Monday, April 11, 2011

Misunderstanding The Gold Standard

I want to write just a short post (if possible, I'll know in a moment) on a common misconception when it comes to the gold standard. This stems from the fact that an economy grows, but there is a limited supply of any particular precious metal (in this case, gold). One version of the objection goes something like this:

How are you going to go to a gold standard with a currency that has more money printed than there is gold on the planet to back it?

This invented problem shows a complete lack of understanding on how the gold standard worked in the past and would work again in the future. Now, I should preface this by stating that ideally we would have a free market in competing currencies. This solves much of the problem right off the bat. But the main issue I'll address is this ignorant notion that "there just ain't enough gold in the whole wide world" to make a gold (or precious metal) standard practical. But it doesn't really matter how much gold exists! The supply of money can remain the same (or grow slowly) and still have the purchasing power to acquire all the products and services of the total economy. If the total of products goes up by a certain amount without an increase in the money supply, you would simply see a corresponding decrease in prices. This was not an uncommon occurrence in the United States before the creation of the Federal Reserve in 1913.

"If the quantity of gold or silver in the world employed as money were exceedingly small, or abundantly great...the variation in the quantity would have produced no other effect than to make the commodities for which they were exchanged comparatively dear or cheap. The smaller quantity of money would perform the function of a circulating medium as well as the larger."-David Ricardo

If we had a gold standard and a growing economy with an increase in goods and services, you would see falling prices, and today, a loaf of bread might cost, say, five cents, and a brand new automobile, instead of selling for the ridiculous price of $20,000-$30,000 (or more) might cost what new cars were priced at 40 years ago, or be at about $2,000-$3,000 in cost. It wouldn't matter what the total amount of commodity-based money was, it could accommodate any size economy. Again, the purchasing power would still be there for ALL goods and services produced.

Of course, this doesn't mean that there wouldn't be any actual increase in the supply of gold (or whatever the commodity your currency is based on). The supply of gold worldwide does go up, and in almost direct proportion to the percentage increase in the population per year. Nevertheless...

Once a money is established, any stock of money becomes compatible with any amount of employment and real income. There is never any need for more money since any amount will perform the same maximum extent of needed money work: that is, to provide a general medium of exchange and a means of economic calculation by entrepreneurs.-Hans-Hermann Hoppe

There is perhaps one sense in which the objection might have merit, but not because it would be true that a gold standard would be impossible due to a shortage of gold, or that a currency with real inherent value would cripple the economy, but because it is true that it would restrict the actions of a government that has a monopoly on money and can create it out of nothing at will. A gold standard would make impossible the manipulation of the economy that fiat money allows. Massive and unrestricted government spending would have to eventually cease (and most likely sooner rather than later), and huge bailouts and unending wars all over the world would be difficult if not impossible to fund. But that, if you have any sense at all to see it, would be a good thing.

1 comment:

  1. I have very little to say on how I feel about the gold standard (it's antiquated but I don't see it as particularly harmful). But I do have to ask: how do you expect to go on a gold standard when there isn't enough gold in the world to back US currency? How would you transition from our current monetary policy to a gold standard? Whose money disappears?


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