You can’t eat gold.

Posted on September 21, 2011 by

There’s been a lot of brouhaha lately over gold. Gold prices are skyrocketing and countries are fighting over physical. This has resulted in a new bubble of sorts, with everyone rushing to purchase gold coin in preparation of the coming end of fiat and return to the Gold Standard.

I call baloney. Fiat currencies are here to stay. The Gold Standard was ended because it sucked. It just did. If the amount of money you have in circulation is directly tied to a commodity, you can only print as much money as there is of that commodity. This strangles any economic boom and leads to chronic economic depressions. Furthermore, it’s not actually any safer than fiat. In a gold system, the government promises to not print any more money than it has gold. How do you know it actually possesses that gold? Have you seen it? Have you counted it? What if it was stolen?

Just like with fiat, gold standards rely on a trustworthy government. Generally, the gold standard has been used to confiscate the citizenry’s gold, so don’t assume that this will be a check on government.

The traditional gold standard is the state’s way to get its collective hands on the public’s gold. It needs this gold to pay for goods in an emergency, when taxes no longer produce sufficient revenues. The obvious situation is at the outbreak of a war. With few or no exceptions, governments cease redeeming gold for their currency units within weeks of the outbreak of war. This is called the suspension of payments. Then, with stolen gold in reserve, the state prints money with abandon. It first made its fully redeemable money familiar to users of its currency. Then it revokes the right of redemption that had served as the lure in the first place.

Gold and silver were not chosen as coin currency because they were so intrinsically valuable, but because they were so intrinsically useless, at the same time that they were very rare. You could make coins or jewelry out of them because you didn’t need them for anything else. No one, even in an emergency, will melt down their jewelry and coins to make a plow or build a house, so the money was rarely taken out of circulation. This has changed as more industrial uses for precious metals have been found.

Gold was also something that was internationally recognized, and there were respected and trusted specialists (goldsmiths) who excelled at working with it. But it never stayed as coinage.

As time went on, people found that gold, along with other commodity based monetary standards, was hard to carry around. Used in coinage, they could be difficult to divide and this division problem was a hindrance to commerce.

Then came the financial innovation called banking. You could deposit your gold in a bank. The bank would issue you a receipt and you could use that paper receipt for trade and commerce. The bank would lend out your deposit of gold to others. This was credit creation, which expanded the money supply. For every ducat lent out, that ducat would usually wind back up in the banking system, creating another ducat available to be lent out. Even with the imposition of reserve requirements that constrain the amount of loans they could make based on their deposit base, this form of fractional bank lending expanded credit and created enormous number of jobs and raised prosperity.

The truth of the matter is that people who advocate for the Gold Standard or even Gold Coinage already own gold. They realize that they are rich and a Gold Standard would make them even richer, and perhaps stabilize or even increase their wealth (deflation enriches creditors), while impoverishing the masses who don’t — and never will — own any gold. In the same way that gold owners are agitating for a Gold Standard, oil producers are advocating for an Oil Standard. Why not a diamond standard, or a silver standard, or a copper standard, or a wheat standard? Whichever standard you choose will disproportionately benefit those who already possess that commodity, and leave us at the mercy of the nation states which produce the commodity, which is a strong argument against commodity-linked currencies.

But the most convincing argument against a Gold Standard is the fact that it would weaken our national power (as our economy could be hijacked by foreign gold-hoarders), and require an international board to set currency exchange rates, depriving nations of their ability to set this monetary policy.

The answer to our monetary woes is not the financial corset of gold, but the end of the usury which whittles away at the worth of fiat currencies by increasing inflation. Currency inflation is a good thing as long as it matches an increase in the overall wealth of a society, currency deflation is a good thing as long as it matches a decrease in the overall wealth of a society.

If the money is in units of economic value, and this economic value is in reference to certain products or services, then the amount of money must keep pace with the amount of goods and services available, unless the value of the money is to change. Money is simply a surrogate for real economic goods and services. As the amount of economic activity increases or decreases, the money supply should roughly keep pace with that increase or decrease.

None of this, of course, is to imply that we need a federal central bank. This is only a treatise on whether currencies need to be backed by gold reserves.