Here's why you should stop wanting a gold standard (Part 1)

Part 1: The Growth of the Economy

The gold standard has been dead for a long time. However, it still seems to have cadaveric spasms in politics every once in a while, despite uniform agreement from economists that it is a bad idea.

During the Republican primary, both Donald Trump and Ted Cruz called for a return to convertibility. Speaker of the House Paul Ryan supports a rough equivalent of the gold standard.

I can't blame people who believe in it. Like many things in politics and life, it sounds elegant at face value - stop the government from printing so much money that they cause inflation. But the reality of it is more complicated. Here's the first reason why you should throw in that gold standard towel:
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Do you believe (A) that when you participate in the economy, you generally create value in the world?, or (B) that when you participate in the economy, there is a fixed amount of productivity and you take value from someone else?

• Well, if you answered (A), you're in good company. Let's move on.

So assuming we create value when we make things, let's create an imaginary country: Bananastan.

looks like a nice island paradise, heh?

• In Bananastan, there are 10 banana farmers. They all do pretty well. And demand for bananas is strong; each farmer sells 100 bananas per year for a total of 1,000 bananas of production.
• One day, two banana farmers - Mr. & Mrs. Peel - have a son. And 18 years later Junior Peel sees how good the banana market is and decides to start his own banana farm.
• Junior's farm takes off and now Bananastan is creating another 100 bananas per year for a grand total of 1,100 in production.

Well this is great. Bananastan is healthy and the economy grew through hard work and entrepreneurship - just like it's supposed to happen. The problem is Bananastan also uses money (BananaBills - $ BB), and that money is attached to a gold standard.

Bananastan's government has 1,000 ounces of gold and promises to give out 1 ounce of gold for one BananaBill. So they are only allowed to print 1,000 BananaBills.

(One note: The number of dollars in the system does actually have to equal the "amount of production", but this is a simplified example)

This worked great when then there was 1,000 bananas in production and they each cost $1 BB.

But.

Junior created value (and bananas) in the economy by starting his farm, but now there are 1,100 units of production and only 1,000 units of money that can be used to buy those units of production. There's not enough money in the system and the government needs to create 100 BB more, but cannot because they don't have another 100 ounces of gold to back it. It will take years of investment to build a new mine and go find some. 

We want the supply of money to grow with production in a society. Imagine if there were only $100 in the entire United States and you couldn't buy or sell anything without having your hands on one of those dollars. Imagine how high the demand for those dollars would be and how slow everything would move.

of course.

If money doesn't grow with production, it leads to deflation. Deflation means that my money is worth more tomorrow than it is today. That also sounds pretty great at face value, but it's actually much, much worse than reasonable inflation. If I know that my BananaBill (or $US) is going to be worth more tomorrow, why would I use it (or invest it in a new farm) today? I would hold on to it because I'd be able to buy more stuff tomorrow with it. And by holding on to it, I reduce the amount of money in the system and the amount of investment (e.g. building a farm), which drives deflation even further into a deflationary spiral. This happened during the Great Depression.

It is impossible (or incredibly unlikely) for the amount of gold mined to grow at the exact same rate as the economy, so with a gold standard it is inevitable that these two values will diverge, affecting the value that is placed on the currency.