<p>Yes it is. Lets first unpack some myths about about gold standard or commodity money in general. </p>

<p>They dont necessary prevent inflation. Spain managed to have under gold standard a very large inflation compared to other European nations (Ferguson, 2008), and this happened even without debasement.</p>

<p>Furthermore as you yourself mention debasement can occur as well. Commodity money or gold standard dont mean the money have to be solely made of that commodity. In case of the commodity money you can easily have gold standard where you debase the % of metal every year even to the point of having 0.0001% of gold and it would still be gold standard. The only difference between debasement and printing money is that debasement is little bit more expensive as it involves smelting - but in modern industrial world the cost is not prohibitive so it could be done almost as easily as just printing money. </p>

<p>Backing paper money with gold does not prevent inflation by itself either. If you for example set the exchange rate to 1 euro = 1 troy ounce of gold, there is literary nothing preventing government from deciding one day that suddenly 1 euro = 0.001 troy ounce just because they decide so. Again thats still gold standard. Even if 1 euro would be set to be equal to be equal to 0.0000001 troy ounce it would still be gold standard. So whats the point?</p>

<p>Is there any way that gold standard may prevent inflation? From economic side not really (aside its more expensive to remint coins in case of using direct commodity money), but from political side it might be more difficult to justify debasement or change in the convertibility as non-economists might perceive that as some sort of cheating, but aside from politics gold standard offers zero protections against inflation by itself. </p>

<p>Next, its important to understand that deflation is also a form of price instability as inflation and it has negative effects on economy in similar ways as inflation (even if we exclude sticky wages). Deflation still creates unnecessary menu costs for example, same as inflation.</p>

<p>In addition to that deflation has extra negative effects because of sticky wages. Sticky wages does not mean that when everything gets cheaper your wages do too. It means that your wage remains the same (at least for certain period depending on stickiness) and due to the fact it cannot be adjusted quickly enough you would get unemployed. Economy with deflation is economy with unnecessary high unemployment which is additional cost of deflation. For this reason wast majority of economists thinks government should on purpose target yearly inflation of about 1-2% (Blanchard et al. 2013).</p>

<p>Furthermore, the modern evidence shows that independent central banks, if they choose so, are extremely efficient in maintaining price stability. In recent period Euro-Zone had average inflation well below 1% which is lower than historically many countries had under Gold/Silver standard. This just further illustrates that it literary does not matter what the money are made of as long as the stuff they are made of is not inconvenient to use (i.e. food that quickly spoils). How big or little inflation country has is ultimately a policy choice no matter what the money are made of. Even in case of cryptocurrency, if its controlled by government, the government can always decide to change the number of money by just changing the source code.</p>

<p>So the question is why bother having gold standard if its literary just using a useful commodity that could be otherwise used in industry for jewelry/electronics etc. improving peoples material standards of living and it does not hold any real advantage over fiat currency except  </p>

<p>So to sum up:</p>

<ol>
<li><p>its a myth that gold standard by itself prevents inflation. In medieval era inflation was kept low mainly due to technical difficulties and due to general weak governments that could not just impose any debased coinage on its populus. Modern day government deciding to be on gold standard with coins with 0.000001% gold can do so as easily as imposing fiat money on its population just by demanding taxes being paid using said coins. There might be some purely political reason why it might be harder for government to increase inflation under gold standard but no direct economic reasons (aside that smelting might be bit more expensive than printing in case you want to have actual coinage and not just backing)</p></li>
<li><p>Deflation is not desirable. As inflation, deflation is a form of price instability. In fact in presence of sticky wages deflation has additional costs making it worse than inflation but even without sticky wages you would not want deflation but maintain price level stable.</p></li>
<li><p>Modern independent central banks can easily deliver price stability. In fact most mainstream economists nowadays are accusing central banks such as ECB to not doing enough to raise inflation to at least 1-2%. Euro is actually being routinely compared to gold standard - see for example Eichengreen &amp; Temin (2010).</p></li>
<li><p>There is no reason to use a commodity which has valuable industrial uses as money when paper does the job in principle as well. Its just a waste of scarce resources that could otherwise be employed in productive uses. </p></li>
</ol>

<p>References:</p>

<p>Blanchard, O., Amighini, A., &amp; Giavazzi, F. (2013). Macroeconomics: a European perspective.</p>

<p>Eichengreen, B., &amp; Temin, P. (2010). Fetters of gold and paper. oxford review of Economic Policy, 26(3), 370-384.</p>

<p>Ferguson, N. (2008). The ascent of money: A financial history of the world. Penguin.</p>

CC BY-SA 4.0
2020-04-02T15:31:12.743Z
Thanks! In my example, the gov. cannot change the value of currency, so one euro is one unit commodity, forever. I.e. there are a million euros and that's it. If the economy grows, each euro can buy more things, but you cannot print more money, would that at least help with hyperinflation?
Tian
CC BY-SA 4.0
2020-04-02T15:34:35.870Z
@Tian in that kind of unrealistic scenario you prevent hyprinflation but as economy grows you might eventually get hyperdeflation which would be much worse than hyperinflation - hyperdeflation would also result in the money being useless as nobody would want to ever sell it and would just keep it as an investment asset. Again you can see that deflation and inflation are mirror images of each other making money less useful just in different ways.
1muflon1
CC BY-SA 4.0
2020-04-13T09:22:46.020Z
thank you this is really helpful, you explain it very simply and clearly :)
Tian
CC BY-SA 4.0
2020-04-01T20:30:18.820Z
2020-04-01T20:30:18.820Z
1muflon1
<p>Gold backed money had one huge advantage: it prevented trade imbalances and indirectly that helped regulate inflation and the economy. This worked by governments settling their trade deficits in gold, which meant an inflow or outflow of base gold. When this happened the banks had to either reign in or could relax the amount of currency in circulation to minimise or maximise exposure.</p>

<p>A return to a gold standard is impossible because there is not enough gold to represent the total money supply, without somehow inflating gold prices, and ownership is not evenly distributed .</p>

<p>Would things be better if we could? Opinions really. Without a credit bubble and subsequent dot-com crash and later great recession, you would not have Elon Musk. Worth it?</p>

CC BY-SA 4.0
2020-04-01T21:05:16.637Z
2020-04-01T21:05:16.637Z
Frank
<p>My question is would it be better if we went back to something like a gold standard but backed by a finite virtual material instead? It avoids the problem of fluctuations in gold supply. The money-supply is also fixed, so governments can't devalue currency with respect to the commodity, and cannot make more of it. If the economy grows, each unit of currency has more purchasing power, but you cannot print more money. Would this stop overprinting of money, help prevent hyperinflation?</p>

<p>My knowledge of economics is very poor so apologies in advance. 
(Sorry I have edited this question so it makes more sense)</p>

CC BY-SA 4.0
2020-04-02T20:13:37.507Z
I made a comment earlier, but it was no longer applicable as the question was edited to reduce length, and I deleted my comment. One underlying issue that remains is that this question is somewhat opinion-based; we can discuss the technical differences between fiat and backed currencies in a technical manner, but whether these are advantages/disadvantages depends upon one’s political views. In particular, some disadvantages you list are what I view as advantages.
Brian Romanchuk
<macroeconomics><currency><money-supply>
Is fiat currency better than a backed-currency?
Tian
# Is fiat currency better than a backed-currency?

(Asked by: username_0 on 2020-04-01)

My question is would it be better if we went back to something like a gold standard but backed by a finite virtual material instead? It avoids the problem of fluctuations in gold supply. The money-supply is also fixed, so governments can't devalue currency with respect to the commodity, and cannot make more of it. If the economy grows, each unit of currency has more purchasing power, but you cannot print more money. Would this stop overprinting of money, help prevent hyperinflation?

My knowledge of economics is very poor so apologies in advance.
(Sorry I have edited this question so it makes more sense)

**Tags:** macroeconomics, currency, money-supply
> **Comments:**
> **username_1**: I made a comment earlier, but it was no longer applicable as the question was edited to reduce length, and I deleted my comment. One underlying issue that remains is that this question is somewhat opinion-based; we can discuss the technical differences between fiat and backed currencies in a technical manner, but whether these are advantages/disadvantages depends upon one’s political views. In particular, some disadvantages you list are what I view as advantages.  

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## 2 answers

### Answer by username_2 on 2020-04-01. Score: 2

Yes it is. Lets first unpack some myths about about gold standard or commodity money in general.

They dont necessary prevent inflation. Spain managed to have under gold standard a very large inflation compared to other European nations (Ferguson, 2008), and this happened even without debasement.

Furthermore as you yourself mention debasement can occur as well. Commodity money or gold standard dont mean the money have to be solely made of that commodity. In case of the commodity money you can easily have gold standard where you debase the % of metal every year even to the point of having 0.0001% of gold and it would still be gold standard. The only difference between debasement and printing money is that debasement is little bit more expensive as it involves smelting - but in modern industrial world the cost is not prohibitive so it could be done almost as easily as just printing money.

Backing paper money with gold does not prevent inflation by itself either. If you for example set the exchange rate to 1 euro = 1 troy ounce of gold, there is literary nothing preventing government from deciding one day that suddenly 1 euro = 0.001 troy ounce just because they decide so. Again thats still gold standard. Even if 1 euro would be set to be equal to be equal to 0.0000001 troy ounce it would still be gold standard. So whats the point?

Is there any way that gold standard may prevent inflation? From economic side not really (aside its more expensive to remint coins in case of using direct commodity money), but from political side it might be more difficult to justify debasement or change in the convertibility as non-economists might perceive that as some sort of cheating, but aside from politics gold standard offers zero protections against inflation by itself.

Next, its important to understand that deflation is also a form of price instability as inflation and it has negative effects on economy in similar ways as inflation (even if we exclude sticky wages). Deflation still creates unnecessary menu costs for example, same as inflation.

In addition to that deflation has extra negative effects because of sticky wages. Sticky wages does not mean that when everything gets cheaper your wages do too. It means that your wage remains the same (at least for certain period depending on stickiness) and due to the fact it cannot be adjusted quickly enough you would get unemployed. Economy with deflation is economy with unnecessary high unemployment which is additional cost of deflation. For this reason wast majority of economists thinks government should on purpose target yearly inflation of about 1-2% (Blanchard et al. 2013).

Furthermore, the modern evidence shows that independent central banks, if they choose so, are extremely efficient in maintaining price stability. In recent period Euro-Zone had average inflation well below 1% which is lower than historically many countries had under Gold/Silver standard. This just further illustrates that it literary does not matter what the money are made of as long as the stuff they are made of is not inconvenient to use (i.e. food that quickly spoils). How big or little inflation country has is ultimately a policy choice no matter what the money are made of. Even in case of cryptocurrency, if its controlled by government, the government can always decide to change the number of money by just changing the source code.

So the question is why bother having gold standard if its literary just using a useful commodity that could be otherwise used in industry for jewelry/electronics etc. improving peoples material standards of living and it does not hold any real advantage over fiat currency except

So to sum up:

1. its a myth that gold standard by itself prevents inflation. In medieval era inflation was kept low mainly due to technical difficulties and due to general weak governments that could not just impose any debased coinage on its populus. Modern day government deciding to be on gold standard with coins with 0.000001% gold can do so as easily as imposing fiat money on its population just by demanding taxes being paid using said coins. There might be some purely political reason why it might be harder for government to increase inflation under gold standard but no direct economic reasons (aside that smelting might be bit more expensive than printing in case you want to have actual coinage and not just backing)
2. Deflation is not desirable. As inflation, deflation is a form of price instability. In fact in presence of sticky wages deflation has additional costs making it worse than inflation but even without sticky wages you would not want deflation but maintain price level stable.
3. Modern independent central banks can easily deliver price stability. In fact most mainstream economists nowadays are accusing central banks such as ECB to not doing enough to raise inflation to at least 1-2%. Euro is actually being routinely compared to gold standard - see for example Eichengreen & Temin (2010).
4. There is no reason to use a commodity which has valuable industrial uses as money when paper does the job in principle as well. Its just a waste of scarce resources that could otherwise be employed in productive uses.

References:

Blanchard, O., Amighini, A., & Giavazzi, F. (2013). Macroeconomics: a European perspective.

Eichengreen, B., & Temin, P. (2010). Fetters of gold and paper. oxford review of Economic Policy, 26(3), 370-384.

Ferguson, N. (2008). The ascent of money: A financial history of the world. Penguin.

> **Comments:**
> **username_0**: Thanks! In my example, the gov. cannot change the value of currency, so one euro is one unit commodity, forever. I.e. there are a million euros and that's it. If the economy grows, each euro can buy more things, but you cannot print more money, would that at least help with hyperinflation?  
> **username_2**: @Tian in that kind of unrealistic scenario you prevent hyprinflation but as economy grows you might eventually get hyperdeflation which would be much worse than hyperinflation - hyperdeflation would also result in the money being useless as nobody would want to ever sell it and would just keep it as an investment asset. Again you can see that deflation and inflation are mirror images of each other making money less useful just in different ways.  
> **username_0**: thank you this is really helpful, you explain it very simply and clearly :)  

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### Answer by username_3 on 2020-04-01. Score: 0

Gold backed money had one huge advantage: it prevented trade imbalances and indirectly that helped regulate inflation and the economy. This worked by governments settling their trade deficits in gold, which meant an inflow or outflow of base gold. When this happened the banks had to either reign in or could relax the amount of currency in circulation to minimise or maximise exposure.

A return to a gold standard is impossible because there is not enough gold to represent the total money supply, without somehow inflating gold prices, and ownership is not evenly distributed .

Would things be better if we could? Opinions really. Without a credit bubble and subsequent dot-com crash and later great recession, you would not have Elon Musk. Worth it?


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