After the abolition of fractional reserve banking, one of the things some libertarians (and others) tend to advocate is a return to the gold standard. The idea seems to be twofold: that this would remove from governments or central banks (which amounts to much the same thing) the ability to vary the amount of currency in circulation as a matter of economic policy, and secondly, I suspect, there lurks the residue of the notion that gold represents true wealth.
Both these ideas seem to me to be wibble of the purest kind.
We can barter or we can use some sort of medium of exchange. Initially, coin made of precious metals was used as a medium of exchange. That’s a simplification – we have no idea what began as the medium of exchange and some societies used other things, like cowry shells – but it’s a simplification that will serve for this post.
The main objection to governments “printing money” is that this debases the currency. But gold and silver currencies were debased, by clipping and adulteration, and worse, the right to operate a mint was highly prized because from time to time you got to force everyone to bring their coins in to be re-minted at a price. How would you like that, today? You have £10,000 saved up? Bring it in to be stamped and pay £100 for the privilege.
The idea that there was ever a time when governments didn’t debase the currency is absurd. Worse, in the past people could snip and trim coins and short-change merchants and farmers. At least today currency debasement is an instrument of deliberate policy, intended to be of general benefit.
And it can be of general benefit. Inflation is bad for savers, but good for borrowers. There are times when the pain of the former at the expense of the latter is desirable. Inflation is the least painful way to adjust over-valued asset prices (like the cost of property – it’s a hell of a lot better than an abrupt crash) and it’s the least painful way to make labour more productive in a recession, by lowering the real value of labour.
As for gold representing real wealth, that’s been known to be untrue ever since the inadvertent, continent-wide experiment that followed the discovery by Europeans of the New World. To quote Adam Smith again:
IV.1.32It is not by the importation of gold and silver that the discovery of America has enriched Europe. By the abundance of the American mines, those metals have become cheaper. A service of plate can now be purchased for about a third part of the corn, or a third part of the labour, which it would have cost in the fifteenth century. With the same annual expence of labour and commodities, Europe can annually purchase about three times the quantity of plate which it could have purchased at that time. But when a commodity comes to be sold for a third part of what had been its usual price, not only those who purchased it before can purchase three times their former quantity, but it is brought down to the level of a much greater number of purchasers, perhaps to more than ten, perhaps to more than twenty times the former number. So that there may be in Europe at present not only more than three times, but more than twenty or thirty times the quantity of plate which would have been in it, even in its present state of improvement, had the discovery of the American mines never been made. So far Europe has, no doubt, gained a real conveniency, though surely a very trifling one. The cheapness of gold and silver renders those metals rather less fit for the purposes of money than they were before. In order to make the same purchases, we must load ourselves with a greater quantity of them, and carry about a shilling in our pocket where a groat would have done before. It is difficult to say which is most trifling, this inconveniency or the opposite conveniency. Neither the one nor the other could have made any very essential change in the state of Europe. The discovery of America, however, certainly made a most essential one. By opening a new and inexhaustible market to all the commodities of Europe, it gave occasion to new divisions of labour and improvements of art, which in the narrow circle of the ancient commerce, could never have taken place for want of a market to take off the greater part of their produce. The productive powers of labour were improved, and its produce increased in all the different countries of Europe, and together with it the real revenue and wealth of the inhabitants. The commodities of Europe were almost all new to America, and many of those of America were new to Europe. A new set of exchanges, therefore, began to take place which had never been thought of before, and which should naturally have proved as advantageous to the new, as it certainly did to the old continent. The savage injustice of the Europeans rendered an event, which ought to have been beneficial to all, ruinous and destructive to several of those unfortunate countries.
Trade, not gold, is the true source of wealth. And trade can be negotiated more conveniently in paper money than in bullion.
I don’t disagree with what Adam Smith says on this issue, and it’s true that some people have an over-reverent view of gold, but I think you are missing some of the argument. Gold is not real wealth, indeed, real wealth being what you can exchange for gold, or indeed money.
At the time of Adam Smith, there was a lot of paper money in use, but it was backed by precious metals, thus limiting the power of banks to create money out of thin air.
Even if a return to a gold-backed currency is a bad idea, there is still an argument to cut the central banks out of their monopoly position, as Lincoln did with his greenbacks.
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“At least today currency debasement is an instrument of deliberate policy, intended to be of general benefit.”
I love dry humour! Reminds me of Caddyshack: “I’ve sentenced boys younger than you to the gas chamber; didn’t want to, but I felt I owed it to them”.
And I believe that the gold standard means promissory notes (banknotes) backed by gold, not actual precious metal coins carried around in one’s pocket.
You’re confused on this issue, I’m afraid. Gold is the best money we have come up with so far because it is a store of wealth, a medium of exchange, unique, consistent, inherently desirable, inert and divisible.
http://thebluetourist.blogspot.com/2010/02/golden-rule-whoever-has-gold-rules.html
By the way, currency debasement is robbery, pure and simple. It’s indefensible. And if currency were private today there could be no debasement because basic instruments could tell whether coins had been “clipped” or notes forged.