In response to "44. The Wizard of Oz problem", where I had written:

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Those who oppose currencies being exchangeable into gold fall into two fallacies. Firstly, they assume that the supply of gold, being fixed, must also necessarily fix its value. Secondly, they don't appreciate that currency started out as a consumer good -- that is, it had intrinsic value -- and that until currency is restored to this role then we will have continuing currency problems. We will either have rampant inflation for a decade or two, or periods of prolonged deflation. In between, there are periods when the value of the government currencies is approximately right, but this is more by good luck than judgement, and they don't last long before we plunge one way or the other again.

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Ed Weick has commented

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I'd have to reread sources like Polyani to understand why countries abandoned to gold standard, but I guess a general enough answer is that it simply proved unworkable. W.J. Bryant's cross of gold argument suggested

that some people already instinctively understood this back in the 19th Century, but still felt that the currency had to be tied to something, if not gold alone, then gold plus silver. What I've never understood is why the prices of all goods and services, and indeed the economy as a whole, had to be tied to a single commodity. Why tie production, consumption and exchange to a single commodity? Why make that commodity the measure of national well being and wealth?

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I don't think we need to read Polanyi or any other economist on why countries abandoned the gold standard. There was simply not enough of the metal to go round as a coinage (or even in ingot form in the bank) during the course of the 19th century in which industrial populations and general prosperity were growing in leaps and bounds, and larger and larger tranches of money were being exchanged. Gold, as a convenient form of currency had had its day. Also, it may be noted, this is where L. Frank Baum was wrong when he advocated the use of silver in his original "The Wizard of Oz A Parable on Populism". The addition of silver as a currency would not have done much at all.

But it's all very well throwing out the bathwater, without the baby as well. Paper currency was the obvious and sensible way forward but, in abandoning currency's previous intrinsic value, and in making the independent banks subservient to a central bank, in turn subservient to government, then trouble was inevitable sooner or later. From then onwards, governments would have no realistic idea as to just how much money to print. Thus, during the last century we have experienced long periods of deflation and also long periods of inflation (between 1947 and 2000, the dollar devalued 23-fold, and the pound even more so). Even during the 16th century when the Spaniards brough in vast amounts of new gold and silver into Europe from South America, inflation only doubled in the course of several decades.

To prevent prolonged inflations or deflations, all that needs to be done is for governments to say that their currencies should be exchangeable against things of tangible value -- whether this is expressed in terms of ounces of gold, or platinum, or a package of more ordinary items doesn't matter. F. A. Hayek has explained all this in his "Denationalisation of Money."

It is unlikely that governments will ever agree to their currencies becoming redeemable against real value because it will enforce discipline on them. They would not be able to inflate money when they needed to borrow large amounts. However, what seems to be happening otherwise is that, because most governments have been imprudent in the control of their currencies, then the number of useful currencies in the modern world is declining steadily. Just at the moment, we only have three or four (dollar, pound, renminbi, the Swiss franc, for example) in which investors have confidence. Gradually, we are edging our way to a single world currency for trade and also for internal use within various countries. When that happens, then the value of money will rise or fall uniformly everywhere and it won't matter very much -- except for mathematical convenience -- whether a loaf of bread costs 1W$ or 1mW$. So long as large scale counterfeiting of currency can be prevented, then this appears to be the way forward. (Of course, a great deal of this future single world currency will be in electronic form -- which is even more convenient than paper money.)