A Return to the Gold Standard? Forget About It! 47 comments
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What Is Money?
Money, as economists define it, is a means of exchange, a store of value, and a unit of account. As a store of value, each unit of money should have the same value in the future as we assign to it today. In days of old, money used to be in the form of Gold or Silver. These metals had universal value among the various peoples of the world and rarely changed in purchasing power over the centuries.
Currency, By Fiat
In modern times, the nations of the world have a substitute for money called fiat currency. The word fiat means by decree. Hence fiat currency is worth what a government says it is, by decree. The value of fiat currency is subject to manipulation by decree, it tends to be debased over time and it fails one of the key definitions of money. Because it changes in value over time, fiat currency is not a store of value, and therefore is not proper money.
Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. – As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.” – John Maynard Keynes
The world's most famous fiat currency, the dollar has lost value consistently over the past 20, 50 and 100 years. As my previous articles show, I am no fan of the dollar and I believe that bigtime inflation is just around the corner. Because fiat currency's value is determined by decree and is subject to manipulation and that value is always falling, fiat currency is bad money. Given enough time, all fiat currencies will eventually fail.
Since we can't always trust what the communists say (like Lenin), let's see what the capitalists have to say about fiat currency. Back in 1967, Alan Greenspan summed it up when he said:
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. … This is the shabby secret of the welfare statists’ tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process… It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists’ antagonism toward the gold standard.
Return To The Gold Standard
Fiat currency is a bad money. as Alan Greenspan said we need real money: a Dollar backed by Gold. Unfortunately, the idea of a Gold-Backed Currency is merely a pipe-dream. The IMF prohibits its Member States from having Gold-Backed Currencies. To be precise, specific provisions in the Article 4, Section 2b of the IMF's Articles of Agreement prohibits member countries from linking their currency to gold. Most countries are members of the International Monetary Fund and most countries want to remain members of the IMF. The return to the Gold Standard isn't going to happen.
I have written earlier that I believe that Gold is a good idea when a) used as a backing for money & b) when used as a portable source of wealth during times of war and societal breakdown, I do not feel that Gold makes sense as a long-term investment.
What About A Silver Standard?
As Sajal wrote recently in his excellent article in Seeking Alpha, silver is in the midst of a 600 year bear market. As Sajal's excellent chart shows while Gold has maintained its value, silver has lost its value when measured in constant 1998 dollars. Certainly we wouldn't want to base our currency on silver.
China has half-heartedly proposed using IMF-issued Special Drawing Rights (SDRs) to replace the U.S. Dollar as the world’s leading reserve currency.
What are SDRs? According to the IMF:
Today, the SDR has only limited use as a reserve asset, and its main function is to serve as the unit of account of the IMF and some other international organizations. The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members.
Strike One: The SDR is not backed by a hard asset, like gold, but instead it is backed by a basket of fiat currencies (including the dollar, an older form of the euro, the yen and and pound sterling). The underlying fiat currencies are all subject to inflation and devaluation.
Strike Two: Central Banks love to hold reserves of foreign currencies in the form of interest-paying bonds. To become a reserve currency, the currency maker needs to issue enormous amounts of bonds. China recently announced it's intention to buy a piddling $50 Billion in SDRs, this is a drop in the reserve currency bucket. The IMF has miniscule credit needs as compared to the economic powers of the world. Besides, the IMF would hardly be a credible issuer of bonds, since they have defaulted on many loans. The SDR is simply not a contender.
In Conclusion
The world is stuck with fiat currencies for the forseeable future. Get over it.
DISCLOSURE: No positions in Gold or Silver. You should perform your own due diligence and consult with a professional before investing.
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My Latin-English dictionary says fiat means "let it be so!" or "let it be made". If the king tells his treasurer, "make it so, number 1", then he has instituted a currency 'by decree'. So I think it is accurate to say that the definition of fiat currency is money whose value is created by decree. Typically governments legitimize fiat currencies by requiring that they be accepted as legal tender for the settlement of all trades, and especially by making their taxes payable in the fiat currency.
The world is stuck with fiat currencies for the forseeable future. Get over it.
Oh we are "over" it. Ignore history at your own risk.
On Jun 20 10:59 AM DONE_SONZ wrote:
> Strong hand takes the gold.
On Jun 20 11:32 AM MGA_1 wrote:
> A gold backed currency would certainly slow down the inflation problem
> but I don't think any govt has that kind of discipline... yet.<br/>
>
> I'll be curious to see how the world feels after a couple more years
> of money printing.
On Jun 20 12:33 PM ksmithdc wrote:
> We need to stop doing everything and anything that devalues our dollar.
> Printing a trillion out of thin air certainly isn't helping the cause.
> As I said in my article....
..... "The IMF prohibits its Member States from having Gold-Backed Currencies. "
If a major contributor to the IMF decided to change from a debt-backed to an gold-backed currency; then the worst that the IMF could do would be to throw a hissy-fit - and then learn to put up with it.
They don't rule the world - yet....
As a twist on your suggestion: certainly if the US wants to get the IMF rule changed - since they are the main force behind the IMF - they probably could get the rule changed. They would change the rule first then they do the switch. Or the US could withdraw from the IMF. There would be a howl of protest from the other fiat currencies. I guess they could withdraw from the IMF.
Remember that they had to twist switzerland's arm to get the swiss to drop their gold standard.
On Jun 20 05:24 PM Screwloose wrote:
> If a major contributor to the IMF decided to change from a debt-backed to an gold-backed currency; then the worst that the IMF could do would be to throw a hissy-fit - and then learn to put up with it.
They don't rule the world - yet....
ps. I'm waiting for the tomatoes.
Good point
On Jun 20 09:57 PM ExaminerB wrote:
> The author makes the claim that a return to the gold standard cannot
> occur and that fiat currency is here to stay. However, the public
> has it in it's power to effectively reduce the amount of fiat currency
> (remember the classic money multiplier effect through which debt
> increases the money supply even though the amount of paper circulating
> does not increase). The public need only live within it's means.
> Reduce your spending, reduce your debt, and increase your savings.
> Inflation will be less likely to occur.
why are you waiting for the tomatoes ?
On Jun 21 01:15 AM David Roskoph wrote:
> Doesn't anyone get it? Gold is not able to reinsinuate itself into
> a monetary sytem growing faster than a rabbit farm. It is being relegated
> to pure commodity status, exiting its monetary role. The world is
> awash with paper and its value has more to do with the francise printing
> it than commodities in the storehouse. Gold is in a drifting lifeboat
> without a rudder as the sea of paper currency rises higher and higher.
> If we had passed the vail into boundless inflation, gold would be
> trading in the thousands and there would be violence. We haven't
> and, truth be told, the presses have not yet replaced deflation's
> toll. Sell gold, as ironic as it may seem, US dollars will be the
> new gold standard for a bankrupt world, based purely on the strength
> of the productivity and innovation of the world's best franchise.
>
>
> ps. I'm waiting for the tomatoes.
seekingalpha.com/artic...
So true.
Dollar will replace gold as world standard? It already did. Breton Woods did this.
On Jun 21 09:08 AM David Roskoph wrote:
> Author,
>
> seekingalpha.com/artic...
Defacto since 1973. The point is that gold will never go back to any relationship to dollars. It's detaching as a monetary instrument, ie something with "intrinsic" value. I have read that the gold / dollar relationship is north of $6,400 presently, by 1935 standards.
"I would not trust any private currency. How do I know that the promoters would not abscond with the funds ? Would YOU trust a private currency ?"
Taking the last first, the fed is a private organization, so we're trusting it already. And what about the Treasury Dept.? It's public, but it won't allow an audit of Fort Knox. Private currencies were trusted in the past, in the form of letters of credit from bankers like the Fuggers. I'd trust a private organization that was a partnership of many large "reputable" firms and that had regular audits, transparency, and other safeguards.
Providing a perfect amount of currency to facilitate the the exchange of debt and assets the world would work perfectly.
Unfortunatly currency has been created out of thin air for many years and has ended up in the hands of the greedy worldwide.
Today the Masses are suffering because of this greed while others only lose a small percentage of their ill gotten gains.
Deleveraging will continue until things get normal enough to start the process over again.
Don't take too much from the little guy or he'll take down the greed machine and send us all back to the stone age.
Gold will rise to heights never seen before if things get too weird.
Currency will get out of hand if we stop working.
People will stop doing alot of things if it's seen as a waste of time and effort.
As for all the gold in fort knox: it doesn't matter the gold doesn't back anything any way.
On Jun 23 11:02 PM Roger Knights wrote:
> The author responded to my comment thusly:
>
> "I would not trust any private currency. How do I know that the promoters
> would not abscond with the funds ? Would YOU trust a private currency
> ?"
>
> Taking the last first, the fed is a private organization, so we're
> trusting it already. And what about the Treasury Dept.? It's public,
> but it won't allow an audit of Fort Knox. Private currencies were
> trusted in the past, in the form of letters of credit from bankers
> like the Fuggers. I'd trust a private organization that was a partnership
> of many large "reputable" firms and that had regular audits, transparency,
> and other safeguards.
> As I said in my article "... The IMF prohibits its Member States
> from having Gold-Backed Currencies. To be precise, specific provisions
> in the Article 4, Section 2b of the IMF's Articles of Agreement prohibits
> member countries from linking their currency to gold. "
I do not believe Article 4 means what you claim it means.
www.imf.org/external/p...
First off, article 4 section 2 is about currency exchange, and setting the value of a member currency. Paragraph IV.2.b.ii is a permissive not a prohibitive paragraph as indicated by the phrase, "may include" rather than "must include" or "shall include".
Second, while clause IV.2.b.ii does mention gold, it does not prohibit gold. Rather that clause allows a member to maintain a currency value in some denomination other than gold. In other words, it is a permissive rather than prohibitive clause.
Third, paragraph IV.2.b.iii specifically allows, "other exchange arrangements of a member's choice."
There is no prohibition mentioned anywhere in IV.2.