Let me start by saying that I was one of those who believed that the gold-standard was the best policy under which to issue money, but I began to listen paper-money supporters who made a compelling argument in favor of a debt-free paper money. For that reason, I’ve completely switched my views on this subject. In this article, I’m gonna debunk the idea that “gold is money.” First we’re gonna discuss two major problems which plagues our monetary system today which would support the argument in favor of paper money.
Paper money supporters have stated that the solution to monetary reform would be for the government to issue a debt-free paper currency and for government to also control the quantity of that currency which would in turn keep inflation at bay. IE: President Lincoln’s greenbacks. As it currently stands, all money in circulation has to be borrowed into existence through a combination of the commercial banks and The Federal Reserve with interest attached through the sale of government bonds.
This very same crowd has also stated that banks should operate under the full reserve lending system. Currently, we operate under what is known as Fractional Reserve Banking (FRB). FRB allows a bank to lend far more than they have in actual reserves. For instance, if a bank holds $100 in actual deposits or reserves with a reserve requirement of 10%, they may lend out a total of $1,000 — creating $900 of credit on the spot. During 2008 Subprime Crisis, some banks lent out as much as 50 times their reserves, while Goldman Sachs was leveraged as high as 300 to 1. The majority of the money in circulation is created out of thin air when banks make loans. Yep, that’s right. When a bank makes loans, that credit counted in the nation’s money supply. In other words, 95% of our “money” is actually credit. This allows a bank to collect interest on money that they don’t have. This scheme works just as long as depositors never withdraw their money in large amounts at once.
Another word about the Fractional Reserve Banking system. A lot of gold bugs claim that such a system could not operate if we were on a gold standard. In all actuality, FRB was popularized by English goldsmiths during the 1600s. At that time, English citizens would entrust goldsmiths to store their gold….the same way that we today use banks to store our cash. To keep record of each person’s deposit, the goldsmiths would issue a paper receipt which acted as a record of a person’s gold deposit. Eventually, these gold receipts began to function as money as people began to trade them in return for goods and services, due to the convenience of the gold receipts. At this point, the goldsmiths began to loan out these gold receipts — much like a bank loans out deposits today. What the goldsmiths noticed was that depositors never withdrew all of their gold at once. They then came up with the idea of lending out more gold receipts than actual gold that they had in storage. This gave rise to the fractional reserve banking system, which allowed goldsmiths to collect interest and essentially control the nation’s money supply, thereby controlling that entire economy.
Now that we have those two issues out of the way, let’s talk about the gold standard. First, there was the gold standard, in which each paper dollar (note) represented a fixed amount of gold. These notes were convertible into actual gold. Then came the Gold Exchange Standard which was implemented under the Bretton Woods agreement, which worked like this:
Under the Bretton Woods Agreement (BWA), the U.S. Dollar was redeemable in gold (except domestically). The fixed price of gold was $35 an ounce (today gold is $1252.20 an ounce as I type this), and one U.S. dollar was the equivalent of 1/35th of an ounce of gold. During this time, The Federal Reserve could print only enough money to match the country’s gold reserves. For example, if they had one ounce of gold in storage, they could only print $35. As you can see, the gold standard provided stability to our currency. Now comes the BWA. Under this agreement, it was determined that the U.S. Dollar would become the world’s reserve currency due to it being linked to gold. In a sense, that would link all the other country’s currency to gold as well. The U.S. til this day is still the world’s reserve currency, despite the abolition of the gold standard.
We’ve outlined the basics, which should give you a full understanding of each point being discussed, now let’s get into which system would make the better monetary system. The truth is this — how you define money is what determines who runs your society. If you define money as gold, then the owners of gold are in control. Right now, we define money as credit which puts the control in the hands of those who issue credit — the biggest banks. What you have to understand about not only gold, but any commodity-based money system is that those commodities can be usurped by simply cornering the market on that commodity. Gold is also scarce which means that only a small amount of money could exist if we were to operate under a pure gold standard. With only a small amount of money, trade and economic expansion doesn’t occur. However, there’s never been a true gold standard. What would usually happen is that issuers of “gold money” would issue paper money which far exceeded they amount of gold they claimed to have. They could always keep this scheme going as long as a large group of people never demanded gold in exchange for their paper money at once.
What many gold bugs will do in order to support their view of a gold standard is to point to the colonial period shortly before America was established. In fact, it was America’s refusal to accept a gold standard that was one of the major causes of the Revolutionary War, as stated by Benjamin Franklin. During the time before the Revolutionary War, the American colonies were printing a paper currency called “Continentals” in order to conduct trade. Under that system, the colonies prospered. Great Britain then demanded that all taxes be paid with gold and silver coinage, essentially forcing America onto a gold standard which caused a massive deflation and a severe depression. To add icing on the cake, they British flooded America with counterfeit scripts which caused hyperinflation. It is this period of hyperinflation which gold bugs will use to their argument but they overlook the fact that Britain counterfeited billions of dollars of Continentals. Which brings me to this point….
Many have claimed that money is impossible to manipulate under a gold standard, but this isn’t true. Money and the economy has still been subject to manipulation (systematic crashes) even under the gold standard by simply inflating the economy through easy money, creating a bubble and then contracting the money supply — this is exactly what caused the great depression. Contracting a nation’s money supply is fatal for that nation because that takes capital away from businesses and from the overall population. Money in circulation comes to a halt as people hoard money and economic activity slows down. Nations around the world didn’t come out of the Great Depression until they dropped the gold standard. America was last of the world’s nations to drop the gold standard, doing so in 1933, which is why The Depression lasted longer for America than for other nations.
Now we have the issue of inflation. Gold money has had a history of keeping inflation in-check. Sounds good, right? Not necessarily. Gold actually has a history of DEFLATING economies which leads to economic ruin. You’d think that deflation, the deflating price of assets, is a good thing but not necessarily. Think of a person who buys a home during a booming market in which prices are rising, then deflation sets in and slashes their home value in almost half. Due to the deflating economy, that person may end up losing their job or end up making less money but yet they still owe the full amount on their mortgage. Foreclosure sets in, the person loses their home and someone swoops in and buys it for pennies on the dollar.
Countries who’d use paper money would experience periods of hyperinflation, usually due to attacks on that country’s currency and the inability of the government to properly handle the deleveraging period. IE: Germany in 1923. Paper money CAN be printed without limit, yes. But here’s the thing…the government currently borrows every dollar it spends (at interest) from private bankers, citizens and institutions. That borrowing and additional money creation causes inflation which is nothing more than a hidden tax on the public. Many would claim that under the gold standard, a government wouldn’t have that luxury. They believe that the money in circulation has to match that nation’s gold reserved. For instance, if the U.S. had 1 million ounces of gold at $35 an ounce, they could print only $35 million dollars but as stated earlier, there’s never been a true gold standard. Besides, a gold standard benefits only the rich. Whereas, paper money economies has a track record of benefiting everyone when that money was issued directly by the government as it was under President Lincoln. Under a fiat money system, governments would ideally print only enough money to match the productivity and growth of the population of that country. What causes a lot of our inflation today is the Fractional Reserve Lending system which was explained earlier. Commercial banks create credit which is counted a part of the nation’s money supply, credit which is far out of proportion to the actual money in reserves.
Under the current system which the U.S. operates, the government DOES borrow money relentlessly, money to which debt is attached. Because of that, we’ve experienced rampant inflation (a hidden tax) and higher taxation over the years. Inflation, by the way, typically occurs when there are too many dollars chasing too few goods. Inflation also occurs when the amount of money and credit aren’t in balance. The obvious solution to stabilize an economy with a large money supply would be to ramp up production and to also control the amount of money and credit in circulation. But as anyone can see for themselves, production and manufacturing has actually declined significantly in America. Most jobs that are being created are being created in the service sector. While at the same time, we import the goods that we consume instead of manufacturing them at home, and with a weak currency, that leads to a higher cost of living. Under a paper money system, a higher level of production would be a great benefit.
Let me ask you this — do you think it’s possible for a blue collar worker to raise 8 kids and support a wife in today’s time? You might have answered “Hell No! Not unless you’re wealthy.” Well, prior to 1971, this was entirely possible because the cost of living remained stable due to a reasonable money supply and there were plenty of domestically made products to go around. I’m sure that anyone who grew up during the early to mid 1900’s could validate what I’ve stated. But that isn’t a gold or a paper money issue, it’s a money mismanagement issue altogether. If we would have remained on a gold standard and the population grew, but yet gold production didn’t rise fast enough, we would face a deflationary environment.
Here’s the real kicker. Many gold-money supporters would say that you can’t have a currency that isn’t backed up by something of intrinsic value. That makes logical sense but in the grand scheme of things, but that simply isn’t true. Anything can be used as money just as long as it is deemed legal tender for the payment of debt and taxes. Putting it another way — it doesn’t matter what backs your money. Only thing that matters is who controls it’s issuance. Therefore, any commodity-based money system is prone to failure. Why? Because, as mentioned earlier, the market on that commodity could be cornered and whoever has the monopoly on that commodity also has a monopoly on money, thereby seizing control of that nation’s economy. This is why throughout history, places like Ancient Greece would dilute their metal coinage into a worthless metal because they understood precisely what I stated in the aforementioned sentence. By issuing currency on a worthless metal, no one could monopolize their money system and also, that nation’s currency was controlled by the government. Deviating from this rule is what led to the demise of Rome. When Rome’s money was tied to a cheap, nearly worthless metal, Rome flourished but when Rome switched to gold money, power shifted to the eastern countries who owned most of the world’s gold. When you take all of that into consideration, that is why paper money on paper is better than gold. No one can monopolize paper, but unfortunately, the printing and issuing of paper money has been monopolized by central banks instead of being controlled by governments….which is the problem of the world today.
Another issue with gold is more of a moral issue than an economic issue and it is that gold has a deep history of bondage and slavery attached to it. Whenever countries sought to find gold in order to use for their country’s money, they’d raid other countries in search of gold. Many people have been enslaved and even slaughtered all for the purpose of extracting gold from that country.
In the end, it comes down to this:
A money system in which the money is tied to a commodity sounds good but you have to ask yourself, “what gives gold its value?” The same thing that gives any fiat paper money it’s value — the law. Gold was given it’s status as money by law of the religious temples, making gold the world’s first fiat money. Actually, all money is fiat because money is brought into existence through legal means. Some would argue that the commodity to which money is tied doesn’t have to be gold, just as long as it is a commodity that is in high demand. That way, the money actually represents an in-demand commodity that is redeemable. But as I stated earlier, anyone can simply corner the market of whatever commodity the money is tied to and control that nation’s money supply. Don’t believe me? Research the Hunt Brothers and their attempt to corner the silver market. Research also Black Friday of 1869 when Jay Gould and James Fisk cornered the gold market.
Gold advocates have always stated that if there were ever a time in which the government declared a fiat currency worthless, it would lose all of its value. Gold is no different! If that were true for only paper money, then why is it that since gold has ceased to function as money, you’ve been unable to buy things with gold? If gold were money despite what the law says, gold would still be accepted but it isn’t. All in all, paper money is better for economic expansion whereas a gold standard really has no place and should be forgotten about. America could never have expanded as it did under the gold standard due to the scarcity of gold, which would limit the amount of capital we could use for expansion. A gold standard benefits only the rich due to the fact that there would be a lot less money in circulation, making the dollar much stronger, giving those that are sitting on cash the ability to buy more things at cheaper prices but it would send the majority into serfdom. It’s been shown time and time again that whenever a nation goes onto a gold standard, deflation sets in and causes their economy to plunge into a depression.
The problem with our monetary system is the private creation of debt-based money and fractional reserve banking. With that bit of info, you decide for yourself which is a better monetary system. As you can see, however, I switched my position as new and better information became available….which is what true seekers of knowledge will do.