What if we discovered that gold is not scarce after all, but as plentiful as sand? That surely wouldn't help with inflation, would it? Gold standard advocates always bother me for that reason. A good friend emailed me about this recently, and the following thoughts occurred to me.
What if the so-called problem is not how to value currency, i.e., by what standard (gold, mink pelts, icicles, fiat, etc.) but how to control it? And what if it's a problem not for ordinary people but only for those who try to figure out a way to control its value?
Could it be, that for ordinary people, the value of money has always rested on the "standard" of trust and good will (a standard that perplexes people who don't understand trust and good will)? So that the standard is controlled by the trust and good will of ordinary people, who, when they have the freedom to do so, can choose to sell their eggs for a penny in times of scarcity, out of mere good will? In this case, the more good will, the more bang for the buck.
Ordinary people live happily in this way, but people who want to control the value of money in order to control the people, have the problem of trying anything and everything (i.e., to wrest the monetary system away from trust and good will) using gold, mink pelts, icicles, or fiat, etc.; anything that can be controlled... anything but the trust and good will of ordinary people.
©2008 Madison Thacker, all rights reserved. You must have written permission from the author in order to republish this work.
Published: Saturday, October 18, 2008
Last modified: Monday, October 20, 2008
The views expressed in this article are those of Madison Thacker only and do not represent the views of Nolan Chart, LLC or its affiliates. Madison Thacker is solely responsible for the contents of this article and is not an employee or otherwise affiliated with Nolan Chart, LLC in his/her role as a columnist.
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Reader Comments:
Posted By: TheOneLaw
Date: 2008-10-18 20:00:51
Quite refreshing to observe a simple thought in a brief composition.
Gold as a monetary standard sounds nice but the concept of energy as a monetary standard is beginning to gain ground.
A concrete standard (gold, energy, or whatever) rather than the current 'trust us' standard allows people to understand just what money is as opposed to the current situation where no one knows what a dollar really is from day to day.
Posted By: Republicae
Date: 2008-10-19 05:50:03
Your questions concerning the supply of gold and its effect on money can be found in the writings of a man who should know about the functions and intricacies of the supply under a gold monetary system; after all he studied the money supply for decades and his name was David Hume.
After several decades examining just how the money supply effected the economy and how the economy effected the money supply, found some very interesting principles. Now it is a strange thing about fundamental economic and monetary principles, they appear to be immutable in sound monetary economics. David Hume found that if the gold money supply were to double overnight and all the people in society awakening to find that their money had doubled then they would naturally think they were twice as rich.
So, the gold money supply doubled overnight, everyone had more money and felt twice as rich as they were the day before, at least they would feel that way for a while until they begin spending all of their new-found wealth. As the people and businesses spend there is a natural economic principle that kicks in when the supply of money enters circulation and that is a proportionally increase in prices due to demand. Once that demand becomes satisfied through more production and the gold money no longer bids against itself for those new products and services that were increased to meet the period of increased demand the newly found wealth is consumed in those higher prices and an equilibrium is once again reached within the economy.
Thus the increase in the money supply will naturally increase the production and the supply of goods and services until the new demand is equalized by a rise in price. The people were not made doubly rich overnight although they had an expansion in their money supply, they were simply provided a medium of exchange that brought about an eventual equilibrium by an increase of products and services. Likewise, when there is a decline in the supply of gold money the reserve takes place. Since real asset money, like gold and silver, impart a defined social benefit on society, its medium of exchange is extremely flexible and thus the money supply, or the supply of gold and silver does not matter in the same way that it does in a fiat economy. Unlike the fiat money supply, which must rely upon the increase of credit to attain growth and productivity, a gold monetary system automatically adjust through free-market principles operating within the economy.
As Hume found, an increase in the gold money supply only diluted the effectiveness of each coin [or convertible specie] in its utility of exchange; while a decrease in the supply raise the purchasing power of each coin in its utility of exchange in the economy. Thus it appears that Mr. Hume found that the actual money supply of gold, when free to perform its proper function, does not matter in the least in terms of economic growth. He succinctly provided proofs that a free market will adjust to the increase or decrease in the money supply by price adjustments through the change in purchasing power of the currency. The most interesting point that Hume made is that this system is self-administrating with absolutely no need for intervention to make the monetary mechanics function…imagine that!
Now, what could be the benefit of such a mechanism within an economy? These periods of increase and decrease serve an extremely important role in a healthy free-market economy. First, the increase of the money supply allows for growth, an increase in both productivity and real wages even though there is an adjustment an eventual equilibrium in the price to exchange ratio. When there is a decrease in the money supply there is an increase in purchasing power until inventories and the amount of goods and services are equalized to the money supply. Additionally, such periods filter out mal-investments, bad financial and business decisions and abuses that would otherwise be hidden.
Asset money [gold] has a definitive utility for prospective exchange and that utility completely lies in its value as a real asset. Fiat money is always, without exception, a liability. Whether is it on the asset side of the book or the liability side, it remains nothing more than a “note” backed solely by debt. Fiat money does not drive growth, the expansion of fiat money and credit drives a growth based upon debt, don’t believe it, then just look at the debt to GDP ratios in this country, it is currently running at over 350%.
Posted By: Doug Eberhardt
Date: 2008-10-19 22:42:03
A Gold Standard puts constraints on governments so they don't spend what they don't have and don't have the money to fight unnecessary wars.
Gold is in limited supply and has over 5,000 years history as money.
It is when nations go their own way via fiat or debasement of gold coins in ancient times, that empires end.
The U.S. has 36 short years of fiat money without gold "backing." Gold backing is not the same as a pure gold standard, one that Article 1 Section 8 of the constitution speaks of; "only congress has the power; "to coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures;" and article 10; "
No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."
Our founding fathers understood what they were doing eh?
Posted By: Jake, the champion of the constitution
Date: 2008-10-20 07:02:44
Rothbard writes pretty much the same as Republicae's quote of Hume in "What Has the Government Done with Our Money?" Check out the section on the Proper Supply of Money, in the appendix of this article
Link --> http://www.nolanchart.com/article4396.html
Technically, gold meets all of the requirements for sound money that I outline later on in the series . And there are rumors that the US has a enormous gold mine at i think a place called chocolate mountain, but who knows if its true
A real problem you've hit upon is trust. The bankers/politicians have the printing press, and those holding fiat are ultimately screwed. Your money will be worth less and less every year. Period. Fractional reserve banking doesnt help you either, just the people that get the money first.
Issuing US Notes with a fixed money supply and closing the Fed would at least wrest some power from the banks, and is a non-commodity money solution to the problem. The issue is its still paper, I dont think the world is going to want to look at paper after this is all over.
All of the gold ever mined could fit in a cube 20x20x20 meters. Modern gold mines mine gold at 1 to 4 grams per ton. A single cubic meter would make a person immeasurably wealthy which is a good reason that today most of the gold we've been able to find has been mined.