Problems of A Commodity Standard
Economists have noted various problems and benefits associated with a commodity standard. A potential problem arises when the price of the anchor good (or goods) regularly fluctuates. Since the prices of all other goods in the economy are determined by the price of the anchor good(s), they adjust to price fluctuations of the anchor good. Take for example an economy operating under a commodity standard where gasoline is the anchor good. Gas station signs show that the price of gasoline fluctuates on a daily basis. In such a scenario, the prices of every other good are adjusted on a daily basis. Facing daily changes in prices would be a nuisance for consumers, whose natural desire is to see stable prices. A way to avoid this problem is to select an anchor good whose price does not fluctuate, or to choose a basket of goods whose price remains stable over long periods of time.
It is questionable whether an economy under a commodity standard would indeed have less inflation than under a fiat currency system. The reason for this is that the commodity content of the dollar can be redefined by the government at any time. That is, the government would have the power to create inflation simply by raising the dollar price of the commodity base(s). Such an act would have the same effect as increasing the amount of dollars in the monetary base.
Read more about this topic: ANCAP (commodity Standard)
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