Can We Let Go of this Gold Standard Nonsense Already?

This being one of my first posts on Amateur Economists I initially thought I would do an introduction. But then I happened on The Huffington Post article National Review Blogger Terrified Of New Five-Dollar Bill and it got my goat enough to change topics. They quote Mark Krikorian in his blog post at the National Review:

“Paper money has no intrinsic value, it can’t be redeemed for gold or silver, you can’t even make jewelry out of it. There’s nothing behind it but the people’s confidence in it, and when the government keeps changing its appearance, as it has with the successive redesigns over the past several years, that confidence is undermined.”

This argument has been made since long before we went off the gold standard, though if you write for the New York Post you don’t know this happened 75 years ago. Gold is an abysmal backer of money. It is ridiculously economically ignorant to think that any major economy today could operate smoothly on a gold standard. The price of gold has more than tripled in less than a decade. Seriously, what would the price of gold be if all the world’s major countries were hoarding enough gold to back their currencies?

The Wikipedia entry on the gold standard lists a number of disadvantages with using gold to back currency. However, these are no longer disadvantages but rather reasons why gold can no longer function in this manner. First off it states that there isn’t enough gold. I want to point out that this particular argument is incorrect. So long as the price of gold is allowed to fluctuate in a free market it would simply rise in price such that a dollar would be backed by a smaller amount of gold as the price rises. But if the value of gold is managed, then who gets to manage it and how should it be managed? If we are to manage the value of gold, then we might as well just manage the value of the paper money, which is one reason countries dropped the standard in the first place.

Perhaps the greatest problem, however, which is missed entirely, is that in order for it to work every country we trade with must be on the same standard and share a common value for gold. If the value of paper currency is tied to the value of gold and one country has no gold, then their currency is worthless and they cannot buy goods from our country. With a gold standard there has to be a conversion to gold associated with any transaction across countries on different currencies. Otherwise, we’re reduced to an inefficient barter system.

6 comments to Can We Let Go of this Gold Standard Nonsense Already?

  • Raymond

    The greatest problem when paper money is not backed by gold is it allows governments to have money without taxation.
    This deep desire to have money without having to collect taxes(irritating) from its citizens goes all the way back to ancient rulers who shave off the realms gold coins to create more coins. Inflation is that old.

    The US federal government under FDR confiscated American gold and built Fort Knox to hoard the loot. This paved the way
    for the new monetary system called Bretton Woods.
    The agreement called for the US dollar to be used as a reserve currency by foreign central banks whereby they could pyramid their own currencies. Only now central banks
    are the only ones that could exchange their dollars for gold.
    And exchange it for gold they did. The reason is the US debased the dollar by running the printing press forcing the central banks to exercise their right to exchange their dollars for the gold in the vault. This continued until the US was in danger of losing all it’s gold forcing Nixon to “free” the dollar
    by declaring we will no longer exchange dollars for gold.
    This is the beginning of the “floating” currencies and the international currency markets that help shape our current economic landscape. Gold is not the problem.

  • J.D. Seagraves

    The gold standard is “nonsense” if you want a government of limitless power that can fight unpopular wars.

    Gold is the people’s money. Paper is the politicians’.

  • J.D. Seagraves

    What’s ridiculous is to think that a centrally planned economy can be managed efficiently. Gold was selected as money by human beings without coercion. Our monetary system did not make gold money, the people did, and our government merely recognized this fact. Regardless, now that the fraudulent Federal Reserve System — which could have never developed naturally and would have never been initially accepted without the dollar’s continued backing by gold — has devalued the dollar by 95% according to the government’s own understating statistics, a “return” to the gold standard is not as desirable as the freest of free-market alternatives: Separation of monetary system and state. Let currencies compete on the free market. The only argument against such a “system” (really a lack thereof) is that it takes the power out of the hands of central planners and puts it in the hands of the people.

  • Dexton Riley

    Why do we need paper money at all?

    Article I, Section 10:

    No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything 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.

    This clearly states that we as a people, under federal law, are allowed to deal in precious metals.

    And if we are allowed to trade in physical commodities such as gold and silver, we could also include copper, and platinum, and silicon in the mix. These are all in limited supply and have an inherent value.

    We are not being forced to use Federal Reserve Accounting Unit Dollars. In fact, let me make a proposal.

    I am the proud owner of one ounce of silver. If anyone would like to trade an item of a roughly equal physical value, I would be glad to pay my debt with silver.

    I would like to make all of my debts and transactions payable in the following forms:

    Silver
    Platinum
    Palladium
    Rhodium
    Iridium
    Cobalt
    Indium
    Molybdenum
    Nickel
    Tin
    Titanium
    Tungsten
    Lead
    and
    Silicon

    We are allowed to measure metals and imprint them as long as we do not coin them with a value. Why shouldn’t we make transactions in this manner? There is certainly enough of these metals, and a company that operates in a similar manner to western union would be able to handle our digital transactions.

    Let’s get businesses on board, lets have the option available. The world should have the option of trading in dollars, or printed metals. Maybe then we can finally abandon the ridiculous idea of inflation.

  • gnayler

    a dollar is simply a unit of measure for conversion between gold and silver coin, at a ratio of 15:1, in other words 100 dollars in silver coin weighs 15 times what 100 dollars in gold coin weighs. Paper notes are not money they are merely receipts for money, which is gold and silver coin, and of course whenever the issuing bank stops redeeming those notes for money they trade at a discount which is why a $100 Federal Reserve Note can be had for only about $9 in actual silver coin, because the federal reserve and its member banks do not redeem their notes for real money. It is simple economics you just have to realize that a dollar is a unit of measure for money, which is gold and silver coin.

  • While we’re discussing things in the vicinity of Citizen Economists » Can We Let Go of this Gold Standard Nonsense Already?, Gold and silver, the world’s favorite precious metals, have a sixty century history of surviving financial collapses, raging wars, and economic chaos. Even the words for “money” and “silver” are the same in over a dozen languages. Six thousand years of history indicates that precious metals will continue to be used as a means of exchange for the foreseeable future, especially if fiat currency becomes worthless.

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