Wednesday, July 4, 2012

Fool's Gold Standards

We hear that "only gold is REAL money." Therefore, it is said, we should return to the gold standard and tie our money supply to gold. Paper money is intrinsically worthless. For example, the dollar has lost 98% of it value since 1900 or so. The dollar can only be a true store of value when it represents an amount of something real and lasting. Alternatively, maybe our money should BE gold.

If the above seems like absolute truth to you, then you may be interested in some of the reasons why so many disagree.

If gold were truly the only real money, then one would expect to find many historical examples of cultures in which gold was also the currency. There are in fact very few examples, if any. Certainly no advanced national culture has used physical gold in a significant quantity to handle everyday purchases for thousands of years.

The main reason for this arises out of Gresham's law. ("Roughly, bad money drives out good money.") Yes, gold makes a good currency, so good that it is hoarded rather than spent. Eventually it all ends up in the "strong hands" and goes out of circulation. Governments learned long ago to keep most of the gold to themselves and substitute alloys of silver and copper or paper notes for physical gold. For the average person, physical gold always has been largely mythological.

That is why most "gold standard" proposals are about limiting the national money supply based on the national gold supply. This is a lost cause from the beginning, however, and no one should spend very much time thinking about it. Once gold is not used as the currency, then the connection between gold and the currency is open to manipulation. The money supply is then dependent on the discipline and plans of those who control it, not on the gold supply.

Policymakers have learned to pay almost no attention to the price of gold. The primary reason is that the gold supply is not flexible enough. The need for currency fluctuates too widely and too quickly for the gold supply to keep up. Gold stands still, but economies do not.

During a first-grade girls soccer game, one of the girls came to the coach in frustration and asked, "Where am I supposed to stand?" The coach was embarrassed because it showed how poorly he was coaching. Soccer is not about standing still. Markets are not about standing still, either. There is no commodity or item that can permanently preserve a constant value.

Finding a constant store of value is most important to the "strong hands" who are able to gather large quantities of anything they want. They are net lenders and tend to want a strong, deflating currency so that the purchasing power of both the principal and the interest increases from year to year on the money they lend out. That is why the Great Depression of the 1930's was a great time for those who had money. Another reason is that there was a real reluctance among policymakers to increase the money supply and counteract the profitable deflation.

Just the serious mention of re-establishing a gold standard should raise the spectre of another deep recession or depression. The purpose of such a policy would be to stabilize the money supply in the favor of the rich. We see this already in Europe, where poverty policies (known as austerity policies in the financial press) are being pushed on poor Greeks to stabilize the savings of rich Germans.

On this side of capitalism, the capitalists often interpret an increasing money supply and inflation as due to mistakes on the part of policymakers, perhaps even the result of secret populist agendas. At best, the rich see it as a cost of doing business in the U.S.

On the other side of capitalism, inflation is seen as the natural result of an unbalanced market where the strong hands have all the money and policymakers have to print more in order to keep the weak hands in the game. Any gold standard is seen as even worse, a step toward a worldwide single currency that could hardly fail to destroy capitalism in the end.

While the concept of a gold standard glitters for many of us, historical experience shows that most of us would never see any gold even if it were made the standard. In fact, the result of a tight monetary policy would be the gathering of all strong currency into the strong hands. Everyone else would live at the mercy of the rich, only participating in the markets as permitted. We should not allow ourselves to be fooled by promises about gold standards.

TheOtherSideOfCapitalism (

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