gold, the deeper its depression and the later its recovery...

If declines in the money supply induced by adherence to the gold standard were a principal reason for economic depression, then countries leaving gold earlier should have been able to avoid the worst of the Depression and begin an earlier process of recovery. The evidence strongly supports this implication. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which stubbornly remained on gold. As Friedman and Schwartz noted in their book, countries such as China--which used a silver standard rather than a gold standard--avoided the Depression almost entirely. The finding that the time at which a country left the gold standard is the key determinant of the severity of its depression and the timing of its recovery has been shown to hold for literally dozens of countries, including developing countries. This intriguing result not only provides additional evidence for the importance of monetary factors in the Depression, it also explains why the timing of recovery from the Depression differed across countries.

The finding that leaving the gold standard was the key to recovery from the Great Depression was certainly confirmed by the U.S. experience. One of the first actions of President Roosevelt was to eliminate the constraint on U.S. monetary policy created by the gold standard, first by allowing the dollar to float and then by resetting its value at a significantly lower level. The new President also addressed another major source of monetary contraction, the ongoing banking crisis. Within days of his inauguration, Roosevelt declared a "bank holiday," shutting down all the banks in the country. Banks were allowed to reopen only when certified to be in sound financial condition. Roosevelt pursued other measures to stabilize the banking system as well, such as the creation of a deposit insurance program. With the gold standard constraint removed and the banking system stabilized, the money supply and the price level began to rise. Between Roosevelt's coming to power in 1933 and the recession of 1937-38, the economy grew strongly...

Now, if someone would come up with a system that could not ever be controlled by a single entity or group of like minded entities, that would be really cool...

Originally Posted by Goldenboy219 No doubt about it. Theoretically, even 1 oz of gold would be enough to implement a gold standard. But just as you said, a more optimal solution would be a free market place of money. But, exactly as you said, gold would be used as a protection against inflationary practices. Although it shouldnt have to be a longterm solution. I just cannot see the logic of obtaining a large loan after a large loss.

Originally Posted by Iriemon I still don't know what you mean by a "free market place of money." But from what I have deduced you mean, it seems like it would be far from optimal and more like unworkable.

Free banking institutionally is: 1. Freedom to form banks 2. Freedom to issue banknotes (promissory notes issued by a bank payable to bearer on demand) 3. Freedom to accept money on deposit to current account, and to pay and collect cheques for customers 4. Freedom to borrow money on term deposit and other forms of secured and unsecured borrowing 5. Freedom to lend money and otherwise invest the bank's assets 6. Freedom to provide guarantees, documentary letters of credit, performance bonds and to incur other off balance sheet exposures.