The Gold Standard

“The Gold Standard” is a phrase used to indicate a monetary system in which the currency is either gold or backed by one hundred percent gold reserves.  Under this system money contains an intrinsic value.  Money that lacks an intrinsic value, also known as a fiat currency, is essentially worthless if not for legal tender laws.

For example, if the legal tender laws making the United States Dollar the currency of the nation were revoked, the dollar would be worth only the paper it was printed upon. On the other hand, an intrinsically valuable currency does not need the approval of the state to maintain value. These currencies hold value in and of themselves as a commodity. In theory, any commodity can function as an intrinsically valuable currency. However, gold has been the commodity historically chosen to serve this function.

The arguments used against a gold standard are often the same arguments used in favor of the gold standard. Detractors claim that gold does not allow monetary flexibility. According to advocates of the gold standard, a lack of monetary flexibility is a positive rather than an unfavorable attribute.  An inflexible currency, advocates claim, keeps government spending within the realm of tax revenue. This eliminates the hidden tax or inflation tax, which appears when fiat currency is simply printed and decreases its purchasing power. Popular Keynesian economists believe the ability to manipulate the money supply can propel the economy out of recessions and towards prosperity. However, not all economists accept this theory. The idea that wealth can be created on net by printing money can generally be rejected prima facia by most non-economists as well. If printing money really increased the wealth of society, we should expect countries like Zimbabwe to be particularly well off. This is obviously not the case.

Furthermore, money is a good that is subject to the laws of supply and demand similar to other goods, but it is also the one aspect of the economy that reaches and affects all industries. With a government monopoly on money creation, we grant the authority to control the entire economy to one entity. If we accept the principle that the market, rather than the government, is most adept to producing goods, we should consider the idea that the same may be said of money.  While the capability to produce gold is subject to limits imposed by nature and the capacity of miners, fiat currency is subject to no limits and operates under the relatively autonomous mechanisms of the Federal Reserve Bank. The topic of a commodity currency versus a fiat currency requires honestly considering which system is superior.