Could a Return to the Gold Standard Solve Our Monetary Issues?

Understanding the Problem with Fiat Currency

It's widely acknowledged that fiat currency, or money that a government has declared to be legal tender, presents a significant issue: the temptation to print more of it is too great to resist, but this action ultimately leads to its destruction.

The Role of Money and the Gold Standard

Money, in all its forms, tends to attract near-religious beliefs and convictions, making it a difficult topic to discuss objectively. However, considering the central role of money (and its sibling, greed) in human affairs, it's worth asking if returning to the Gold Standard (gold as money or gold-backed currency) could solve our most pressing monetary problems.

The Belief in the Gold Standard

Many believe that returning to the Gold Standard could be the solution. This view considers President Nixon's 1971 decision to end the convertibility of the US dollar to gold in international foreign exchange (FX) markets as the original sin that led us to the inflationary hell of fiat currency. In this perspective, the only way to avoid the consequences of this original sin is to return to the gold standard.

Understanding Gold-Backed Currency

While the term "gold-backed currency" rolls off the tongue easily, it's not as simple as it seems. In theory, it means that every unit of paper or digital currency in circulation can be converted on demand to a physical quantity of gold or silver at an exchange rate set by the nation-state's government or by the market. This conversion acts as a control on the issuance of new currency.

Tricks with Gold-Backed Currency

There are various tricks that can be played with gold-backed currency. For example, the government can assign a conversion rate that doesn't align with the actual market value of gold or silver, or it can limit conversion to the settlement of foreign trade with other nations.

Why Did Nixon End USD Conversion to Gold?

The reason Nixon ended USD conversion to gold was because he had no choice. The geopolitically necessary trade deficits were rising to the point that America's gold holdings would have diminished to zero if the rising trade deficits were settled in gold.

The Role of Markets in Currency Pricing

Markets determine the price/value of competing currencies. Therefore, nations whose currency is priced higher than others will have difficulty exporting their goods, as these goods are priced in their own strong currency and are therefore more expensive in nations with weaker currencies.

Understanding Fiat Currencies and Sovereign Bonds

It's important to note that fiat currencies issued by the sale of sovereign bonds are not actually "backed by nothing": they're backed by the interest payments made on the bonds and the entirety of the nation's economic-political-social stability and productivity which guarantee repayment of the bond at maturity.

The Problem with Printing More Currency

The temptation to print more currency is irresistible, but ultimately destructive. Once currency is issued in excess of the actual expansion of goods and services, the result is devaluation or loss of purchasing power, also known as inflation.

Central Banks and Gold Reserves

In response to this, central banks are adding gold reserves. Gold reserves are now larger than the reserves of the second-largest reserve currency, the euro.

Where Does This Leave Us?

Unfortunately, there is no easy answer. We are left with more complexities, starting with credit. Credit has been an essential element of commerce from the earliest days, for very compelling reasons. How do we graft credit onto "money" when credit is itself a form of "money"?

Wealth-Income Inequality and the Gold Standard

We also have to consider the other crisis we face, the soaring wealth-income inequality, which arose without restraint in ancient economies that used precious metals for money.

Politics, Social Stability, and Economic Vitality

Looking at the history of Rome, we note that politics is part and parcel of "money," social stability, and economic vitality or stagnation.

Final Thoughts

While there are no easy answers, it's clear that the discussion around the Gold Standard and its potential to resolve our monetary problems is complex and multifaceted. It's a topic that warrants further exploration and understanding. What are your thoughts on this matter? Do you think a return to the Gold Standard could be the solution to our monetary problems? Share this article with your friends and spark a conversation. Don't forget to sign up for the Daily Briefing, which is everyday at 6pm.