Gold standard

From RationalWiki

In economics, gold standard refers to a type of monetary system where the currency of a country is backed directly by the national gold reserves. In theory, it is possible for anyone to go to a bank and exchange an amount of money for a specific amount of gold. The idea behind the gold standard is that it offers economic stability by limiting inflation and promoting public trust in the national currency.

[edit] Economics

In medieval and early modern monetary systems, coins were manufactured from gold, silver and other metals, meaning that money's value was intrinsic in the coins themselves. This became impractical during the eighteenth century, with increasing quantities of money in circulation, growing use of notes and bank credit, and declining resources of silver. Hence the development of the gold standard.

The first country to formally adopt the gold standard was the United Kingdom in 1717, and it became especially widespread in the latter half of the 19th century, but was eventually abandoned in the decades after World War II. The United States had some version of a gold standard until Richard Nixon, bowing to inflationary pressure, removed it. (The US dollar was, in reality, falling, but since it was tied to gold and could not, no one would invest in the US without a substantial increase in interest rates. Nixon felt that allowing inflation was less politically risky than doubling interest rates.)

Some people (such as Republican Presidential contender Ron Paul) continue to preach in good faith that without a gold standard, money is "objectively worthless"; these people are sometimes known as "gold bugs". However, this ignores the fact that gold is intrinsically worthless, as any object's value is only assigned by the collective value put on something by its consumers (otherwise known as "the market"), and that the use of gold as reserve currency is more a tradition than anything else. This is why most developed countries have similar "floating" currencies, and it is only in the developing world that "fixed currencies" still exist, though most of those are fixed to the dollar, not to gold. (Even so, in many of those, such as Zimbabwe and North Korea as well as the former governments of the old Soviet bloc, there are official exchange rates and black market exchange rates.) Survivalists often like the gold standard because it holds out the promise of a stable currency in a governmental vacuum; the idea that the standard response in a barter economy to a handful of American Eagles or Krugerrands is likely to be "sorry, can't eat gold" never seems to come up. (Well, technically, you can eat gold. It has no taste or nutritional value, but eating it is mostly harmless. Well, except for chrysiasis -- that's like argyria but more expensive.)

Another problem in returning to the gold standard is that there is simply not enough gold in the world to cover the quantity of currency presently in existence. To put it another way, even if the US were somehow able to purchase the world's entire gold stocks (in itself an impossible proposition) there would still be nowhere near enough gold to cover the total value of dollars in existence.

All of this being said, this does not mean that printing money (or Bushonomics) is always a good thing; quite the contrary. Printing money without a sound policy to manage the money supply can devastate an already-troubled economy if investors hoard the new money rather than spending it, reducing the real value of a stagnant market. However, returning to the gold standard or a fixed exchange system does not prevent inflation (see the Mexican peso crisis of 1994 and the Icelandic financial crisis of 2009). All it means is that there will be a severe and debilitating crash in the currency when the government realizes it can no longer subsidize an artificially strong currency. A well-run mint would tie the production of "fresh" currency to run slightly ahead of growth in the economy, thus keeping the money supply in a close relation to the actual wealth of the nation.

[edit] Science

In science, a gold standard refers to a best possible test to which other tests can be compared. A common type of study in medical science compares a new diagnostic test to a "gold standard". This type of evidence is used to evaluated new methods of diagnosing disease.

For example, the gold standard for diagnosing pulmonary embolism (PE) is the pulmonary angiogram, in which dye is injected into the bloodtsream and xrays are taken of the arteries in the lungs. Because this is an invasive test, other methods of diagnosing the disease are desirable. Computed tomography (CT) scanning is an increasingly common method used to diagnose PE. To know how accurate it is, it must be compared to a test that is known to be good. Angiography is presumed to be nearly 100% sensitive and specific, and then CT can be compared to it, and its accuracy calculated.

Tests that are not a gold standard are always presumed to contain a measure of error.

This usage of the phrase is descended from the economic meaning, described above.