Could Gold Backing Be the Future of the Dollar?

As the Federal Reserve grapples with high interest rates in an attempt to counteract years of monetary inflation and devaluation, some are suggesting a return to the United States' original monetary system. These advocates argue that the dollar was once "backed by gold". However, this is a misconception. In the early days of the nation, the official currency was not backed by anything - it was gold and silver coins.

The Founding Fathers and Paper Money

The framers of the Constitution were wary of paper money. They were aware of the historical trend of governments using inflation of the paper-money supply as a means to exploit their citizens. By continuously printing more money to fund their operations, governments would cause the value of the currency to decrease, leading to increased prices for goods and services.

This was a reality that Americans had recently experienced during the Revolutionary War. The Continental, the basic unit of money at the time, was so heavily printed that its value plummeted to near zero. This led to the popular phrase, "Not worth a Continental."

Gold and Silver as Currency

With this in mind, the framers sought to create a monetary system that would prevent government officials from devaluing the currency. They decided that a paper-money system would not achieve this, so they established gold and silver coins as the official currency. They understood that unlike paper money, the government could not simply print more gold and silver coins.

The Constitution established a government with limited powers, only allowing for the exercise of powers explicitly listed within it. One of these powers was the ability to coin money. Since paper cannot be coined, but gold and silver can, the government was effectively restricted to issuing gold and silver coins as currency. This system lasted for over 125 years.

State-Issued Bills, Notes, and Bonds

While the federal government was limited in its powers, the states had more inherent governmental powers, including the traditional "police powers" to provide for the health, safety, morals, and welfare of the people. However, the Constitution expressly prohibited states from issuing "bills of credit" or paper money and from making anything other than gold and silver legal tender.

The Constitution did allow for the federal government to borrow money, which meant it could issue bills, notes, and bonds. Although these instruments often circulated as payment for goods and services, they were understood to be promises to pay money, not money itself. The money they promised to pay was gold and silver coins, the official currency established by the Constitution.

The End of the Gold and Silver Standard

This gold and silver coin monetary system was one of the most successful in history, preventing government-induced inflation for over 125 years. It contributed significantly to the increased standard of living in America, particularly towards the end of the 19th century and the beginning of the 20th century.

However, this system came to an end in the 1930s when the Franklin Roosevelt administration replaced the gold and silver coin system with an irredeemable paper-money system. This change was implemented without a constitutional amendment and was not challenged by the Supreme Court.

Separating Money and State

So, should we return to a system where the dollar is "backed by gold"? According to Friedrich Hayek, a Nobel Prize-winning libertarian economist, the answer is no. Instead, he proposed separating money and the state. This would involve repealing legal-tender laws, abolishing the Federal Reserve, and ending all governmental involvement in money.

Hayek believed that the free market should determine the concept of money. Given that the free market tends to produce the best of everything, it would likely produce a monetary system even better than the original gold and silver coin system.

Bottom Line

The debate surrounding the monetary system of the United States is complex and multifaceted. While some argue for a return to a gold-backed dollar, others, like Hayek, advocate for a complete separation of money and state. As we consider these perspectives, it's crucial to remember the lessons of the past and the potential for the free market to innovate. What are your thoughts on this matter? Do you think the dollar should be backed by gold, or should the free market decide the concept of money? Share this article with your friends and join the discussion. Don't forget to sign up for the Daily Briefing, which is available every day at 6pm.