The Forgotten Benefits of the Gold Standard

One of the benefits of the gold standard, long forgotten, was that it acted to regulate imbalances in trade. Under the gold standard, trade imbalances between countries were unsustainable because they would self correct over time. Here is an example of how that worked: When a country would export more than it imported, it would accumulated more gold. That is because it could take the surplus foreign currency received in trade and convert it to gold.

As you have learned, when gold entered a country from outside its borders, it always caused inflation. That is because the surplus of gold (money) relative to the goods and services available for purchase always bids up those prices. When a country's goods become more expensive, they also become less attractive to its trading partners. As a result, the country cannot export as much as it once could.

Back in the days of the gold standard, more gold would then flow out of the country than would come in, because imports would exceed exports. Because of less gold in the country, prices would eventually decline to where they had been originally.

World War I began in 1914, although the United States did not enter the war until 1917. In the early years of the war, England and France depended heavily on the United States to provide them with arms. As a result, gold flowed into the Unites States, while arms flowed out. The incoming gold allowed the banks to loan more money, causing the money supply in the U.S. to increase by nearly 50 percent during the period 1914 -1917.

When the U.S. entered the war in 1917, England and France had all but exhausted their supplies of gold. As a favor to England and France, the U.S. suspended the gold standard and began providing armaments on credit. Additionally, the U.S. printed money to provide for its own troops. During the next three years, the money supply again increased by almost 50 percent. When the war was over, the Allies looted Germany. With the spoils, England and France paid back their loans to the United States. As a result, even more gold flowed into the United States.