What is Gold standard and why we may never return to it?

Gold has been a currency, medium of exchange and savings option for  thousands of years. Throughout the world and especially in ancient India, Kings stored most of their wealth in the form of gold. Even now, we hear lot of stories about  tons of gold stored in  treasures beneath in many Temples.

When trading and economic activities increased, gold as a currency of exchange was not able to sustain the huge amount of transactions.  So paper currency was invented to replace the gold as a medium of exchange.

Now paper money is the common denominator of all economic transactions. Based on this paper money, the present banking system was developed and as a logical extension to banking, credit system was developed. The use of gold in the old banking system was through fixing the unit of currency reference to gold.

A country on the gold standard cannot increase the amount of money in circulation without also increasing its gold reserves. Otherwise, the exchange rate between gold and the currency has to be fixed on regular basis which will result in huge fluctuation in the price of gold. Public usually deposit gold with the banks and credit was extended relative to amount of gold deposit. It was argued then, the gold standard was the main reason for the Great Depression during 1930's. Later U.S abandoned the gold standard in 1933, and completely decoupled the link between dollar and gold in 1971.

Now and then, the return of gold standard is being discussed and recently during the 2008 financial crisis, revival of the gold standard was extensively discussed. It is argued that it is impossible. Why revival of gold standard is very unlikely?

Main reason is the size and complexity of the world economy. Just to back the paper currencies in circulation in the entire world, each country has to evaluate their gold reserves and fix its price based on money in circulations. For example, in case of major economy like U.S, with the approximately 261 million ounces of gold held by the U.S. government and about $2.7 trillion money in circulation, gold price has to rise to around $10,000 an ounce, up from about $1,241 as on today. Inflation will go out of control and the world economy will go into a tailspin.

The performance of the world economy will be purely depended on gold supplies. If there is a production related problem and new supply is stopped, economies will come to a halt. How to manage such a situation?

Unlike oil, gold has not much of an economic value, except jewelry. It can't power automobiles and generate electricity. Holding world economy, hostage to such a commodity and its availability, is asking for disaster.