OK let's say we tie our dollar to gold.
Let's say that 1oz of gold = $100 (for simplicity's sake).
Now, let's say that gold is traded on the open market (as it always has and will be, seeing as how it's a finite commodity).
Let's also assume that another major country (let's use China for this example) ties their currency to gold.
Finally that there is a trade equilibrium and that currency values are stable and equitable (say $100 for 1000 yuan).
Now what happens when China discovers a mountain filled with 10000tons of gold? Does it hold its value?
Will gold still trade on the open market of China (or of the world) for 1000yuan? Unlikely.
Gold is less valuable now, seeing as how more of it exists (as value is tied to scarcity), so thanks to a discovery of gold in another country (something which we have no control over), the US dollar is now worth LESS in countries without a gold-based currency. The open market will now value gold at lower levels due to the new surplus, and US real GDP will fall.
Way to go, gold standard!
Let's try another example, based on the previous assumptions (except for the gold mountain), and one more (that we trade with Germany, who does not have a gold-based currency.
The US wants to perform a currency exchange with Germany.
Let's say that on June 1, $100USD are worth 50 Marks (= 1oz of gold).
Now it's June 15th, time for another exchange.
This time $100 USD are worth only 45 Marks.
Exchange rates fluctuate constantly, and there is no 'precious metal basing' that can stop it. Unless international trade is abolished, currency exchanges will continue indefinitely.
So, now we're at 45Marks = 1oz of gold
Now let's say that the precious metals markets experience a fall, and 1oz of gold is now only worth 25Marks. Now, 25 Marks = $100.
So, pretend that I live in Germany and you live in the US. Now, thanks to exchange rate fluctuations (which, admittedly could go the other way), you're having to pay 2x as much for imported German stuff, and I have to pay half of what I previously paid to buy American stuff.
In a floating currency situation, the monetary value deficit would resolve itself, as US workers would increase GDP by making and selling more products to export, and as that demand grew, the value of the Mark would decline, as the trade deficit in Germany would reduce it's GDP, resulting in a general stabilization in currency values.
Wait a sec - the value of the dollar is still tied to GOLD.
That means that we have to hope that the precious metals market doesn't go haywire so that we can live our lives without having to pay $17/gal for gas.
I'm sure I'll hear the argument "gold is scarce, and they're not making any more of it, etc", and "gold will only increase in value".
HA.
Even if gold did only increase in value, it would be a mirage in economic context.
Say from our previous example that gold goes up, and now $100USD = 100 Marks.
Sweet! We now have twice the buying power in Germany!
That works for awhile, but seeing as how Germany's currency floats, it'll stabilize eventually too. Inflation (from all the GDP increases) will devalue the Mark, and in the end market equilibrium will be restored, albeit at a higher level.
In Barney terms - it will be super terrific, but only for a little bit!
Those are two more examples that spring to mind. Please listen to reason (I feel like I'm better off debating a roll of electrical tape in regards to progress being made). I really don't feel like having to dig thru a textbook to spell it all out for you.
Remembered a third.
Deflation.
Any value we attribute to a specified amount of gold is based absolutely and simply on what a deciding body SAY it's worth.
Let's assume that the US has 100 tons of gold and nothing other countries do (including trading in gold) affects the US.
Now, 1 ton is worth $3.2 million (this is based on $100/oz). Our national net worth is now 320,000,000.
Shit, well that doesn't work.
Let's assume that 1oz is worth $10000. Now 1 ton is worth $320,000,000 and the national net worth is 32 trillion bucks.
That's sounding better.
So we can print up to $32trillion (although most of it will be held in reserve, etc).
We're doing great and our economy is expanding, but shit - another snag. We're COULD BE doing $40 trillion in business, but we don't have 8 trillion worth of gold to back it up.
Solution? Make the dollar worth even less!
Now instead of 1/100th of an ounce, or 1/10000th of an ounce, the dollar will be worth EVEN LESS, just so the money supply doesn't run out.
Man it's a good thing we have a gold-backed currency. It sure makes for fun macroeconomics!
Fun like self-castration with a pair of rusty
dikes, and a car cigarette lighter for post-castration cauterization.