What if the US had been on the gold standard?

A number of people (mostly libertarians, in the contemporary North American sense of the term) advocate a return to the gold standard, notwithstanding the fact that no country has used it in decades. Econbrowser has an interesting thought experiment- suppose the US had gone back on the gold standard in 2006?

Many things might have been different had the U.S. decided to promise to exchange dollars for gold at the 2006 price of $600 per ounce of gold. But let's start with some of the things that wouldn't have changed. I contend that we'd be no less worried today about geopolitical events in places like Nigeria, Iraq and Iran. The phenomenal growth of the Asian economies would presumably have continued. The bad mortgage loans made prior to that time would still be on the books and still be problematic, with attendant worries about the financial soundness of many institutions. All of this would have meant an increase in the demand for gold. Equilibrium would then require an increase in the relative price of gold compared to what it had been in 2006. That is, the number of umbrellas, or cars, or chairs that people would be willing to surrender in order to obtain an ounce of gold would have gone up relative to what it had been in 2006.

Now, if the number of dollars you have to surrender to obtain an ounce of gold is fixed by the government's commitment to a gold standard, and the number of umbrellas, or cars, or chairs you'd be willing to surrender for an ounce of gold has gone up, the only way that can be is if the dollar price of umbrellas, cars, and chairs have all fallen. Maintaining a gold standard while the relative price of gold increases requires deflation in the dollar prices of all other goods.

For more, check the original article. It doesn't sound like a ringing endorsement, that's for sure. The thing is, fiat currency gives governments more flexibility to control the economy than a gold-backed currency does. Presumably that's why libertarians don't like it, but that flexibility is necessary to keep a complex society functioning properly.

Thanks to Stephen Gordon at babble for the link.