HappySqurriel said:
This is why you would phase out the old currencies slowly over time ... You introduce the new currency and it begins its life (effectively) as a gold-derivative that is traded on foreign exchange markets. Every time the central bank sells a note they take the money they receive from that sale to buy gold to hold in reserve; allowing them to print more notes for sale. Over 20 or 50 years, existing central banks would sell any foreign reserves they had. Eventually, these currency reserves would be large enough that you could create an exhange rate that is a proportionate distribution of the new currency based on people's holdings of the old currency, and the existing central bank could be phased out. |
It still would mean huge transitional costs... In fact, doing it slowly may make the problem worse as people wonder when and how the currency will start. And a "proportionate distribution" does not answer the question on exchange rates. I think the most important problem which you have not addressed is the fact that the gold standard limits the flexibility and range of actions that central banks can take to improve a nation's economy in fundamental ways. (For example, in a fixed exchange rate regime, central banks have less ability to maximize employment, stimulate growth and manage price stability.) The business cycle would also be ridiculously extreme, i.e. the bank cannot help a country be lowering interest rates, so some countries will do very well, others terribly. An while you say that the paper money has to be backed by 10% its value in gold, what happens if there is a tremendous bank run? You still have the age old question of there not being enough gold to go around!
