Why gold money?

Recently Rob McEwen of McEwen Mining Co. and Michael Crofton of Philadelphia Trust discussed the pros and cons of the gold standard. In this debate, Mr McEwen made an excellent case for gold as “the ultimate currency”. He argued that using gold as currency could help restore fiscal discipline in governments; and that, in essence, it already is the world’s reserve currency.

Conversely, Mr Crofton stated all the typical arguments against the gold standard: that there is not enough gold in the world for everyone; that it would prevent the authorities from controlling the monetary system; that it would hinder the government’s debt financing, etc.

Here are some of my responses to Mr Crofton’s points.

First, in regard to the “not-enough-gold-in-the-world” argument, the error in this thinking is that quantity equals quality. The anti-gold person believes that because there is only so many ounces of gold per capita, most people will be financially poor if they only have an ounce or two. But this thinking is economically unsound because it fails to acknowledge that it is not how many ounces of gold – or even dollars – a person owns, but what the purchasing power of these assets is. A relatively stable currency supply is perfectly conducive to an expanding economy, as productivity gains are simply reflected in falling prices, meaning that the purchasing power of each individual unit of currency increases. This so-called “good deflation” is what the United States experienced for much of the late 19th century (post-Civil War), a period in which the country transitioned from being a largely low-tech agrarian economy to an industrial powerhouse.

Why is it desirable to allow central banks/politicians to control the money supply? So that they can overspend in an effort to win votes? Or so that they can win financial backing from  interests that favour inflationary policies? All too often, history has shown that government control of the money supply inevitably leads to debt, deficits, and runaway inflation. Human nature doesn’t change.

So in regard to a gold standard hindering the government’s ability to finance its deficits, once again I fail to see why this is a problem. Fiscal discipline is a common-sense practice that every person and business must adhere to. If not, the result is over-consumption and under-production. If I were to run a business where my consumption continually outweighed my production, it would be irrefutable evidence that I am wasting real resources by taking them from those who could have possibly used said resources in their productive business. I benefit and others suffer. If I go too far in squanerding resources, my business will go bankrupt.

The same goes for our governments when they spend more than they take in in tax revenue. Government borrowing syphons money away from private investment and discourages capital accumulation. Why should we then be wary of systems that place hard limits on government deficit spending, when – taken to excess, as it invariably is – government borrowing is detrimintal to the private economy?

Last, in regard to the problem of a gold standard making gold and not the dollar the reserve currency, this is only a political problem not an economic one for the United States. For the reasons stated above and for the reasons expounded upon by Ludwig von Mises, Friedrich Hayek, and Murray Rothbard, gold is the best form of money for the people of the United States. For the reasons mentioned by Mr Crofton and others, paper money – that is, the dollar – is the best form of money for the United States’ government. My question then is: Between the two, who should we be more concerned for?

I say the people. So said Mises, too:

“It is impossible to grasp the meaning of the idea of sound money if one does not realise that it was devised as an instrument for the protection of civil liberties against despotic inroads on the part of governments. Ideologically it belongs in the same class with political constitutions and bills of rights.”

~Mises: The Theory of Money and Credit, pg. 454.

Author: Gabriel M. Mueller

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