I’ve been working to formulate my own thoughts around gold-backed currency for some time. I doubt I have any new ideas on this subject, but thought I’d take a crack at putting something down that was compelling and easy to understand. Note that “gold as money” can take many forms and I’m far from an expert on the details of what would work best. This subject is a bit like the metaphor of the rabbit hole: how deep do you want to go? My goal here is primarily to create a reference for common and routine debate, so the answer is that, admittedly, I will not go very deep. I hope I can inspire you to dig deeper.
The easiest way to attack this is to address the concerns that typically arise:
Gold is “Old Fashioned”
This isn’t really any argument and those who use it aren’t really debating in any normal sense of the word. What exactly is the complaint? Feel free to comment below to enlighten me if you feel otherwise. I know there are those who seem to think mankind will always advance itself toward an enlightened state on all matters. I don’t agree.
There’s not enough gold for this purpose
I think it’s important to note that gold has been used as money much longer than paper, and especially fiat paper. In fact, paper money is a relatively new phenomenon. The United States first printed paper money in 1690 and didn’t turn to a fully fiat currency until 1971. Gold on the other hand was used as money around the 6th century BC. Aristotle first defined the qualities of what makes a good money 2000 years ago. Of Aristotle’s four qualities, none of them really deals in any way with the question of what is “enough”. In other words, what matters is that gold is divisible enough that it can be spread about the world and it’s population (which it is). You may argue that the change in supply of gold is relevant, but the total volume is not.
Gold is inconvenient
The majority of financial transactions today don’t involve physical money, so this is mostly irrelevant. In addition, one could use some sort of note, which would be backed by gold. While it is somewhat inconvenient to use physical gold as money and arguably unnecessary, I believe there is value in it. The reason is that, as time passes without using physical gold as money, the actually idea of notes being backed by gold is forgotten. This leaves us open to cheating, fraud or policy changes that once again put is right back where we are today. If notes are to be used, then the nature of the gold backing should be at least as prominent as it was in the past.
Gold does not guarantee fraud any more than paper
There are a few angles to this point. As the electronic exchange of goods supplants the use of money, how do we ensure we don’t lose sight of golds importance? One way would be to create an official gold emblem that would be prominent not only on notes, but credit cards, account statements, etc. While this does not absolutely guarantee there will not be fraud, every bit helps. For example, if my bank account statement has this emblem, I have the right to ask the bank for the equivalent in gold. If a mortgage has this emblem the debtor must pay in gold.
There is also the question of how to prevent government, or something like the current federal reserve, from cheating. This is an important question because, historically, that is what government has always done. My personal opinion is that the only solution to this problem is that the banking system must be 100% private. What’s interesting here is that you can argue that the Constitution already forbids the existence of the federal reserve. Given that, how do we prevent such a thing from recurring? This is not an easy question to answer. It’s one thing to put a framework in place that works at this point in time. However, the framework must also be lasting. I’m not going to attempt to tackle this here because it really is completely new rabbit hole. However, I do think with the proper framework, clearly gold does prevent fraud much more than fiat paper.
What’s stopping you from using gold now?
My assumption is that the federal government would continue to issue reserve notes. Therefore policies would need to be put in place to control and manage a backing by gold. Banking accounts would also be denominated in gold or gold-backed paper. As far as using physical gold as money, this is where it gets a bit confusing. Rather than get into a long legal debate, suffice it to say there would need to be some national consensus on this before it becomes commonplace. As things stand, there is certainly doubt in the minds of most people on this subject. In either case, capital gains taxes would need to be eliminated to make gold exchange on par with current reserve notes. The other issue is that you are currently forced to accept federal notes in payment. It’s the law. You would need to turn around and buy gold with them, which has transaction costs that are not insignificant. Lastly, there is Gresham’s Law, which states bad money (from the state) drives out good money (gold). This results in gold being hoarded while reserve notes are used for trade.
Gold has no more value as a medium of exchange than anything else
First, let’s go back to Aristotle’s four qualities of a good money. Thrughout history, trade has evolved toward using gold as a medium of exchange. It seems illogical to me to argue that gold has no more value for this purpose than a piece of paper. It’s true that as long as everyone agrees to use the fiat currency as a medium exchange, exchange will take place. The question is, under which system are we more likely to have issues with confidence, especially under financial stress? I would argue that the current rising price of gold provides a direct answer to that question. In addition, this kind of thinking ignores the most important feature of a gold-backed currency: it limits the size of government.
Gold’s value is too volatile
First of all, at a basic level, I think some people are deceived here because a federal reserve note has a number on it that never changes (say 20$). However, the value of reserve notes changes all the time, just like gold. As prices rise, the value of reserve notes decline. The actual value of gold changes very little over the long haul. Historically it is the printing of money and changes in the gold standard that has the most significant affect on golds price. The following chart shows this clearly (note the affect of the civil war greenbacks, FDR’s gold confiscation and Nixon taking us off the gold standard). I see recent price increases in gold as a decrease in the value of reserve notes. Clearly the trend would be much less volatile without government intervention. That is why some call gold a store of value, not an investment. Another thing to consider is that the free market tends to stabilize prices. When prices rise, incentives to produce that good increase. This increase in supply works against the price rise. The opposite is true when prices go down.
Don’t we need the federal reserve to print money?
First, we should establish that a gold-backed currency means the end of the fed. Even mainstream wikipedia admits that much. Ending the fed is a hot topic right now. The primary reason the fed justifies it’s existence is in maintaining stable prices. It’s arguable whether they have actually been able to do that, except possibly for short periods of time. More importantly, it’s arguable whether it is even necessary. Ultimately you have to decide for yourself whether the purpose of the fed’s scare tactics is to protect you or protect themselves. It comes down to this: is deflation bad? Whether you believe it or not, there is certainly enough evidence to doubt it. Think of it this way: if the prices of everything (wages, consumer goods, producer goods, raw materials, etc) were cut in half tomorrow, what would happen? Nothing really. It’s the relationship between prices that matter. The fact that pro-fed pundits don’t normally distinguish between various prices in such a debate is telling – they haven’t even thought it thru that far.
I don’t plan to go deeply in to Austrian economic theory here. My question to you is this: do you really want to give an elite group of people who, working hand-in-hand with Wall Street and the federal government, have total control of monetary policy? The federal reserve is an organization whose effectiveness, and even the need for it’s existence, is questionable. When the fed prints money, the value of your dollars go down. Meanwhile, that new money goes to favored interests at near-zero interest rates. Mish Shedlock, in this video, discusses the affect on income distribution. Also note, the costs of food, clothing and shelter mean very little to the wealthy, so the fact that the fed causes inflation has little affect on them. Now, if you were in their shoes, you too might think about using a little fear mongering to keep the machine going.
As a side note, I personally put zero faith in the fed’s ability to maximize employment.
What are the benefits of gold?
Some of the benefits have been mentioned already. However, there are a few more subtle benefits not yet mentioned. One, people will save more. Surely it can be seen how lack of savings, and lack of frugality in general, was partially responsible for the financial crisis. Coupled with a sound banking system (another topic), these savings can be used for investment. Another benefit is you will have more control over your money. How many of you enjoy being coerced into participating in the stock market just to stay above inflation? And yet another benefit of that is that businesses must work harder to earn our investments!
However, the number one benefit of a gold-backed currency is the return of your freedom. Why do I say this? It costs a small fortune to fund war-mongering across the globe, TSA grope-downs, the drug war helping put more of it’s citizens in prison than any other country in the world, the DHS, etc, etc. Take away the ability to print money, and you take away the ability of your federal government to grow to infinity.
The last thing I will leave you with is this: the powers that be know what this means. They will not give up without a fight. Think about what we are saying: we, the people, here by limit your powers to grow, force you to balance your budget, eliminate your ability to loan near free money to favored interests, and request you give us back the gold that you stole from us in 1933. The current republican parties talk of a gold commission is nothing but political pandering. Nothing, short of a revolution (a peaceful one, we would hope), is going to change that.
Where to Find More Information
There are many articles on the web you can find. However, this one is good because it is short, reasonably current and drops the names of some important players in this discussion.