Recently, I was quoted by Patrick Coolican in a Las Vegas Sun column on the Gold Standard proposal, an idea which I think the historical record does not support. Here is data on real per-capita GDP growth and price inflation, in annualized averages per decade, along with the standard deviation.  These data come from the Historical Statistics of the United States.

Decade

Average Real Per-Capita GDP Growth

Standard Deviation

Average Inflation Rate

Standard Deviation

1790-1800

0.8%

2.2%

3.3%

5.7%

1800-1810

0.7%

3.2%

0.9%

7.1%

1810-1820

-0.2%

1.8%

-2.6%

9.4%

1820-1830

1.3%

2.8%

-1.3%

4.6%

1830-1840

0.9%

4.1%

0.7%

4.1%

1840-1850

0.9%

2.4%

-0.1%

4.5%

1850-1860

1.9%

2.9%

0.7%

4.5%

1860-1870

0.9%

3.5%

2.8%

11.8%

1870-1880

3.8%

7.6%

-2.1%

3.0%

1880-1890

0.6%

4.9%

-0.9%

2.1%

1890-1900

1.4%

6.3%

-0.4%

2.1%

1900-1910

1.5%

9.2%

1.5%

2.1%

1910-1920

1.0%

6.2%

8.0%

7.8%

1920-1930

1.2%

5.8%

-2.2%

7.2%

1930-1940

2.0%

8.5%

-1.6%

5.7%

1940-1950

4.2%

9.6%

5.4%

4.0%

1950-1960

1.7%

3.1%

2.4%

1.9%

1960-1970

2.9%

2.1%

2.7%

1.6%

1970-1980

2.1%

2.6%

7.0%

1.9%

1980-1990

2.3%

2.3%

4.2%

2.1%

1990-2000

2.2%

1.5%

2.1%

0.6%

2000-2010

0.7%

1.8%

2.2%

0.9%

For inflation, first you should know that price deflation used to be common, and often accompanied depressions, which were also common.  The 1820s and 1830s were nasty, and there was a "long depression" from the 1870s to 1900 or so, then another financial crisis in 1907. The civil war was a period of particularly unstable prices, no surprise, as was WWI, the Great Depression, and WWII.  But after that, even though the average inflation rate was higher on average, price inflation became more stable.  In economic theory, it is the predictability of inflation that matters more than the rate. Notice too that the average growth rate was also higher after WWII, so one cannot argue that mildly higher average inflation hurt growth.

These data strongly suggest to me that the Gold Standard of 1873-1913 and the modified gold standard of 1919-1933 were not characterized by stable prices in the U.S. (the Bretton Woods system of 1944-1971 was a modified gold standard only for international transactions). The period before the existence of the Federal Reserve Bank does not deserve the nirvana status that Libertarians ascribe to it. Furthermore, the gold standard caused the American financial crisis of 1929-32 to become an international Great Depression.  In Weimar Germany, which refused to abandon gold because it had learned the wrong lessons from its hyperinflation in the 1920s, the resulting depression laid the foundation for Hitler's rise.

I have done my own research on deflation.  Here are some papers for those who doubt the historical evidence.  The latest one on top is short and sweet, providing econometric evidence that deflation and recession go together historically and internationally, but it also concludes that deflation is bad for growth regardless of whether it causes an actual recession.  The second one looks just at the U.S., and finds that deflation reduced growth even if it didn’t consistently cause to recession, and when recession did occur it led to a downward spiral. The earliest one is the least technical, and just explains the reasons why deflation should be avoided.

Guerrero, F., & E. Parker (2006), "Deflation and recession: Finding the empirical link," Economics Letters 93(1): 12-17.  [Download]

Guerrero, F., & E. Parker (2006), "Deflation, recession, and slowing growth:  Finding the empirical links," ICFAI Journal of Monetary Economics 4(1): 37-49. [Download]

Cargill, T.F., & E. Parker (2004), "Price deflation and consumption: Central bank policy and Japan's economic and financial stagnation," Journal of Asian Economics 15(3): 493-506. [Download]

Cargill, T.F., & E. Parker (2004), "Price deflation, money demand, and monetary policy discontinuity: A comparative view of Japan, China, and the United States," North American Journal of Economics and Finance 15(1): 25-147.  [Download]

Cargill, T.F., & E. Parker (2003), "Why deflation is different,"Central Banking 14(1): 35-42. [Download text]  

Deflation is sometimes supply-led, sometimes demand-led, and the former is relatively benign while the latter can be nasty.  In the long depression the U.S. economy grew -- though most of that growth was due to immigration.  However, the deflation appears to have acted as a damper on that growth.

How are the Gold Standard and price deflation connected? The problem is that money supply is arbitrarily limited when it must be backed by gold, while money demand changes.  Some of that change is predictable: as population grows, as productivity improves, as more products are produced for markets, and as the supply chain becomes longer, the transactions demand for money grows.  Since the amount of gold available for reserve usage does not grow at the same rate as money demand, the same amount of money chases more goods.  The growth of gold supply can also be unpredictable at times. 

Even worse, sometimes the demand for money grows suddenly and unpredictably.  When the economy goes into recession, when interest rates drop towards the zero lower bound, when a financial crisis makes depositors less willing to trust banks and banks less willing to trust borrowers, when a balance-sheet collapse makes firms try to pay down debts and accumulate cash, then the demand for money rises very fast.  If the money supply does not rise to meet it because it is tied to gold, a deflationary spiral can occur. Furthermore, the money supply can shrink even with a fixed gold supply, as the deposit-expansion cycle collapses.  Most money is deposits, not cash, but if banks stop lending and depositors stop depositing, the money supply drops like a stone as it did during the Great Depression.

Why is deflation potentially bad?  The Central Banking paper above explains five separate reasons.  It also tends to favor lenders at the expense of borrowers, and the leading advocates for the gold standard a century ago were the big banks themselves. There is a reason why the gold standard helped set off the populist reaction. 

In general, we can conclude that a little bit of deflation is worse than a little bit of inflation.  In fact, economic theory and all the evidence support the argument that a low rate of inflation does no particular harm to economic growth.  Unpredictable price inflation, however, can do harm.  The period of the gold standard shows pretty clearly that while prices may have been relatively stable in the very long run, prior to 1950, they were very unstable in the short run.  One wonders why people so averse to inflation are so sanguine about deflation.

The Fed had its bad periods:  the Great Depression, which it made much worse, and the 1970s, when the nominal interest rate targeting rules it followed led it down the garden path.  But since then, the record of growth and inflation is much better. Volcker focused on stabilizing the rate of money growth, but found the velocity of money was not as stable as he thought.  Greenspan focused on a stable and low rate of inflation. The Fed did inadvertently encourage excess lending in its response to the 2001 recession, though its lack of oversight was perhaps an even greater problem.  (As a side note, it is ironic to me that Greenspan was a disciple of Ayn Rand, the libertarian goddess, and the libertarians partly base their dislike of the Fed on Greenspan's policies.) 
Criticize the Fed all you want, and perhaps even propose improvements.  But there is no evidence that getting rid of the Fed and replacing it with private banking along the lines of a gold standard would help the economy at all.  None.  In fact, the idea scares the hell out of me.