With all the fiat money out there, how do we back it, and more importantly, how do we do it without breaking our economy in the process? by BJSchaefer
(libertarian)
Sunday, December 9, 2007
So, it seems when I'm out canvassing for Ron Paul, a common question is asked when the Gold Standard is brought up "How Do We Do It?" That answer is actually quite simple, so simple infact, that the answer is usually overlooked.
Essentially, to back our money with gold, our government first needs to get gold. The common quip I hear is "If we print money to buy gold, won't that do more damage in the way of inflation, defeating the purpose?" That is actually quite correct, as the value of gold is, loosely, tied to the value of money. So yes, if we printed money to buy it, we would defeat the entire purpose.
But that's not how you bring back a gold standard. You do it, quite simply, by making Gold, and I would say Silver as well, the ONLY Legal Tender: that is the only thing the government will accept in payment. Secondly, as Ron Paul points out, you allow competing commodity currencies to enter our market, thusly saturating our currency market to the level we need.
As Milton Friedman rightly pointed out, even back in the days of the gold standard, we had fiat money. It is actually unavoidable, as people will not carry gold, and with fractional reserve banking, there will be more money than gold. In fact, even with full reserve requirements, we couldn't back every single dollar, as there is a larger volume of dollars than there is in the worlds gold supply. But, this is a misleading factoid. With full reserve requirements, there would be less dollars in circulation in the first place.
Now, full reserve requirements, under a Ron Paul Administration, probably wouldn't even become law. This is because by legislating reserve requirements, we dictate how much risk banks can take. But, at the same time, under a free-market approach, banks wouldn't be "bailed out" by the government either, so reserves would probably increase anyways as banks seek equilibrium in their risk to asset ratio (or reserve to bank note ratio). Banks are over-extended in risk simply BECAUSE of Federal Deposit Insurance, which if ever needed on a mass scale would spell instant mass inflation of epic porportions.
So yes, a gold standard is easily possible, all we have to do is allow competing currencies and make government payments be gold, silver, or commodity notes. Easy answer for those of you out there trying to figure out what to tell people.
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Posted By: Walt Thiessen
Date: 2007-12-10 07:03:37
Good article. I would emphasize that by introducing commodity-based currency competition, the paper Federal Reserve dollar in its current form would quickly go out of favor. Those who were holding it in large quantities would find that their investment would quickly be worth a whole lot less. This would be very bad for the uber-wealthy (multi-billionaires and world banks who hold large portions of their wealth in dollars and couldn't dump them fast enough), but a whole lot better for the rest of us (the other 99.99% of the population). It would single-handedly reduce much of the divide between the so-called "haves" and "have-nots."
I like the idea of commodity-based currency as well. Not too many supporters of the gold standard use this in their analysis.
It is also a great point made about Friedman's thoughts on fiat money and it's inevitability.
I would like to say though, that the suggestion of this being easy or simple is slightly if not grossly of base. This being my opinion though, I like your thoughts overall and it is encouraging to hear talk of this kind of reform on a scale such as this. Maybe we will see a change come about as a result of us speaking up on the issue.
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