Should the united states adopt a gold standard Remain in the

Should the united states adopt a gold standard? Remain in the current float-based system? Or Use some other system?

Solution

Under the gold standard, the value of a currency was determined as per weight of gold. Gold was the measurement yardstick. But after World War II, all countries de-linked their currencies from gold and the standard collapsed.

Currently, US dollar is determined in a floating rate exchange rate market. The main advantage is that the central bank (Fed) doesn\'t need to keep intervening every time the value of dollar goes up or down, to stabilize the dollar value within the specified band. Nowadays, all major economies have floating rate system. The rate is market-determined and completely dependent on market demand and supply forces. As the demand (supply) of dollar increases, value of dollar increases (decreases).

US should retain the current floating rate regime for the primary reason that this system is in accordance with most major trading partners. Even though fluctuation of dollar poses a problem, repeated Fed intervention in case of a fixed rate dollar makes the system inefficient. Moreover, the cost of non-intervention cannot be measured.

Therefore, continuing with floating rate regime is a prudent course of action.