How Gold Stabilizes World Trade

Gold provides a very important and natural mechanism to stabilize world trade that would prevent a nation from running too big of a deficit and running into problems with debt. The USA had balanced trade for a very long time but only after President Nixon broke the dollar’s link to gold in 1971 did the country start running deficits that grew larger and larger. At its height during 2008, the USA was importing $800 billion more per year than it was exporting. The difference being paid for with borrowed or printed money.

A gold standard would prevent any trade imbalance from persisting too long and from reaching such heights. If a country begins importing far more than it exports, gold is taken out of circulation in that country as the country pays for its imports. As the quantity of money in circulation declines, the price system responds by lowering the price of domestic goods and labor. This makes that same country look better to foreign companies that may want to take advantage of the cheaper labor and it also makes the goods produced in that country less expensive to foreigners. Capital will flow back into the economy, creating jobs and more goods will be produced domestically for export such as gold merchants.

Conversely, countries exporting large quantities of goods would have the prices of their domestic labor and goods rise because of the influx of gold. This makes the same country look less attractive to import from, and less likely for international businesses to set up shop in. That country will begin to import more and export less because of the changes to domestic and foreign prices. Thus, the balance of trade between countries is maintained.