Cause and effect: What would happen if the US went back on the gold standard?

 The US going on a gold standard would result in hoarding of gold and using paper money to buy things.

Because of incentives:

If the government pegs the dollar to gold at a fixed rate while also letting paper dollars circulate at par by legal decree, people will tend to keep (or export) the scarcer, more valuable asset—gold—and spend the easier-to-pass paper. That is classic Gresham’s law: when two monies are forced to trade at a fixed legal rate, the undervalued “good” money disappears from day-to-day circulation, and the overvalued “bad” money circulates. [2][4]

Key mechanisms:

• Fixed peg + legal tender = mispricing. If the official parity undervalues gold relative to its world market price, anyone who can redeem paper for gold gains by hoarding or exporting the gold and paying bills with paper. The more binding the legal tender/par conversion is, the stronger the incentive to spend paper and save gold. [2][4]
• Store-of-value vs medium-of-exchange. Gold carries no issuer risk and tends to hold value; paper claims are convenient for transactions but carry inflation/counterparty risk. Rational actors therefore keep gold as a store of value and part with paper first in routine purchases. [5]
• Deflationary expectations under a tight gold base. If the money base is constrained by gold while real output grows or gold supply is inelastic, people may expect prices to fall. Expected deflation raises the real return to holding gold/cash balances, so the public slows spending and increases gold hoarding, again pushing paper into daily circulation. [3][6]
• Transaction costs and convenience. Physical gold (or coin) is costly to assay, ship, and make change with; paper claims are lighter, divisible, and easier to pass at par. Even with full convertibility, everyday commerce will gravitate to paper while gold sits in reserves, vaults, or jewelry—another channel that looks like “hoarding.” [5]

A laissez‑faire perspective adds an important nuance: the hoarding/spend-paper pattern is not caused by “gold” per se but by state-imposed pegs and legal-tender privileges that force a one-to-one exchange between claims and the commodity at a fixed price. In a truly free market with competing monies, free pricing, and no privileged paper, arbitrage and market interest rates would discipline note issuance and reduce the mispricing that triggers Gresham’s-law effects. When governments fix the price of gold to paper, people rationally arbitrage—hoarding the undervalued good money and using the overvalued paper to buy things. [1][2][4]

Sources

1 Man, Economy, and State with Power and Market, Scholar's Edition, by Murray Rothbard

2 Human Action, Third Revised Edition by Ludwig Von Mises

3 Capitalism by George Reisman

4 Classical Economics by Murray Rothbard

5 Farewell to Marx by David Conway

6 Economic Thought Before Adam Smith by Murray Rothbard

In addition:

Under a classical gold standard, rational market actors tend to keep (hoard) the scarcer, higher-quality money (gold) as a store of value and spend the lower-quality, more convenient claims (paper) for day‑to‑day transactions. That outcome follows from straightforward incentives, not from coercion or policy.

Why this happens in a free‑market setting

• Fixed‑parity arbitrage (Gresham’s-law logic under legal parity): If gold coins and redeemable paper dollars circulate at the same face value, people will spend paper and keep gold. You part with the asset that carries more issuer risk and less “moneyness premium,” and you retain the scarcer, globally saleable asset. In other words, “bad” (or merely less sound) money circulates; “good” money is saved [3].
• Store‑of‑value premium from scarcity: Gold’s supply is relatively inelastic. If real output grows faster than new gold production, the purchasing power of gold tends to drift up over time. Expected real appreciation gives holders a reason to save in gold rather than spend it—what critics call “hoarding,” but is simply rational intertemporal choice in a hard‑money regime [6].
• Redemption option and bank discipline: Paper notes are typically convertible into gold on demand. Spending paper while holding gold preserves your option to redeem later. Banks that over‑issue are disciplined by redemption, so the public naturally passes paper along while keeping the base asset in reserve [4].
• Lower transaction costs of paper: Paper (or deposits) is lighter, more divisible, and easier to transfer and clear. Markets economize on transaction costs by using the cheaper medium for payments and the scarcer medium for savings. That division of labor—paper for exchange, gold for reserves—is efficient, not pathological [2].
• Risk sorting: Paper carries counterparty risk; gold carries none. In ordinary spending, you discharge the riskier claim first and keep the non‑liability asset. In uncertainty, this preference strengthens, raising demand for base money (gold) while paper continues to circulate for transactions [1].
• International settlement channel: Under a gold standard, external imbalances are settled in specie. Anticipation of cross‑border drains or financial stress makes domestic holders even more inclined to retain gold and use paper locally, reinforcing the pattern [5].

Free‑market takeaway

• None of this requires mandates. It is the market assigning roles to different monies: gold as the high‑quality store of value and ultimate settlement asset; redeemable paper as a low‑cost transactions medium. “Hoarding” is just increased demand for money; prices and interest rates adjust, and free banking disciplines issuers via convertibility without central planning [3][4].

Sources

1 Man, Economy, and State with Power and Market, Scholar's Edition, by Murray Rothbard

2 Human Action, Third Revised Edition by Ludwig Von Mises

3 Capitalism by George Reisman

4 Classical Economics by Murray Rothbard

5 Farewell to Marx by David Conway

6 Economic Thought Before Adam Smith by Murray Rothbard