That's a pretty key difference.
The value is based on scarcity.
When there's no scarcity constraint, we can all just collectively vote ourselves to be billionaires.
What could go wrong?
I could say the same for basing your money supply on the production of a yellow metal. What happens when there's a massive discovery of gold? Or there's a (trade) war between the top producers (eg. china, australia, and russia)? Or when there's a worldwide pandemic and you need to provide stimulus so the economy doesn't collapse?
Never in history has this situation caused a collapse like the hyperinflation seen in Weimar Germany or recently Zimbabwe. Because even a huge change in supply is only going to affect price by a double digit percent (check a chart of historical gold price volatility), while hyperinflation can reduce the value of currency by orders of magnitude.
>Or when there's a worldwide pandemic and you need to provide stimulus so the economy doesn't collapse?
The stimulus was only necessary because of the lockdowns, which in hindsight proved completely counter-productive, empirically producing no overall reduction in deaths (https://onlinelibrary.wiley.com/doi/full/10.1002/hec.4737 ). Without the ability to print money governments wouldn't have been able to get away with locking down their citizens so long, and the damage they inflicted on mental health and children's educational outcomes could have been reduced.
The question of whether lockdowns were justified aside, pandemics aren't the only form of economic calamity that might occur. Financial crisis occur. Other supply shocks (eg. war in ukranie) exist as well.
2. There's opportunity costs with keeping such high reserves around, rather than doing something productive like investing in infrastructure.
3. It's unclear how introducing massive amounts of gold (previously held in reserve) into the economy won't cause inflationary effects. Like I said earlier, you can't eat gold. Dumping a bunch of gold into the economy doesn't magically increase the amount of goods in existence, which would also lead to inflation that money printing would cause.
China as a country with relatively low GDP per capita also manages to maintain high foreign exchange reserves.
>2. There's opportunity costs with keeping such high reserves around, rather than doing something productive like investing in infrastructure.
Infrastructure spending is only a small fraction of the US budget compared to warfare; if the US hadn't gone to war in Iraq and Afghanistan it could have a few trillion dollars of reserves with no drop in productive spending.
> It's unclear how introducing massive amounts of gold (previously held in reserve) into the economy won't cause inflationary effects. Like I said earlier, you can't eat gold. Dumping a bunch of gold into the economy doesn't magically increase the amount of goods in existence, which would also lead to inflation that money printing would cause.
It would cause inflationary effects initially, but this would be a one-off thing, as the mining rate of gold is relatively steady.
And they're only able to pull it off by having a high trade surplus. Needless to say, not everyone can have a high trade surplus, so it's unclear how this is a policy that can generalize.
>if the US hadn't gone to war in Iraq and Afghanistan it could have a few trillion dollars of reserves with no drop in productive spending.
If the pandemic is anything to go by, if there's a surplus the money would get plowed into tax cuts, not reserves.
https://www.economist.com/united-states/2022/08/25/states-ha...
Governments with a gold-backed currency could maintain high (government) reserves even with a high trade deficit. Imagine a king with literal gold currency, a huge pile of gold in his throne-room. No matter how large the private economy's trade deficit, he's still going to have the same amount of gold in his pile.
>If the pandemic is anything to go by, if there's a surplus the money would get plowed into tax cuts, not reserves.
If governments couldn't print money they'd be forced to be more economically cautious, because they couldn't just print themselves out of trouble, instead they'd need a tax, which would face more resistance.
Isn't that just quantitative easing/tightening by another name? During good times you're taking gold out of circulation to build reserves, and during bad times you're releasing gold out of reserves to stimulate the economy.
>because they couldn't just print themselves out of trouble, instead they'd need a tax, which would face more resistance.
The above example involves US states, which can't print their own money.
Yes, exactly. But in this scenario the gold's being taken out of circulation by taxation rather than by inflation, which makes it more visible and constrained. Similarly the release is constrained by the amount of physical gold reserves, so you couldn't realistically have e.g. a few years of 100%+ inflation rates. And the process of transferring the wealth is less lossy; 100% goes to the government, none to intermediaries in the financial system.
>The above example involves US states, which can't print their own money.
They can't, but they can try to get the federal government, which can, to bail them out.
It comes at a heavy cost though: you need to keep tons of the yellow stuff around, rely on the past administrations being prudent to actually keep a sufficient reserve. In the end you're still relying on people to act prudently.
>They can't, but they can try to get the federal government, which can, to bail them out.
I mean if you're going to invoke extraordinary measures like this, then I can also invoke up extraordinary measures like the government debasing the currency, which was still done even when countries were on the gold standard.
A cost to the government, but much less of a cost to the lower classes, who pay low taxes thanks to progressive taxation so inflation represents the biggest drain on their wealth (especially since most don't have access to financial instruments or the education to use them).
>I mean if you're going to invoke extraordinary measures like this
It's not necessarily extraordinary; we haven't seen the Federal government bail out a state yet but we also haven't yet seen a state undergo a complete financial collapse, so it's quite possible there'd be a bailout if things got bad enough. The WSJ predicts a bailout of the states is upcoming: https://www.wsj.com/articles/the-coming-biden-bailout-of-blu...
>like the government debasing the currency, which was still done even when countries were on the gold standard
They did that by essentially turning their currency into a fiat currency: saying it was worth X, when the actual precious metal it consisted of was only worth e.g. half of X. But yes you're right that in theory nothing prevents a government with 100% gold standard from debasing it like that, however doing so would be more visible to citizens than inflation since it'd require centralising how the currency was priced.
Wouldnt that be a healthier cycle than one where we just paper over everything?