A gold standard offers exactly the kind of discipline that's missing from the Fed. But its impact would be wider: Both in substance and in symbolism, gold provides integrity to the entire global financial system. Governments, however, have historically bridled at the constraint and accountability a gold standard brings. After all, when currency can be exchanged for gold, it's harder for governments to inflate the money supply, which they're tempted to do in order to spend beyond their means or cheat on their debts.
Before 1933, you could, generally speaking, trade a US dollar for a set amount of gold. That gave the dollar strength and stability. During World War I, when European governments abandoned gold and inflated their currencies to pay for the war effort, the US maintained its gold backing.
In 1933, however, to enable the Treasury to finance massive new government spending hailed as an economic recovery package – sound familiar? – President Roosevelt suspended domestic transactions in gold, and reduced the dollar's gold value. Finally, in 1971, President Nixon officially abandoned the gold standard. The dollar – and inflation – has fluctuated wildly ever since.
Today's Fed thus faces virtually no constraints. Were a gold standard in place, it could not possibly have doubled its balance sheet in only seven weeks without triggering a wholesale flight from the dollar analogous to the summer of 1971.
Weimar Germany experienced one of the greatest inflations in modern history in 1922 and 1923. Eventually, the official exchange rate reached 4.2 trillion marks per dollar. Some Germans heated their homes by burning cash, since it was cheaper than buying wood. The inflation finally was tamed by government bonds promising repayment in gold, backed by land taxes also payable in gold.
Today, if the US price level responded directly with the Fed's current rate of expansion of its own credit, then the technical conditions for Weimar-style hyperinflation could be upon us. Fortunately, Fed credit expansion acts on the domestic price level with a significant time lag. But could it tighten monetary conditions if it had to, having shifted its reliance to the discount window and the specific projects being financed there?