The idea that Gold cannot be used to back currencies "because there is a shortage of gold" is a prime example of specious reasoning.
Charles Rist, Governor of the Bank of France, pointed out that this "shortage" simply meant that gold was not priced correctly - similar to a shortage of any good with arbitrary price controls set too low. There is not a shortage of gold - there is too much paper money.
His exposition of this problem was laid out in his 1946 book, "The History of Doctrines relative to Money and Credit:: Since John Law until the Current Day." Due to it's timeliness, this book was just re-published in French April 2003 and was previously published in English in 1961 as "The Triumph of Gold."
He also points out the dangers of a Central Bank adjusting monetary aggregates to target "price stability" at least forty years before Alan Greenspan attempted this policy with predicable disasterous results.
A policy aiming at monetary stability will secure a relative stability of prices, but the economic history of the 1920's teaches us that a policy whose goal is stabilization of prices may result in inflation of money and credit, and very unsound speculation.
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