Answer to Question #87009 in Macroeconomics for Dennis Gurban

Question

What was the negative part of the government needing to sell gold reserves during a recession while the gold standard was in place?

Answer 1

Since the gold standard is based on the fact that monetary units are necessarily supported by a certain amount of gold, then the sale of the gold reserve of the state, in this case, will lead to the devaluation of the national monetary unit, which in turn will increase the size of inflation.

Especially during a recession in the economy, when GDP growth is at zero or even negative, inflation growth will lead to negative economic changes and aggravate the country's economic downturn.

In addition, the government sells its gold reserves to cover the balance of payments deficit, shows its helplessness, because it does not overcome the recession, but only constrains its consequences by selling gold reserves.