Chapter 2: Findings and Analysis- Maneuverability Problems with the Gold Standard-Inability to influence the Business cycle- National Reserve Currency

2.7     Maneuverability Problems with the Gold Standard

2.7.1    Inability to influence the Business cycle

Influence the Business cycle

The business cycle is considered by most mainstream capitalist schools of thought to be integral to the functioning of a free market. It is asserted that with the Gold Standard, various policy tools, such as the use of Fiscal and Monetary Policy, cannot be used to mitigate the negative phase of such cycles. The business cycle is characterized by periods of accelerated growth in output, followed by a period of slowdown and then contraction in output often called a recession.

It is argued that the central banks, some of which are independent of direct government control, can help to lessen the impact of such cycles and by so doing extend the period of the boom and minimize the bust phase of the cycle. This goal, it is claimed, can be achieved through various monetary policy tools such as the raising of interest rates and increasing the money supply. Such actions would not be possible under a fully backed Gold Standard where Gold would act as a limiting factor to the supply of money within the economy.

The business cycle is a product of external and internal factors. There can be cases where a downward trend or recession can be caused by external factors such as the 1970s oil price shocks; however such external or exogenous factors are beyond the scope of this paper. Internal factors that cause recession tend to be related to monetary tightening (usually rising interest rates) policies to restrain an over-heating economy and accelerating inflation.

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