by Mateusz Urban

Cynics dispose of the advocacy of a restitution of the gold standard by calling it utopian. Yet we have only the choice between two utopias: the utopia of a market economy, not paralysed by government sabotage, on the one hand, and the utopia of totalitarian all-round planning on the other hand. The choice of the first alternative implies the decision in favour of the gold standard. (Ludwig von Mises)

Friedrich August von Hayek once famously stated that if money had not been invented spontaneously, but rather by a single person or a group of people, it would have been thought as the greatest human invention. Indeed, hardly anyone would deny the fact that money serves as a genuine basis on which all of the advanced economies were erected on. Historically, though, money did not exist in a vacuum: its forms, functions and qualities were shaped by various factors, with actions of the state to the fore. Last century has seen a gradual yet consistent departure from the so-called gold standard, whatever definition of it we adopt. The critics of the current, ‘fiat’ currency system, blame it for numerous adverse consequences it has on the economy, including sowing the seeds of the business cycle. To address those they propose the return to the ‘gold’ monetary regime. In my paper, I will first shortly analyse the role state has played in the market for money. Subsequently, I will outline different gold standard proposals and argue about the benefits of the transition toward gold. Finally, I will assess the practical feasibility of such changes to the monetary system.

Murray Rothbard (1985: 1) was precisely right when he wrote that ‘few economic subjects are more tangled, more confused than money’. Rarely one can find as many misconceptions, half-truths and flawed notions as in the realm of monetary issues, be it currency, banking, let alone the government’s role in these. The problem of the gold standard is no different. In fact, one could argue that it could serve as a prime example of an economic issue where the amount of disagreement both in terms of definitions and conclusions has reached an unprecedented level. According to Salerno (2010: 328):

The monetary reformer intent upon presenting the case for the gold standard confronts another problem created by the very ambiguity attaching to the term gold standard. This stems from the fact that the term has been used very loosely to denote a number of diverse historical monetary systems and monetary reform proposals in which gold is a key element.

Consequently, this renders the task of assessing the desirability of the restoration of the gold standard very complex. Indeed, to reach any legitimate conclusions clear definitions must be used, and, as I will explain beneath, the issue of gold standard cannot be reduced to a purely economic one. Ignoring the state, which currently has an effective monopoly over the issue of money, is more than likely to render our reasoning, let alone conclusions, completely fallacious.

The history of state tampering with money to its own benefit is as old as the institution of money itself. To put things briefly, the temptation to use the source of income other than through (often costly and ineffective) taxation was always there (Schlichter 2011). The debasement of currency was a commonplace practice during the Middle Ages. Later, the process of artificial increase in the money supply started to take more sophisticated forms. Central banks’ printing presses allowed governments to finance their spending deficits and henceforth expand the state (especially during the wartime) (Mises 1953). In essence, gradual departure from various forms of the gold standard gave the rulers ability to both monetize their debt and artificially ‘boost’ the economy by the manipulation of the money supply. The economic consequences of inflation (understood as a rise in the money supply) are twofold. Firstly, the Cantillon Effect, which states that inflation results in the switch of the purchasing power to those who spent the newly-created money first. Therefore, inflation has been often dubbed a ‘hidden tax’ (Lehrman and Paul 1982: 189). Secondly, inflation is thought to distort the informative function of prices and hence cause the artificial investment ‘boom’ (which has to be subsequently corrected by the market). This is what we call a business cycle (Huerta de Soto 2006).

In the Denationalization of Money Hayek (1976) confirms those observations claiming that our ‘history is largely a history of inflation, and usually of inflations engineered by governments and for the gain of governments’. Ludwig von Mises, Hayek’s timely mentor, also recognized that for most of its modern history money ‘functioned in a twilight zone, partly in the market and partly under the influence of the state’. Ebeling (1992: 48) writes:

The result was that it [money] evolved in an extremely bastardized form, with government control increasing as the nineteenth century passed into the twentieth. Finally, with the outbreak of the First World War, the international gold standard—which had facilitated a hundred years of world economic growth and trade, and which had slowly integrated a set of national economies into a world economy—was first circumvented and then overthrown in the flood of national paper monies that financed the war efforts of both sides in the War to End All Wars.

Alongside the shift away from the free market to government central planning in the sphere of money (especially during late XIX and early XX centuries), another vital change took place, albeit of different nature. Namely, the ‘constructivist’ view of the origin of money started to gain momentum. It stood in startling contrast to the ‘organic’ or ‘spontaneous’ theory popularized by the forefather of the Austrian School, Carl Menger. The latter claimed that money is a social institution that is ‘the unintended result of innumerable efforts of economic subjects pursuing individual interests.’ (Menger 1963: 5). His idea was further developed by F.A. Hayek, who depicted money as a result ‘of human action but not of human design’ (Hayek 1978: 96). Therefore, in essence, money resembled phenomenon such as language, which was not ‘planned’ by anyone and yet is one of the most useful inventions in history. To the contrary, ‘constructivist’ view states that money originated as a result of some kind of deliberate social agreement, which was ‘consciously designed to overcome the perceived problems and inefficiencies of direct exchange’ (Salerno 2010: 370). It became to be seen as a ‘tool’, which state can (and should) use to foster economic prosperity (Mises 1951).

It should become clear by now that, historically, the more state tampered with money, the lesser it was based on gold (Rothbard, 1985). All this means is that the more ‘radical’ type of gold standard we want to adopt, the less room for the state involvement (and inflating the money supply) is left. To use Alan Greenspan’s words, if one grasps that money ‘stands as a protector of property rights’ which does not allow the government to inflate the currency, directly through debt monetization or indirectly through credit creation, then ‘one has no difficulty in understanding the statist antagonism toward the gold standard’. The question of gold standard, therefore, boils down to the question of how much state intervention in the money market we want.

Let us now turn to the different versions of a gold standard that has been proposed during the last decades. Due to the relative abundance and complexity of these let me simplify the case by dividing them into four main categories, namely: the gold “price rule”, the classical gold standard, parallel gold standard and 100% reserve gold standard.

The gold “price rule” is a proposal of a number of the supply-side economist, including Arthur Laffer and Robert Mundell. To examine it in more depth let us focus on the proposition of the former. To keep matters simple, Laffer’s blueprint includes the Federal Reserve establishing an official price of gold “at the day’s average transaction price in the London gold market” (Laffer: 1980). Following that, Fed would allow to freely convert dollars into gold at the set price. Furthermore, it would be bound to meet the so-called “Target Reserve Quantity” which effectively means that the Federal Reserve would have to keep the gold reserves equal to 40 percent of the dollar value of its liabilities. Then, as long as certain conditions are met (including the full convertibility of the dollar at the official price and the gold reserves not deviating significantly from the target), Fed would be able to fulfil its usual duties (Laffer: 1980).

The critique of this proposal was given by the American economist Joseph Salerno, who pointed to the fact that it does not even fulfil the criteria to be called a real ‘gold standard proposal’. He notes that Laffer’s proposal is ‘an outline of an elaborate scheme for legally constraining the monetary authority to adhere to a price rule’, and it does not matter indeed whether we keep the price of the dollar stable in terms of gold or any other commodity or set of commodities (Salerno 2010: 381). Therefore, it differs little from the monetarist framework – only instead of quantity rule, price rule is advocated (as Laffer believes this rule to be technically superior in controlling the amount of dollars) (Laffer and Miles 1982). Consequently, this system would to some extent resemble the so called Bretton Woods agreement, and indeed its authors openly admit that. Therefore, the ultimate cause of inflation, Salerno argues – the government monopoly over money – would be left untouched. Furthermore, Rothbard (1992) notes that it would be inferior to the post-WWII agreement as the definition of the dollar and of the price rule itself would be open to manipulation by the Fed, and history of the Bretton Woods system shows that such manipulations would be more than likely.

Another modification of the present monetary system proposed is a return to the ‘classical’ gold standard. This direction of reform was in recent decades promoted mainly by Lewis Lehrman, whose ideas were profoundly influenced by the long-time advocate of gold standard, French economist Jacques Rueff. In The Case for the Gold Standard, Lehrman, following his teacher, calls for the establishment of the dollar ‘as a weight unit of gold’ (Lehrman 1981a: 21). Therefore, he explains, ‘the dollar would be the monetary standard, set by law equal to a weight of gold (…) It would be a claim to a real article of wealth defined by law as the standard’ (Lehrman 1981b). As Salerno (2010: 385) explains, Lehrman’s proposal closely approximates the system which operated before the 1933, which is referred as to the ‘classical’ gold standard. It is vital to point out that, though to some extent restricted (by, as he calls it ‘reasonable self-denying ordinances’), central bank still holds a monopoly power over money. Despite this, I hasten to stress, this system would be ‘infinitely superior’, to use Rothbard’s (1992: 28) words, to both Bretton Woods and fiat currency regime, for a number of reasons. Let me focus on two main ones – the issues of inflation and capital flows.

The most pivotal consequence of defining the currency (e.g. dollar, yen, zloty) in the weight of gold (which, in essence, is equivalent to saying that gold will once again become money) is that it effectively restricts government’s ability to inflate the currency in order to finance the deficit or boost the economy (Huerta de Soto 2006). Therefore, ‘classical’ gold standard ensures responsible fiscal policies, as politicians are aware that should deficit occur, it can be paid back only through tax receipts (Schlichter 2011). This, as I have shown, is not an easy (let alone popular) task. Naturally, the challenge that lays ahead while implementing such system (leaving aside the whole bulk of political issues), would be to find ‘optimal’ unit weight of dollar. Let me postpone the discussion on that to the final section of the paper.

The second argument in favour of the ‘classical’ gold standard is that, while introduced in a group of countries, it creates a peculiar economic zone within which foreign exchange risks and barriers to capital movements are effectively non-existent. It is because every country on a gold standard is assumed to set the value of its currency in terms of gold. To see the gains from such development, one does not have to rely solely on the theoretical argument. It is actually possible to look at what happened to the international trade and capital flows during the actual ‘classical’ gold standard, i.e. approximately in the period between 1870 and 1914. As the World Bank’s Report (2013: 20) concludes, ‘it is difficult to imagine the rise of globalization during the 19th century without the gold standard’, adding that ‘the period between the 1870s and 1914 was one of remarkable stability and predictability in international trade and capital flows’. Rodrik (1997) goes as far as to claim that then on the world economy was even more deeply integrated than it is today. Indeed, it has been estimated that the rise of the classical gold standard (which constituted a peculiar single currency area) accounted for roughly 20% of the overall rise in global trade between 1880 and 1910 (Lopez-Cordova and Meissner, 2003).

Furthermore, the last beneficial feature of the classical gold standard that I want to mention is the balance of payments adjustment mechanism. To put it bluntly, when gold is money, every trade deficit must cause the outflow of gold abroad, and vice versa. Let us assume the former happens – the national economy imports’ value exceed those of exports. Consequently, the difference is paid by gold being sent abroad. As a result of the decrease in the national money stock, deflation occurs, which in turn boost exports and hampers imports. The equilibrium is restored. Without going into much detail I conclude that ‘classical’ gold standard ensures that countries do not run prolonged trade deficits (vide USA today), simply because it would lead to the evaporation of the domestic gold stock and hence economic disaster (Salerno 2010).

However, while evaluating this proposal we should bear in mind the words of Ludwig von Mises, who, referring to what has happened to the ‘classical’ gold standard at the beginning of XX century, wrote:

First of all there is need to remember that the gold standard did not collapse. Governments abolished to pave the way for inflation. The whole grim apparatus of oppression and coercion policemen, customs guards, penal courts, prisons, in some countries even executioners – had to be put into action in order to destroy the gold standard. Solemn pledges were broken, retroactive laws were promulgated, provisions of constitutions and bills of rights were openly defied. And hosts of servile writers praised what the governments had done and hailed the dawn of the fiat-money millennium. (Mises 1912)

As Salerno (2010) soberly notices, there is nothing that could make us believe that once we re-establish the this kind of gold standard it will prove more durable and immune to the government’s influence (which would eventually lead to its demise) than the one we have seen over one hundred years ago. As the inflationary tendencies are inextricably linked to the government, it seems naïve to believe that the central bank could remain its ‘independence’. Salerno (2010: 390) compares this situation to ‘proffering the fox an invitation to guard the chicken coop’. I could hardly come up with a better example. In fact, one could argue that recent monetary developments such as Quantitative Easing programmes prove that the inflationary nature of governments has not changed a bit. Furthermore, such system would be extremely prone to the inflation and deflation ‘rollercoaster’ due to the fact that any change in the gold reserves (which act as a monetary base here) would lead to expansion or contraction of bank notes and deposits (Salerno, 2010). This, coupled with the central bank’s ability to artificially adjust interest rates’ level would result in serious distortion in productive activity, i.e. business cycle mechanism.

Third group of proposals that has been put forward may be gathered under the notion of ‘parallel’ gold standard. Various versions of this kind of this monetary regime has come into the limelight. Let me focus on the proposals described by F.A. Hayek (1976) and R.H. Timberlake (1981). Firstly, unlike the previous ones, both theories are essentially based on the abolition of the government monopoly over money (i.e. legal tender laws). Practically, for Timberlake (1981) this means putting an end to the central bank and leaving the money and credit markets to the unhampered competition. For Hayek (1976), in turn, the competition is secured, albeit central bank may still issue money (as can anyone else). Even though their proposals must have been seen as a radical, Hayek (1976: 23) claimed that they ‘seemed both preferable and practicable to the utopian scheme of introducing a new European currency, which would ultimately only have the effect of more deeply entrenching the source and root of all monetary evil, the government monopoly of the issue and control of money.’

The system of free banking is optimal while looking from the consumer’s perspective. Here, Hayek (1976) argues, just as in any other industry, competition will foster product tailored to consumes’ needs. White (1992) supports that view claiming that if we take into account the ‘micro sovereignty’ approach, then we have to favour free banking system. According to White (1992, 117):

Only under open competition are there market forces tending to ensure that consumers get coins having the attributes they demand, for example having the denominations (sizes) they find most convenient.

Furthermore, White (1992, 121) supports Hayek writing that plurality of issuers (in latter’s terms – ‘denationalization’) would minimize the probability of a ‘large-scale errors in the money supply’. Later, he agrees that even under gold standard, business cycle could still be created by the central bank and points to the evidence from the early XIX century (the issue of Bank of England and the Second Bank of the United States). However, those crises would be minor in comparison to the contemporary ones (White, 2015). All this leads White (1992: 123) to conclude that the gold standard is ‘inadequate without free banking’, as ‘a central bank that has the power to cause monetary disturbances inevitably will cause them’.

So have we found the optimal solution that would grant us the kind of money we need, at the same time separating government from money? It could have seemed so, if it had not been for the probable problems that are bound to arise during the implementation of such a reform. As Rothbard (1992: 3) explains:

There is a crucial difference, however, between money and all other goods and services. All other goods, whether they be postal service or candy bars or personal computers, are desired for their own sake (…) Money, however, is desired not for its own sake, but precisely because it already functions as money, so that everyone is confident that the money commodity will be readily accepted by any and all in exchange.

Hayek and his followers have failed completely to absorb the lesson of Ludwig von Mises’ “regression theorem”. (…) Mises showed, as far back as 1912, that since no one will accept any entity as money unless it had been demanded and exchanged earlier, we must therefore logically go back (regress) to the first day when a commodity became used as money, a medium of exchange. (…) In other words, for any commodity to become used as money, it must have originated as a commodity valued for some nonmonetary purpose, so that it had a stable demand and price before it began to be used as a medium of exchange. In short, money cannot be created out of thin air, by social contract, or by issuing paper tickets with new names on them. (…) But one crucial problem with the Hayekian ducat is that no one will take it. New names on tickets cannot hope to compete with dollars or pounds which originated as units of weight of gold or silver and have now been used for centuries on the market as the currency unit, the medium of exchange, and the instrument of monetary calculation and reckoning.

The problem with the implementation of the ‘parallel’ gold standard would be that people are unlikely to accept newly issued species of money and use it in daily transactions. In line with the Gresham’s law, should any bank issue banknotes fully backed by gold, let alone genuine gold coins, those would be saved by people and hence not enter the circulation, in contrast to the money created by the state, to which people has become used to. This issue is also brought about while evaluation Ron Paul’s (1986) transition agenda, which involves a period of ‘parallel’ gold standard.

The last system I will depict is the one named the 100% reserve gold standard, which:

(…) would be the system in which gold was literally money, and money literally gold, under which transactions would literally be made in terms either of the yellow metal itself, or of pieces of paper that were 100 per cent warehouse certificates for gold. (Friedman, 1976)

It would to some extent be a peculiar mixture of a ‘classical’ and ‘parallel’ types. As the latter, it proposes the abolition of central banking and hence the establishment of a free market for money and credit (which will determine the equilibrium rate of interest). Moreover, following the ‘classical’ version of gold standard, the currency would be fixed by law in value to the appropriate weight of gold. The issue that sets this kind of system apart from the previous ones is also the legal requirement for the depository institutions to keep 100% of the deposited money in reserves (Huerta de Soto 2006; Salerno 2010).

There, we seem to have reached the end of the government-money spectrum. Indeed, as North (2012:) states, 100 percent gold standard is that it is the ‘only monetary system which effects the complete separation of the government from the supply of money’. In the words of Milton Friedman (1982: 99), if we implement this kind of gold standard, ‘the principles of monetary policy are very simple. There aren’t any. The commodity money takes care of itself’.

Such system, according to Huerta de Soto (2006) and Salerno (2010) would put a definite end to any inflationary actions (even short term ones) as the ‘credit creation’ process would be effectively outlawed. Therefore, the disruption in the informative function of prices would not pose a threat to the sound entrepreneurial actions, thereby taming the business cycle (Hayek, 1976). Furthermore, money would become gradually more valuable, which would make its future value easy to predict and, as I show below, the steady deflation would increase incomes and ease debt repayment (Reisman, 2000). Finally, due to 100% reserve requirement, the risk of insolvency of a particular bank would be virtually non-existent. Bank’s responsibility, on the other hand, would be enacted also due to the lack of ‘render-of-last-resort’ institution.

Which one, then, is the most economically and politically beneficial system to adopt? The last one proposed, i.e. the genuine 100% gold standard may be seen as being the closest to the free market ideal and hence leading to the greatest gains for the people. However, as has been shown, even within Austrian School there is no general consensus on whether 100% reserve requirement does restrict free market in the credit industry (White 1992; Huerta de Soto 2006). Nevertheless, let me present further arguments on how the introduction of the commodity-based monetary system would increase the economic welfare both at the domestic and international level. I will primarily focus on the issues of business cycle and deflation.

The advocates of the 100% gold standard claim that, while introduced, it would put an end the business cycle. This conclusion stems directly from their view on the origin of boom and bust cycle. Austrian Theory of the Business Cycle can be briefly (and, I admit, to some extent simplistically) outlined as follows. Firstly, let us assume that central bank artificially decreases the official (discount) interest rate. This, in turn, fosters the credit expansion through the system of private banks. As we operate in the fractional reserve environment, the additional money gets multiplied (in essence, created ex nihilo) in the recurrent process of so-called credit creation. Furthermore, alongside interest rates decline, more investment programmes, so far unfeasible, now become potentially profitable. This begins the ‘boom’ phase of the cycle. During the economic expansion, the prices of producer (or ‘higher order’ goods) increase relative to consumer goods. Increased demand in the factor markets puts an upward pressure on their prices. As labour market tightens and capital goods become more expensive, the initialized investment projects are suddenly abandoned (these are a so-called ‘malinvestments’). The economy enters a painful bust stage, where market corrects bad investment decisions (Mises, 1912; Hayek, 1944, Huerta de Soto, 1999; Salerno, 2000). It safe to say, therefore, that any restriction put on the process of the money creation would considerably ease the business cycle. Naturally, under 100% reserve requirement advocated by Huerta de Soto (1999) this restriction would be the most thorough one. However, even in the case fractional reserves (with or without central bank), gold standard will act as a constraint to the amount of money that could be created (White 1992; Rothbard 1985).

That genuine gold standard will act as a check on the amount of money entering the market, which is expected to be a steady rise of circa 2% per year. That it would effectively eradicate inflation should be clear by now. Instead, the most probable result will be a widespread deflation (indeed, the evidence from XIX-century evidence support that view). Deflation, in turn, is the phenomenon (as mainstream economist claim) that we should be very much afraid of. It is because of two main problems it may cause: so called ‘deflationary spiral’, when people postpone consumption as they expect prices to fall and ‘debt deflation’, where because of rising purchasing power of money it becomes harder to repay the debt[1]. However, Reisman (2000) proves that decrease in prices under the genuine gold standard would not result in any of the aforementioned phenomena. Instead, it is the ‘proper’ deflation (i.e. sudden decrease in the money supply) to be blamed for debt deflation, postponed consumption and wiping out of profit. Reisman (1996) claims that under the gold standard ‘nothing could (…) suddenly reduce the quantity of money’ adding that ‘once gold (…) comes into existence, it stays in existence’. Furthermore, he concludes that under the gold standard any reason for a sudden increase in cash holdings (and hence, postponed consumption) is virtually non-existent.

Reisman’s argument appears even more reliable if we account for the confusion caused by the prolonged deflation that was witnessed recently in Western hemisphere. Indeed, some of the prominent economists stated that Europe was dealing with a ‘beneficial’ kind of deflation, as it was brought about the decline in the commodity prices (i.e. crude oil) (Broadbent 2015). Consequently, one has to conclude that it is the source of declining prices that matters, not just a decline in the price index in itself. Simply put, if deflation occurs due to rising productivity (and effectively declining commodity prices) it increases real incomes and eases debt repayment. In contrast, if it is caused monetary contraction, it results in the adverse effects we described above. The thing is, the second option is effectively ruled out under the gold standard (Reisman 2000). Reisman’s conclusions find a considerable support in the form of empirical work conducted by Milton Friedman (1969), who calculated that the wealth-maximizing rate of the change in prices. According to him, this would be a deflation of 4-5% a year (assuming economic growth of 3-4%).

Furthermore, gold standard keeps the value of money way more stable compared to the fiat currency system. In his recent paper, White (2015) points to the study conducted by Selgin, Lastrapers and White (2012) who estimated the ARMA (1,1) model. According to White (2015: 3):

(…) during the classical gold standard era in the United States,1880–1915, the autoregressive component of inflation was small and negative, whereas during the post war era, especially after 1971, it became large (above 0.9) and positive. (…) and thus the price level has “become less rather than more predictable” under fiat money. SLW also find, (…) that forecasting future price levels has generally become more difficult, with the degree of difficulty increasing with the forecast horizon.” They point out that the greater predictability of the price level at medium and long horizons makes it especially easy to appreciate why corporate securities of very long (e.g., 100-year) maturities, which were common in decades just prior to the passage of the Federal Reserve Act, have become much less common since.

Theoretically speaking, the gains from a transition towards the ‘ideal’ 100% gold standard seem to be unsurmountable. However, it does not follow that the implementation of even a fraction of proposed reforms is just a matter of conveying the list of benefits to the public. The issue is way more complex. Mises (1953) wrote that any transition toward the gold standard would not occur if the, as Hayek would probably call it, ‘anticapitalistic mentality’ reins in the public sphere. However true this may be, I think it is just a tip of the iceberg.

By all means, the biggest adversary of the gold standard is the state itself, for the reasons I outlined above. It would be extremely naïve to expect the state to give up the possibly of inflating the economy, should not any serious macroeconomic events (e.g. hyperinflation) occur. Furthermore, the banks and financial institutions, now in the propitious position of acting as a ‘first spender’ of the newly created money (vide QE or bailing-out programmes) and earing huge profits on the providing a credit, would lose those massive sources of income (please note that by ‘credit’ I meant the one based on money creation instead of the traditional channelling saved funds to borrowers) (Schlichter 2011). Furthermore, there is the issue of economists in themselves. Leaving aside the fact that vast majority of the prominent academia either completely ignores or is hostile towards even considering the reinstatement of the gold standard (White, 2015), we have to note that considerable part of the economists work for the government or institutions connected to it. In the USA, for example 2% of all economists work for the Federal Reserve alone (Schlichter 2011).

Another issue that hampers the prospects to return to the commodity money is the lack of comprehensive transition programme that would ensure such shift would not prove (excessively) harmful to the economy. Both Mises’ (1953) and Paul’s (1986) plans, in my view, could be rendered more realistic and feasible. However, this requires gigantic analytical research to be conducted and still it could prove virtually impossible to draft a plan the majority would agree on. The most difficult challenge is to correctly specify the value of dollar in terms of gold (Rothbard 1982).

Last but not least, the international dimension remains unsolved. While the ‘classical’ gold standard ‘evolved piecemeal and autonomously, not by international design and agreement’ (World Trade Organization 2013: 50) it seems improbable that we could follow the same path. According to White (2015: 4):

When countries resumed the gold standard in the past (for example, the United States in 1879), the other leading economies of the world were already on the gold standard. Resumption then meant re-joining a common currency area that already included the nation’s main trading partners. Resumption today, in a world where gold has been everywhere demonetized, would be a different story. Today no country can fix to gold and simultaneously join a large common currency area, unless many countries resume together. A treaty in which the dollar, the euro, the yen, the pound, and others become gold currencies simultaneously may be judged unlikely.

Ludwig von Mises wrote over 60 years ago that ‘Whoever today dares to hint at the possibility that nations may return to a domestic gold standard is cried down as a lunatic’. Hardly have the matters changed since then. Indeed, the gold standard proposals seem to be widely ignored or dismissed within the worldwide academia. However, several (both theoretical and empirical) studies have shown the superiority of a gold standard over a fiat currency regime. The major arguments for the restoration of the gold standard include easing the business cycle, greater price stability and fostering the fiscal responsibility of the governments. Despite the gains to the welfare of the people from the transition to the golden monetary regime, governments (and the financial industry) should not be expected to voluntarily forgo any of the benefits they derive from the fiat currency system. Restoration of the gold standard may come at a considerable cost, no one doubts that. However, as economists, we should take into account the opportunity cost of such transition, which is the current state of affairs: the world of recurrent crises, state monopoly over money and unsustainable debt levels. Is this cost we are indeed unwilling to pay?

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