A number of people believe
that all of our financial and monetary problems — and economic ones as well —
would be solved if we just went back to “the gold standard.” Some people dismiss this as sheer fiscal romanticism,
while others think it’s the only way to go.
There’s enough truth in either extreme to make both positions plausible
. . . as long as someone doesn’t understand money, credit, banking, and
finance.
We can think of at least four
definitions of “gold standard”:
1) Gold is the only legal currency.
All transactions must be carried out and all contracts fulfilled using
gold and only gold. This is obviously
ludicrous, as there is not enough gold in the world to serve as the universal
medium of exchange. If there were that
much gold, it would have so little value that it would be worthless as
money. (This, by the way, is also the
chief problem with “Modern Monetary Theory,” that posits only government bills
of credit — government debt — are money.
If a government issues enough debt to enable all transactions, it soon
loses all value. Neither gold as gold
nor government debt as government debt produce anything, and cease to have
value as money if there is too much of it.
Unlike government debt, however, gold has many productive uses, and many
more could be found if it were less expensive.
The only use for non-monetary government debt — an oxymoron — is wastepaper.)
2) Gold is the only legal tender currency. People may freely choose to carry out
transactions without gold, but either party to an exchange has the right to
demand payment in gold. Again, there is
not enough gold in the world for this.
 |
| £1 in gold, .2354 ounces. |
3) Gold is the standard of value and all legal tender currency is either
gold, or is convertible into gold on demand. This is the system that operated briefly
(relatively speaking) at an international level from Great Britain’s “New
Coinage” of 1816 until the general abandonment of the gold standard from 1931
to 1933. It surprises many people to
learn that, prior to the New Coinage and the imposition of the gold standard on
most of the British Empire (a notable exception was India, which caused serious
problems down the road), the world was on the silver standard. Some countries tried to maintain parity of
gold and silver, which caused automatic scarcity of one or the other when the
relative prices changed, while many simply let the value of their gold coins
“float” relative to the official silver, despite any “official” exchange rate.
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| $1 in paper = 37¢ in gold in 1864...if you could get it. |
4) Gold is the standard of value, and the currency unit is measured in
terms of gold, but not necessarily convertible into gold. This is actually a subset, so to speak, of 3
above. If the government legal tender
paper currency began to inflate in terms of gold, people would rush to the
banks and convert their paper into gold, an example of “Gresham’s Law”: “Bad
money drives out good money.” People
would hoard the gold, and use paper for their transactions. Unless the government wanted the banks to run
out of gold, they would allow (or sometimes order) the banks to suspend
convertibility. This happened in the
early months of the Civil War, when the first United States Notes (Greenbacks)
backed by government debt were at first convertible into gold. Within two months, gold reserves had dropped
to the point that it was calculated that within a few weeks they would be
completely depleted, so the convertibility feature was dropped until 1878. Savvy speculators held on to their gold until
the end of the war, whereupon they used the gold to purchase inflated
Greenbacks at bargain prices, knowing that it was a priority of the government
to restore the faith and credit of the federal government by reestablishing
parity of the gold and paper dollar.
Parity was reestablished in 1878, giving the speculators who had first
held gold, then paper, profits in some cases of upwards of 500%.
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| $1 in gold = $2.64 in paper in 1864...unless you could get more. |
The fact is that throughout
history there has never been a time when gold served as the only money, or
backed the currency, except for gold certificates. Until the twentieth
century when governments were able to seize control of money creation and
economic activity in varying degrees, most transactions were not carried out
using currency of any kind. Even today
in most places — as has been the case for thousands of years — transactions are
carried out by credit instruments, “money contracts.”
Even that is a little
misleading, because “money contract” is, in a very real sense, redundant. Money is anything that can be accepted in
settlement of a debt. That being the
case, all money is a contract and (in a sense) all contracts are money. People carried out commerce for thousands of
years before coins were even invented.
There has never been a “moneyless economy” in the entire history of the
world. Gold and silver, even currency
itself, has always been of secondary importance in any economy. It’s agreements between people and
institutions that are the financial workhorses of an economy, not currency.
So, when you say you want a
return to the gold standard, to which gold standard do you refer?
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