Did you read the negatives too?
Disadvantages
Gold prices (US$ per ounce) since 1968, in nominal US$ and inflation adjusted US$.A gold standard leads to deflation whenever an economy using the gold standard grows faster than the gold supply. When an economy grows faster than its money supply, the same money must be used to execute a larger volume of transactions. The only ways of achieving this are for the money to circulate faster or to lower the cost of the transactions. If deflation drives costs down, the real value of each unit of money goes up. This increases the value of cash, and decreases the monetary value of real assets, since the same asset can be purchased with less money. This in turn tends to increase the ratio of debts to assets . For example, assuming interest rates remain unchanged, the monthly cost of a fixed-rate home mortgage stays the same, but the value of the house goes down, and the value of the money required to pay the mortgage goes up. Thus deflation rewards cash savings.[citation needed]
Deflation rewards savers[24][25] and punishes debtors.[26][27] Real debt burdens therefore rise, causing borrowers to cut spending to service their debts or to default. Lenders become wealthier, but may choose to save some of their additional wealth rather than spending it all. The overall amount of expenditure is therefore likely to fall.[28] Deflation also robs a central bank of its ability to stimulate spending.[28] Deflation is considered to be difficult to control, and to be a serious economic risk. However in practice it has always been possible for governments to control deflation by leaving the gold standard or by artificial expenditure.[28][29][30]
The total amount of gold that has ever been mined has been estimated at around 142,000 metric tons.[31] Assuming a gold price of US$1,000 per ounce, or $32,500 per kilogram, the total value of all the gold ever mined would be around $4.5 trillion. This is less than the value of circulating money in the U.S. alone, where more than $8.3 trillion is in circulation or in deposit (M2).[32] Therefore, a return to the gold standard, if also combined with a mandated end to fractional reserve banking, would result in a significant increase in the current value of gold, which may limit its use in current applications.[33] For example, instead of using the ratio of $1,000 per ounce, the ratio can be defined as $2,000 per ounce effectively raising the value of gold to $9 trillion. However, this is specifically a disadvantage of return to the gold standard and not the efficacy of the gold standard itself. Some gold standard advocates consider this to be both acceptable and necessary[34] whilst others who are not opposed to fractional reserve banking argue that only base currency and not deposits would need to be replaced.[citation needed] The amount of such base currency (M0) is only about one tenth as much as the figure (M2) listed above.[35]
Many economists believe that economic recessions can be largely mitigated by increasing money supply during economic downturns.[36] Following a gold standard would mean that the amount of money would be determined by the supply of gold, and hence monetary policy could no longer be used to stabilize the economy in times of economic recession.[37] Such reason is often employed to partially blame the gold standard for the Great Depression, citing that the Federal Reserve couldn't expand credit enough to offset the deflationary forces at work in the market. Opponents of this viewpoint have argued that gold stocks were available to the Federal Reserve for credit expansion in the early 1930s, but Fed operatives failed to utilize them.[38]
Monetary policy would essentially be determined by the rate of gold production. Fluctuations in the amount of gold that is mined could cause inflation if there is an increase, or deflation if there is a decrease.[39][40] Some hold the view that this contributed to the severity and length of the Great Depression as the gold standard forced the central banks to keep monetary policy too tight, creating deflation.[33][41] Milton Friedman however argued that the main cause of the severity of the Great Depression in the United States was the Federal Reserve, and not the gold standard, as they willfully kept monetary policy tighter than was required by the gold standard.[42] Additionally three increases by the Federal Reserve in bank reserve requirements in 1936 and 1937, which doubled bank reserve requirements [43] lead to yet another contraction of the money supply.
Although the gold standard gives long term price stability, it does in the short term bring high price volatility. In the United States from 1879 to 1913 the coefficient of variation of the annual change in price levels was 17.0, whereas from 1943 to 1990 it was only 0.88.[40] It has been argued by among others Anna Schwartz that this kind of instability in short term price levels can lead to financial instability as lenders and borrowers become uncertain about the value of debt.[44]
Some have contended that the gold standard may be susceptible to speculative attacks when a government's financial position appears weak, although others contend that this very threat discourages governments' engaging in risky policy (see Moral Hazard). For example, some believe the United States was forced to raise its interest rates in the middle of the Great Depression to defend the credibility of its currency after unusually easy credit policies in the 1920s.[41] This disadvantage however is shared by all fixed exchange rate regimes and not just limited to gold money. All fixed currencies that appear weak are subject to speculative attack.[45]
If a country wanted to devalue its currency it would generally produce sharper changes than the smooth declines seen in fiat currencies, depending on the method of devaluation
