3 - Common Misconceptions about the Gold Standard

Summary

Chapter 3. The mechanisms that govern how a gold standard works, and the historical performance of gold standards in practice, have often been misunderstood or inaccurately described – both by critics and by supporters, including academic economists. We address the main misconceptions by critics, including “The Gold Standard caused the Great Depression,” “A gold standard is dangerously deflationary,” “The volatility of the price of gold in recent years shows that gold would be an unstable monetary standard.” We also address the main misconceptions by supporters, including “Gold has objective value,” “A gold standard provides a perfectly stable measure of value, like a yardstick provides a stable measure of length, because it fixes the definition of the monetary unit,” and “The quantity of money is self-regulating under a gold standard only if we outlaw fractional-reserve banking in favor of one hundred percent reserves.”