The Volitility and Inflexibility of the Gold Stardard

December 7, 2018 in Economics

The value of gold has always been based on an aristocratic desire for rare decorations. Even today its value is as arbitrary as the valuation of paper money. So, why do fiscal conservatives argue that our money should be backed by gold?

If you’re new to this topic, many conservatives expect banks and people to hold resources in collateral for the money/notes they give in return. This is how it used to be but it’s an economic system based on 15th century feudalist monetary policies; it’s archaic. Imagine if people were to just stop caring about certain metals being held in reserve, the whole economy would collapse, just like with paper money. These commodities, like gold, are even more vulnerable than currencies to consumer devaluation. Plus, someone who finds a giant mine of these metals could massively devalue the currency.

These fiscal conservatives fear economic collapse. But if we suddenly changed our monetary policy to require it be backed by a resource it would absolutely cause sudden and immediate economic collapse. These fiscal conservatives neglect how much the gold standard restricts commerce. They use the expression “a house of cards” to describe the economy today. The phrase itself indicates a belief that the “house” has been constructed, or is growing, too quickly. Even if that were true, then they must acknowledge that bringing back the gold standard would wreck the house. They only think about the fact that money holds no real value, they don’t think about how the gold standard would reverse much of that growth. Their solution is to bulldoze the house (economy). But what if the house isn’t made of cards after all? There is good reason to believe that the GDP growth we’ve seen since 1971 is just as stable as the lesser growth we would have had by keeping the gold standard.

Some people just don’t like to trust the central banks to regulate our currency but leaving the values up to the oligarchs, who are the controllers of the resources, is clearly a worse idea. Never in the history of the world have things just naturally worked out well for the middle class economy when it left unprotected from oligarchs/aristocrats.

Gold truthers often complain about the Fed’s ability to just print more money but the policies under which the supply and value of paper money is managed is much more stable and trustworthy than money tied to expensive decorations. Plus, we have a century of economic data during the industrial age to help guide our monetary policy. Every economist today knows to never just suddenly print or revoke a ton of money. Although, there are benefits to gradually adding a little more money each year. It resembles a stable supply of any resource that is needed to expand with population growth.

Okay, so some fiscal conservatives might say we should back the money with vital resources instead of gold. To do so those resources would have to sit under lock and key, removed from the economy. It would create shortages of vital resources. Also, in this scenario, intense manipulation of commodity markets would occur as financial companies and investors try to profit from every little change in the value of each commodity. This would catastrophically jeopardize the stability of the economy, risking average people’s access to necessities.

Why would they want to venture into such an irrational experiment when our current system is functioning well?

There’s nothing wrong with trading an “I owe you.” It’s a stable reliable federally protected number of units. Yes, it’s imaginary. So what? It’s allowed immense economic progress. All human valuation of resources is “imaginary.” I mean, it’s measurable and we achieve greatness by properly planning and legislating our economy, but it’s still “imaginary.” So, we all trade these notes back and forth.

Half of the US doesn’t have savings. So, whether or not the note/money is backed by a resource doesn’t matter to them. If you have savings and you want your savings to be commodity based, then buy commodities. I don’t believe the existence of commodity trading is damaging to the economy. It’s just obsurd today to require half of the money in circulation, which isn’t being saved, to be backed by a commodity.

Let’s be real about something here. If there is a crash and money become worthless, the government will step in to make sure people survive. Although, wealth will be effected and middle class happiness will be effected, but people will be fed and housed.

If our economic system crashes and the value of money becomes worthless it will be due of our warring parties mismanagement of our federal budget, not because Nixon abandoned the gold standard in 1971. If we are in an economic recession and fiscal conservatives elect to brings back the gold standard, it will without a doubt result in a severe depression. Creating scarcity of resources through the seizing of money during the 1929 recession contributed greatly to the Great Depression.

How do these fiscal conservative not see the negative effects of governments seizing massive amounts of commodities? I understand how the federal debt can cause fear but this clearly isn’t the problem or solution.

So, then what’s the solution to the debt crisis?

That’s a more difficult question that I will answer next…