Federal Reserve and Gold Standard

Economics Political Theory
1

Could someone explain to me what functions the federal reserve can and can’t have if there’s still a gold standard? Doesn’t the arbitrary setting of interest rates expand the money supply thus changing the price of gold?

The setting of interest rates is basically the purchasing/selling of government assets right? So could they still create money to buy assets despite having a gold standard or did they just buy them out of pocket? I’m not sure if what I’m trying to put across is coherent but hopefully someone will catch my drift…

2

  1. A gold standard means that one US dollar will forever be redeemable for a certain fixed weight of gold. Thus, in theory, the govt cannot print more paper money than they have ounces of gold. Which is the ultimate reason sane people favor a gold standard, since it puts a limit to how much money can be printed, in theory. However:

  2. The govt can print money even if it is redeemable in gold, hoping nobody will actually redeem it. I think the USA did this under Nixon, and DeǴaulle called the bluff, sending in ships full of paper dollars to exchange for American gold. Since Nixon had no gold to hand over, he declared the gold standard dead.

  3. The govt can allow the banks to write checks for non existent money in their vaults, pretending they have money when they actually do not. This is called fractional reserve banking, and by changing the laws which declare to what extent the banks are allowed to do this, they can manipulate interest rates. I think this is how there was inflation during the 20ś even though there was a gold standard.