The Trouble with the Gold Standard

Critics of paper fiat currencies have an important point to make: what gives the paper value is the belief that it has value, and that other people will be willing to trade goods and services for your paper money. The value in the paper money is based on, at best, a mutually agreed-upon illusion (and, some would argue, it is in fact a delusion). Because dollars are no longer backed in gold (or anything else we deem to have intrinsic value), there is an inherent stability in it. If, for instance, the economy were to collapse and there were a run on banks, you couldn't go into your bank and trade dollars for gold, as you once could—in which case your money would effectively have intrinsic value (because you could still use it to get something apparently valuable: namely, gold). Nope, what you’d have if everyone’s faith in the dollar collapsed is a collection of inky paper.

Rightly, people across the country and around the globe want their currencies to be backed in something of actual value. What I hope to show briefly is that while the goal of backing currency in something of “intrinsic value” is an important safeguard against collapse, tying the value of the dollar to gold (or any other commodity of invariant quantity) is the wrong way to go.

You have to remember that unless we one day master alchemy, there will only ever be a fixed amount of gold. So if you’re going to create some kind of hypothetical currency, tying the value of the currency to the gold supply will limit your hypothetical economy before it even gets off the ground.

Simply put, healthy economies grow. When economies grow, people are earning more money and spending more money, which means that the supply of currency has to increase. If a country that is healthy (or at least in the business of deluding itself into believing such) ties its currency to something that will never increase in quantity—even if it only initially uses a small amount of that limited quantity—it will eventually run out of the commodity backing its currency and either have to augment the original supply with a new commodity or switch commodities altogether.

Adding other precious metals one by one to our reserve might work for quite some time, and it seems to be a plan many would like to adopt. But I have to point two issues with that plan.

First, in the long run, we will run out of precious metals remaining to be mined in order to back our economies here on Earth, and there will be a point at which if we still want to back our currencies in precious metals, we will have to be able to perform mining operations off-world. So if backing our economies in precious metals is going to be our long-term plan, we're going to have to make the assumption that interplanetary (and eventually interstellar) mining is something we’ll one day be able to do. Personally, I think we will be able to do it (at the very least at the interplanetary level), but I just want to make sure it’s clear that for this to be “the” solution, that’s an assumption you have to be ready to make.

Second, I need to restate something that having a gold standard (or any set of precious metals as the backing for your currency) means, by definition: what gives such a currency any kind of “real” value is your ability to trade it for shiny metals. The gold standard, in other words, means putting the value of your economy, above all else, in a rare and heavy semi-shiny malleable metal. Now, as long as people see value in this piece of metal (and they have for a long time), this method works.

But is this really the best estimation of value we can tie our economy to? The long history of gold as a material used to denote class, royalty, and wealth seems to have clouded our judgment as to its intrinsic value. We must remember that the purpose of currency is to provide us with a universal medium of transaction to buy and sell things in order to improve the conditions of our lives and those we care about.

In other words, the money you have is meant to stand in for potential utility, and we are backing our utility stand-in with rare metals that historically have been held by a very select few of people (aristocrats, royalty, and giants of commerce) who have hoarded the majority of these “valuables” “in circulation”.

Calls to return to the gold standard, or to augment it with other precious metals, is to treat a degenerative disease with a Band-Aid.

I wish I knew the “right” answer. But “What is the right answer?” is the million-whatever question, and unfortunately, I don’t have it.