I made an account here to ask a question I have been pondering for some time.
I understand why a gold standard might be a good idea, what the problems with fractional reserve banking is, why central bankers cant get the rate right, why falling prices isnt a bad thing and so on.
Say a country adopted the gold standard. Lets call this country Switzerland. The country now uses either gold or more like - a currency 100% backed by gold. When foreigners want to buy goods from Switzerland they have to buy gold from the world market to give to the swiss. When the swiss want to buy goods from abroad they will have to sell some of their gold on the world market to get foreign pieces of paper to pay for the goods. In reality the exchange between goldbacked swiss franc and foreign currencies will be the same as the gold price.
My question is then what would happen if the price of gold suddenly surges? I know this happens with foreign currencies as well. But since a) gold surges probably have bigger magnitude (gold up 400% over 10 years) and b) there is no central bank to print money would a gold surge not prove very problematic for competiveness of a country on a gold standard?
Prices of that country´s products might suddenly explode in terms of foreign currency? I know that having a strong currency has its advantages since one can buy more inputs from abroad etc. but a very sudden rise gives no time for such adjustments?
Is this not a potential problem for that countrys industry? If yes, what could be done to fix it?
I hope i managed to clarify my question well enough. Cheers!
shivan:I do know its NOT a good idea overall. But if you DO want to do it, isnt it better that the printed up money is distributed to all people rather than few select with the right connections?
Shivan, to add to the good answers you already got here, the exporting swiss watchmakers -- and all other swiss, for that matter -- would BUY their foreign watchmaking competitors and increase their profits and market-share. They sure would have the buying power to do so, and more.
Flight to quality