Some have argued that the deflationary nature of pegging the dollar to the value of gold would have prevented the current economic crisis. That is not necessarily true – the real problem was that the central bank and government did not take asset inflation seriously so the sub prime market was allowed to implode and take the banks with it. Also, stricter rules on the lending to capital ratios and more scrutiny to lending is necessary. The US government ignored the warning of Thomas Jefferson:
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks…will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered… The issuing power should be taken from the banks and restored to the people, to whom it properly belongs.”
By all means argue that gold has a property that makes more sense (something physical that glitters). The fact that the value of that commodity is dependent on things that are not in tandem with the economy, makes it an insane thing to base the currency on. It does not work in a modern economy. The experience is that it has led to inflexibility to meet economic problems by making monetary policy less effective, and assumes that gold has an inherent value that is more accurate than the value of a currency relative to that of others. A free floating exchange makes more sense. Under the gold standard interest rates are not based on domestic considerations, but on keeping a currency fixed at it’s parity with gold. In short you could cause a recession just doing this – it has a deflationary bias that causes unemployment to be higher then it would be over an economic cycle.
Basing your currency on the value of one commodity (gold, silver, diamonds, bullshit) makes no sense and poses more problems than it supposedly solves (gold miners go on strike, panic raises price of gold, countries with a natural advantage in gold, relative value of other minerals etc) which may be at odds with what monetary policy should be doing at that moment and makes inflation dependent on gold mining in South Africa and Russia. You end up being a hostage to the value of a commodity that does not reflect the fundamentals of the economy, whose world production you do not control.
Most economists reject the gold standard as not sound monetary policy – not just neo-Keynesian. The main proponents are those that use it are libertarians who see public spending as a threat to freedom, and think this is an effective way to do so. Gold has a value as a means of exchange or storage of value. As the basis of sound monetary policy it does not cut it.