What would have happened if currency was still backed by gold?
Question: What would have happened if the gold standard were still in place, in an alternate timeline?
Interesting scenario. I disagree with other commenters that think that modern history would have been full of “economic disasters” as if there would have been more tough economic periods than we have had in this timeline. I don’t think you can know that for sure.
While economic policy can ease economic distress by borrowing from society and the future, it can also cause it through the creation of financial bubbles and artificial boom and bust cycles, like the dot-com bubble, real estate bubble, green bubble, meme stocks, or cryptocurrencies. A lot of these bubbles got fueled by lax economic policy and cheap money (although most of these bubbles did create valuable companies and products, there was also a lot of money lost through wild speculation with newly minted currency). Since a lot of new currency is backed by an ever increasing government debt that will most likely remain unpaid for the foreseeable future, you could call a lot of government spending and inflation a permanent and periodic redistribution of wealth rather than a “loan” from society or the future, basically another tax.
I think what would have happened as you assumed is that the value of gold would have increased relative to everything else, and its current price would be much greater. I believe that monetary instruments simply expand or shrink in price to accommodate their demand, or to accommodate trade.
So commerce would have continued, but in a environment where the currency is deflationary. Deflation affects trade negatively because sometimes people would prefer to not spend their gold, and save it to buy more stuff in the future (deflation). Meanwhile in an inflationary environment there is an incentive to buy things now rather than later, because people think prices might increase in the future.
Gold would have continued to be mined like it always has, it is believed that the total supply for gold above the ground (mined gold) increases at about 2% per year in the present 2024. Even though gold is scarce, its supply is still growing. At 2% a year, gold’s yearly supply increase is exactly the inflation target of central banks.
It’s worth noting that effective inflation is different from emission rate, a central bank could achieve 2% yearly inflation while increasing its currency supply 5% to 6% a year, this is because technology and production improvements lower the cost of producing goods every year, and also because the total amount of goods increases every year in a growing economy. More goods and services, and innovation have a deflationary effect (which lowers the prices of mostly everything).
The difference is that in a world that still uses the gold standard, the mining rate of gold would probably be much higher due to more companies exploring gold mining as a business opportunity.
Since currency would be represented by a physical asset and possibly exchangeable back and forth (redeemable gold notes), companies that audit physical bank reserves and weigh their gold would probably be more relevant in the auditing industry. There might even be gold ATMs where you could deposit standardized gold coins or get gold coins in exchange of paper currency as well.
Alternatively, to accommodate more trade, banks could have issued competing currencies that derive their value from promises of repayment (loans) denominated in gold or something else, or their own currency. Effectively private money, this has happened in the past, and still happens now because a lot of money inside banks isn’t immediately available. A lot of a bank’s reserves are loaned, but people can still trade with each other using these promises in digital form even though these promises aren’t fully backed at the time of these trades, for example credit card purchases and money transfers between savings accounts are this. These activities inflate a currency, because the market treats them as government currency even though they aren’t issued by governments or central banks.
Stocks, bearer notes, or cryptocurrencies, could have been used in trade as well, although this tends to be less common due to their volatility, and generally speaking highly volatile assets aren’t used as payment, however this has happened as well in the past, and still happens frequently in some settings like corporate acquisitions (where a lot of the payment part of a company being acquired is paid in stock in a new company or the acquirer’s company).
