Metallic Faith

My wife asked me a very interesting question the other day, and unfortunately she was not in the mood for the kind of answer that was required. So, I set about writing a post about it… until I realized there was much about the subject that not even I understood.

A major component of Libertarian economics is a return to the gold standard. What this means is that Libertarians feel every dollar in the US should be “backed” by gold (i.e. you can bring a dollar to the bank and redeem it for a dollar’s worth of gold). If there was 8 trillion US dollars (which is slightly lower than is the case, but is a nice round amount), then the US would have to have 8 trillion dollars worth of gold safeguarded in reserves across the country, such as Fort Knox.

My wife’s question: why use gold? What makes gold inherently valuable? Many people realize the dollar bills in their wallet are only symbols, which have no real value beyond the cloth-paper they’re printed on. However, gold seems to carry some sort of mystical intrinsic worth. In order to understand this whole dilemma, one must understand money.

In a barter society which lacks currency, business transactions between individuals can be complex. If I’m a doctor and a farmer gets sick. he may pay me in grain. Suppose the cobbler gets sick, he may pay me with shoes. Suppose the person who makes tampons get sick… well, I don’t need tampons. Does that person go on being sick, because they have no way of paying?

In a barter system, people hold on to surplus goods in order to use them for negotiations. That grain I was paid with might be used to pay for something later if I need something from a healthy person who does not my medical services. I might take tampons from the tampon maker, even though I have no need for them, just in case I could use them to trade later.

In a barter system, the best goods to keep around for trade are those which do not perish and those which retain their value. Gems and precious metals are ideal, because they are easy to transport. The problem with gems is that they cannot be divided while retaining their value. Metals can be cut to any size while retaining their utility. Gold fits the bill, but silver is often just as important in the role of go-between commodity.

If I’m a doctor, I may demand that my clients pay me in silver or gold, because I don’t want to deal with grain, shoes and tampons. Then, it simply becomes an issue of determining how much gold or silver will be exchanged. Coins are nothing but standardized measures for this purpose. Often, coins were cut into halves or fourths in order to make “change,” so to speak.

Paper currency is nothing but a system whereby banks hold the gold and silver themselves while issuing banknotes to people as a sort of “I.O.U.” These pieces of paper entitle the holder of the banknote to a set amount of precious metal from within that bank’s vaults.

But why gold? Honestly, it doesn’t have to be gold. It can be silver, platinum, steel, palladium, copper… really any metal. However, gold has some special properties beyond its legendary status as the mark of wealth.

For one thing, there’s not much gold in the world, and we aren’t mining much. It is estimated that there was about 150,000 tonnes of gold in the world in 2006, with only about 2,500 tonnes of new gold mined each year. That’s a growth of about 1.5% each year, which creates a very stable market. It is a good commodity for investment, because there is rarely ever a surplus dragging down the price. This creates a stable environment, which is why gold is a “safe haven” investment.

On top of all this, gold is very useful. It is utilized in medicine, jewelry, industry, electronics, chemistry, even food and beverage (Goldschläger, anyone?). It’s not that gold is actually “intrinsically” valuable, gold is just an ideal go-between which maintains its utility and has a conservative supply.

Gold is a decent commodity against which to measure value, but it makes a horrible economic pillar. For one thing, there is quite a finite amount of gold in the world. If all of it were melted into a cube, its sides would be about as long as an Olympic sized pool. While that would be a lot of gold, the scarcity of this resource lends itself to manipulation. Silver has already been manipulated in this manner, and putting all our backing in a single resource as arbitrary as a precious metal is only appealing to those seeking simple answers, not correct ones.

Even diversifying to bimetallism by including silver would alleviate some of the problems of switching our monetary system to a gold standard. For one thing, humans have not mined enough gold. In fact, we have roughly $8.3 trillion in circulation and deposits, and there’s only slightly more than half that, $4.8 trillion, worth of gold mined. Switching to a gold standard would devalue our money or inflate the price of gold, probably both. Not to mention the fact that in our government’s mad dash to purchase enough gold to cover our currency, it may become a crime (again) to own gold, as a worldwide shortage hits hard

I don’t know enough to comment further, I’m afraid. I don’t know if it would be a good idea to back our money with precious metals. I know this: it seems to be a policy that favors the haves, with few benefits for the have-nots. It is a policy that seems to protect the value of the dollar against… well… conservative policy.

Our money is essentially backed by the stability of our economy. Conservative economic policies have a tendency to blow giant bubbles, forming a foamy foundation for our markets. All the games that conservatives are playing will result in our dollar being drastically devalued [more than it already is]. If the dollar is backed by metals, you can’t just print money to pay your way out of a recession.

I would support some variation of a gold standard if we did one thing: all our money should henceforth read “In Gold We Trust.”