Advantages
The history of money consists of three phases: commodity money, in which actual valuable objects are bartered; then representative money, in which paper notes (often called 'certificates') are used to represent real commodities stored elsewhere; and finally fiat money, in which paper notes are backed only by use of' "lawful force and legal tender laws" of the government, in particular by its acceptability for payments of debts to the government (usually taxes).
Commodity money is inconvenient to store and transport and is subject to hoarding.[4] It also does not allow the government to control or regulate the flow of commerce within their dominion with the same ease that a standardized currency does. As such, commodity money gave way to representative money, and gold and other specie were retained as its backing.
Gold was a common form of representative money due to its rarity, durability, divisibility, fungibility, and ease of identification,[5] often in conjunction with silver. Silver was typically the main circulating medium, with gold as the metal of monetary reserve.
The Gold Standard variously specified how the gold backing would be implemented, including the amount of specie per currency unit. The currency itself is just paper and so has no innate value, but is accepted by traders because it can be redeemed any time for the equivalent specie. A US silver certificate, for example, could be redeemed for an actual piece of silver.
Representative money and the Gold Standard protect citizens from hyperinflation and other abuses of monetary policy, as were seen in some countries during the Great Depression. However, they were not without their problems and critics, and so were partially abandoned via the international adoption of the Bretton Woods System. That system eventually collapsed in 1971, at which time all nations had switched to full fiat money.
Former US Federal Reserve Chairman Alan Greenspan once argued, before the advent of monetarism, that
"under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth... The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit... In the absence of the gold standard, there is no way to protect savings from confiscation through inflation."[6]
Disadvantages
A currency needs to satisfy three functions to become a true representation of transactions between people.[citation needed]
1. Medium of exchange
2. Store of value
3. Unit of Account
For gold currencies to be valid, the issuer should be able to deliver "value / energy" on redemption of currency. Otherwise, gold currency has no mechanism to satisfy the "delivery of value" function to be real currency. Gold does not have inherent value/energy so exchange value has to be negotiated during each transaction. During times of scarcities like famine, exchange value of gold goes down drastically.
The total amount of gold that has ever been mined has been estimated at around 142,000 tons.[7] 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 $7.6 trillion is in circulation or in deposit (although international banking currently practices fractional reserves). Therefore, a return to the gold standard would result in a significant increase in the current value of gold, which may limit its use in current applications.[9] For example, instead of using the ratio of $1,000 per ounce, the ratio can be defined as $2,000 per ounce (or $1,000 per 1/2 ounce) effectively raising the value of gold to $8 trillion. Gold standard advocates consider this to be an acceptable and necessary risk. [10]
Fluctuations in the amount of gold that is mined could cause inflation, if there is an increase, or deflation if there is a decrease. Some hold the view that this contributed to the Great Depression.
It is difficult to manipulate a gold standard to tailor to an economy’s demand for money, giving central banks fewer options to respond to economic crises.
Some have contended that the gold standard may be susceptible to speculative attacks when a government's financial position appears weak. 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.
If a country wanted to devalue their currency, it would produce sharper changes than the smooth declines seen in fiat currencies
