If you can get your friend to stop laughing, and actually give you an answer as to why it would be a bad idea to return to a classic gold standard, you will invariably get one of the following responses. As we will see, some of these are either just plain wrong, or they are at best misunderstood.
1. Nobody wants heavy gold coins weighing down their pockets
This response is usually accompanied by some quip about going back to medieval times, with gold ducats carried around in purple drawstring pouches. But this just shows a lack of understanding of the essence of a gold standard. Yes, under a gold standard, you could transact in actual gold coins, which is what happened earlier in history. But people eventually figured out they could use paper currency that represented claims on the gold actually stored at banks and in vaults. The only stipulation for a gold standard is the ability to convert or redeem your money into gold, if so desired.
Therefore, you can still have currency and even units like ‘dollars’ as long as they represent a fixed amount of gold. This is what is meant by ‘gold-backing’. The option to convert to gold keeps banks and governments honest, but as long as citizens are unconcerned that banks or governments would ever default on this pact, then they will happily use the dollars and leave the gold in the vaults. In fact, our monetary system wouldn’t look much different; you would still have your checking and savings accounts, debit cards and credit cards, all denominated in dollars. The only difference is the additional option to convert those dollars to gold at any time.
2. Gold is a barbarous relic
Economist John Maynard Keynes and even talented investors like Warren Buffet and Charlie Munger have described gold in these terms. It has been suggested that if aliens saw humans digging up gold from the ground – refining it and shaping it into coins and bars, only to bury it back in the ground in vaults and guard it – they would think we are crazy. Perhaps this is not an unreasonable remark, considering the wasted resources on all of this energy, equipment and labor.