The True Gold Standard (Second Edition)
News Desk: Special Reports
The chart reveals that the supply of gold is tightly correlated with economic growth over the last two centuries.
As a monetary standard, gold promotes both long-run price stability and real economic growth. The former holds insofar as the supply of gold is limited. Former United States Gold Commissioner Lewis Lehrman explained that, "...total new gold production in any single year is only a minor fraction of the total supply of gold in existence--about 2 percent." Because of the costs of gold production, total supply is both limited and stable. A dollar backed by gold would have the same virtues.
Moving forward to a modernized gold standard would contribute to real economic growth by "...provid[ing] not just an American but a vast worldwide countercyclical 'stimulus package' -- one not financed by yet more government debt -- since when all other prices declined, the gold 'price' would stay constant, stimulating gold mining." That is to say, the gold standard contributes to real economic growth.
This final point may be observed most dramatically in the chart as the divergence between economic growth and the growth of the gold supply. This began with the creation of the Federal Reserve System in 1913-14 which was followed by the collapse of the classical gold standard and the establishment of the Bretton Woods system in 1944. This deviation is most obvious in the years following Nixon's 1971 rescission of the gold standard whereby economic growth exceeds the supply of gold, inflation--including that of the money supply--runs rampant, and dollars become backed only "by the full faith and credit of the United States government."