How Would a Return to the Gold Standard Affect the U.S. Economy?

From: http://www.about.com/

By Kimberly Amadeo, About.com

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monetary policy
economic growth
foreign currency
exchange rates
u.s. debt

What Is the Gold Standard?:
The gold standard is when the value of a country's money is tied to the amount of gold the country possesses. Anyone holding that country's paper money could present it to the government and receive an agreed upon value (par value) from that country's gold reserves.
What Are the Advantages of the Gold Standard?: The benefit of this system is that money is backed by a fixed asset. It provides a self-regulating and stabilizing effect on the economy.
The government can only print as much money as its country has in gold. This discourages inflation, which is too much money chasing too few goods. It also discourages government budget deficits and debt, which can't exceed the supply of gold.

In addition, more productive nations are directly rewarded. As they export more goods, they can accumulate more gold. They can then print more money, which can be used for investing in and increasing these productive businesses.The gold standard discourages government debt and budget deficits, as well as trade deficits. Countries with any deficit lost gold from their reserves in order to pay their creditors.

The gold standard has also spurred exploration. It is why Spain and other European countries discovered the New World in the 1500's - to get more gold and increase the country's prosperity. It also inspired the Gold Rush in California and Alaska during the 1800's.
What Are the Disadvantages of the Gold Standard?: One disadvantage is that the size and health of a country's economy is dependent upon its supply of gold, not the resourcefulness of its people and businesses. Countries without any gold are at a competitive disadvantage.

However, this is an advantage to the U.S., which is the world's second largest gold mining country behind South Africa. Most U.S. gold mining occurs on federally owned lands in twelve western states, with Nevada being the primary source. Australia, Canada and many developing countries also are major gold producers. (Source: National Mining Association)The gold standard causes countries to become obsessed with keeping their gold, rather than improving the business climate. For example, during the Great Depression, the Fed raised interest rates to make dollars more valuable and prevent people from demanding gold. However, the Fed should have been lowering rates to stimulate the economy. (Source: Econlib, The Great Depression)Government actions to protect their gold reserves caused large fluctuations in the economy. In fact, between 1890 and 1905, when the U.S. was on the gold standard, the economy suffered five major recessions for this reason. (Source: Federal Reserve, Remarks by Governor Edward M. Gramlich,, 24th Annual Conference of the Eastern Economic Association, February 27, 1998)
How Would a Return to the Gold Standard Affect the U.S. Economy?: How a return to the gold standard affects the U.S. economy depends on which gold standard method is proposed, and how it is implemented. For a detailed description of some of these methods, see The Cato Institute, The Gold Standard: An Analysis of some Recent Proposals, September 9, 1982 and Foundation

for Economic Education; How to Return to the Gold Standard, November 1995.
Returning to a gold standard, however it is done, would constrict the government's ability to manage the economy. The Fed would not longer be able to reduce the money supply by raising interest rates in times of inflation, or increase money supply by lower them in times of recession. In other words, the money supply would have to remain constant. In fact, this is why many advocate a return to the gold standard. It would enforce fiscal discipline, a balanced budget, and limit government intervention.

However, a fixed money supply, dependent on gold reserves, would limit economic growth. Many businesses would not get funded for lack of capital.
The U.S. could not unilaterally convert to a gold standard if the rest of the world didn't. If it did, everyone in the world could demand that the U.S. replace their dollars with gold.
The U.S. does not even have enough gold, at current rates, to pay off the portion of its debt owed to foreign governments. For example, China, Japan and other countries own $2.4 trillion in U.S. Treasury debt - but there is only $182 billion (at $743 per ounce) total in gold reserves at Fort Knox. (Source: U.S. Treasury Major Foreign Holdings of U.S. Debt; Office of Inspector General, Audit Report, November 2007)

Today, the U.S. economy is an important partner in an integrated global economy. Central banks work closely together throughout the world to manage monetary policy. The U.S. could not unilaterally adopt an isolationist economic stance, and abandon its ability to manage its economy using monetary policy, by returning to a gold standard.
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Addendum: From http://www.about.com/

How Do Exchange Rates Work?
Answer: Exchange rates change every day. This is because currencies are traded on an open market, and the demand for them varies based on what is happening in that country. The interest rate paid by a country’s central bank is a big factor, since a higher interest rate makes that currency more valuable. Inflation is also taken into account, since high inflation in a country makes that currency worth less the longer it is held. Finally, a country’s financial stability will also impact a currency over time, since investors want to be sure they will get paid back.

Blogger comment:

Artificial economy is that which deviate from the demand and supply real market economy. In this Real Economy:
1- There is no fiat money but paper money has to be printed according to certain commodities.
2- In real economy the Fed does not control money supply but demand and supply. Thus if there is increase demand (paper money in hands of most people) there will be always demand for supply.
3- There will be no interest rate like in the artificial market but fee for service given to banks to borrow money. In with real market economy the fees will be competitive unlike the interest rate which is usually fixed and it will be smaller than the interest rate. Thus people will invest in real economy and not in money itself. This will prevent the bubbles from happening.

To understand the real market economy: imagine that we have 100 dollars in a market divided between 5 people not necessarily equal and each produced a service or good. The 100 dollars recycled between all of them. One of them did not have money after this first trade between them so they gathered a percent form each of them of 2.5% of their money and they gave it to him. They went through a second cycle of production of goods and services and they traded again between them like with the first cycle and compensated the poor one with 2.5% of the money of each of them. You will notice what happen in this simple real economy ( so used 100 dollars to simplify it):

1- The more repeated the cycles the more the wealth accumulated from goods, services, things that produce the service and goods.
2- The power of purchase of one dollar will increase with these cycles, the more the cycles per year the more the power of purchase.
3- If we started with one dollar equal one gram of gold we will end after these repeated cycles by one dollar equal two or more grams of gold. Or if we want to fix the dollar to gold as one to one ratio we can print more paper money as its value increases. Thus the printed money present real exchange medium of real economy.
4- As we keep the cycles with no interest rate the money will be chasing goods and services. If another intruder comes and tells these people keep your money with me and I will give you an interest rate we will shift from real economy to gimmicks. If this guy would control the money like banks now he will lend to them the money at high interest rate. Thus in artificial economy the money monopoly goes to the government, banks and rich people. It is not directed mainly for demands but for gambling with our money and creating bubbles.
5- These guys in real economy will not have inflation if any thing the purchase power of their dollar make goods and services more cheaper.
6- These guys if they want to trade with other guys who have different currency but same roles of real economy like them, the exchange rate will reflect the real economy in large part and not an artificial one. They will have fair trade.