Top Ten Reasons why fiat currency is superior to gold (or silver) money
Introduction
In the spirit of the holidays and hope for a more prosperous 2017 I
thought Insight readers might appreciate a little holiday humor. So please
don’t take this edition too seriously. But if you happen to stumble across a
‘paperbug’ or two over the holidays, perhaps you could share some of the
points made here as it will help them to realize just how hopelessly
misguided they are. Cheers!
View the entire Research Piece as a PDF here...
Top Ten Reasons why fiat currency is superior to gold (or silver) money
NUMBER 10: THERE IS NOT ENOUGH GOLD (OR SILVER) IN THE WORLD TO SERVE
AS MONEY
Let’s begin with the obvious. We know that central banks the world over
have printed money at exponentially growing rates for years. There is now so
much paper and electronic money floating around the world that gold (or
silver) cannot possibly be expected to keep up. You can’t print gold, after
all, you need to find it, dig it out of the ground, refine it, etc, a hugely
expensive and time-consuming process which practically ensures a stable
rather than exponentially growing supply of the stuff. Of course, we know
that an exponentially growing supply of money is a good thing. How else can
an economy hope to grow, especially one bearing an exponentially rising debt
burden! We need all that new money to pay all that new interest, don’t we?
And don’t forget, most things keep getting more expensive, like food and
fuel. Don’t we need more money to pay for all that too? What about government
entitlements that keep growing in size? If we didn’t have a constant flow of
new money, how on earth would we pay for all of that? It is essential that we
keep the printing presses rolling.
NUMBER 9: GOLD AND SILVER ARE OLD-FASHIONED, CUMBERSOME MONEY
Here’s another obvious one for you: Gold is HEAVY! Who wants to carry gold
coins around? They might be nice and shiny, but to me, gold looks even prettier
around a lady’s neck or wrist. The more you think about it, in an age of
electronic, plastic, internet or blockchain money, the whole concept of
coinage begins to seem a bit anachronistic. Who even uses small denomination
coins anymore, except as household poker betting tokens? I suppose larger
coins are still of some use, but let’s face it folks, even those are almost
worthless anymore. Coinage is just so passé. Sure, coins used to have some
value. When I was young and I watched Little House on the Prairie and The
Waltons I was amazed that at the general stores or other retail
establishments a penny actually bought a range of items and with a few
nickels and dimes you could purchase much of what was on offer! But why
bother with coins today? I use plastic or electronic money for almost
everything. Sure, that money still references dollars, or euros, or sterling,
or yen balances of a bank account. But hey, it would be just so barbaric to
reference a gold or silver account instead, wouldn’t it? As if banks even
hold enough cash on hand for large withdrawals anymore, much less gold or
silver. Oh and an ounce of gold, at a whopping $1,150 is just way too
expensive for most commerce. So not only is there NOT ENOUGH gold in the
world as per Number 10 above; what gold there is, is TOO EXPENSIVE to serve
as a useful money! Oh I suppose we could use fractions of ounces of gold
instead of full ounces, but most people struggle with fractions, including
me. Silver might be more useful, but at some $16/oz, it wouldn’t really work
for making change now, would it?
NUMBER 8: GOLD RESTRAINS GROWTH
OK, this reason is a little bit wonkish, but if you’ll bear with me I’ll
explain why gold-backed money would put the brakes on the healthy growth the
world has been experiencing all through this prosperous modern period of an
exponentially rising money supply and might even send us back to the poor
house. We already touched on this with Number 10 but let’s go off on a
tangent here. You see, back when gold was money, people were poorer. Way
poorer. And economic growth was often much weaker. I mean, before the
industrial revolution, we didn’t even have machines to do basic work like
farming, so people had to have loads of children just to get basic work done,
resulting in a cycle of poverty. Sure, a handful of landed aristocrats held
most of the wealth, and they did just fine, but really, do we want to go back
to that sort of wealth disparity?
Oh and as for the industrial revolution, it was such a fluke. Sure it led
to the most rapid economic growth in history in most of Europe, North America
and Japan, but it would probably have been way more rapid had money growth
been exponential instead of stable at the time. That said, inflation didn’t
actually work out so well in France, where exponential money growth destroyed
much of the economy in the late 18th and early 19th centuries. But hey, how
else to finance that Revolution of theirs? The American Revolution was also
hugely inflationary, you know, those worthless continentals and all. But
wasn’t it a huge overreaction for the US federal government to choose silver
coinage as the inaugural US federal money?
For that matter, had Napoleon just kept on inflating, rather than paying
his soldiers in silver coin to earn their confidence and loyalty, he might
have won the wars against those Brits and others who refused to inflate their
currencies. And why did the Americans experiment with gold- and silver-backed
money for so long? Imagine how much faster they would have industrialized had
they just kept on printing continentals instead! Ah well, hindsight is 20:20.
Perhaps technology wouldn’t exactly regress if we went back to gold- or
silver-backed money but you never know. Some people talk like that. And
certainly most of the innovations of modern times would never have taken
place had we been on gold-backed money. Think about all those green
technologies that promise to solve our energy problems someday. Things were
just fine before we started consuming all the carbon stuff and now we’ve got to
get back on track. Only exponentially growing money can fund these programs
that aren’t yet profitable. Imagine what would happen if money were gold? Or
silver? We would be dependent on energy and other technologies that actually
made fundamental economic sense. No, that would be a huge mistake.
NUMBER 7: THE GOLD STANDARD CAUSED THE GREAT DEPRESSION
This is related to the above but hugely important in its own right so I’m
treating it as a separate critique of gold- or silver-backed money. Milton
Friedman is famous in part for blaming the Federal Reserve for causing the
Great Depression. This runs contrary to what many believe, however, that the
gold standard itself caused the Depression. Of course, they are right. Let me
show you why by way of a little historical background. We all know that WWI
was hugely inflationary as Britain, Germany and other belligerents went off
the gold standard in order to finance the war by printing money. Following
years of printing, in Europe prices for just about everything skyrocketed.
It didn’t help, of course, that much industrial capacity was destroyed by
the war, limiting supply. In Russia, most of the capital stock was seized by
the government as part of their anti-capitalist revolution. So there was
loads more money chasing far fewer goods in Europe, which is one way Milton
Friedman and other so-called ‘monetarists’ like to explain inflation. In some
places like Weimar Germany, interwar Austria and Hungary, there was outright
hyperinflation and currency collapse in the 1920s.
Impoverished, these countries ended up with highly competitive labor
costs, similar to various poor emerging markets today. Britain, however, had
gone back on the gold standard in 1925 and thus had the strongest currency in
Europe. This made British labor highly uncompetitive, resulting in
persistently high unemployment and massive strikes, some turning violent. In
1927, the Bank of England kindly requested that the US Federal Reserve
stimulate demand for UK exports by expanding the US money supply. The Fed
obliged. This contributed to a huge stock market bubble in the US, but
unfortunately it crashed under its own weight in 1929. Meanwhile, Britain’s
economy remained mired in a depression unknown to most Americans today.
Finally, in 1931, Britain decided to devalue its currency. The US was already
slipping into depression at the time and suddenly found it had by far the
least competitive wages in the world. It was now in a situation comparable to
Britain in 1927, yet without another country to which it could turn for help.
The Federal Reserve had already accumulated a huge amount of gold from
Britain but, as Milton Friedman observed, didn’t do as it was supposed to do
and expand the domestic money supply in line with the swelling gold reserves.
Why? No one knows. Perhaps the Fed was spooked by the stock market boom and
bust that it had created in 1927-29 and didn’t want to risk a repeat. But
whereas the 1927 monetary expansion was not linked to an inflow of gold
reserves, in 1930-31 the Fed could have hugely expanded the money supply in
line with growing gold reserves, thereby preventing many bank failures. To
make matters worse, President Hoover was advised by some prominent,
proto-Keynesian economists of the day that a drop in aggregate demand had to
be avoided at all costs and that the best way to accomplish this was to
support wages, notwithstanding rising unemployment. As a result, US wages
were by far the highest in the world by 1931, labor was uncompetitive, and
unemployment was thus far higher than it would otherwise have been, had
Hoover left things alone.
So, it is blindingly obvious that the gold standard was the cause of the
Great Depression. Not WWI. Not the massive inflation to pay for WWI. Not the
widespread destruction of European industry. Not the Russian Revolution and
industrial collapse. Not the 1920s hyperinflations and revolutions in central
Europe. Not the Fed’s stock market bubble of 1927- 29. Not the Fed’s failure
to allow the money supply to expand naturally with gold reserves in 1930-31.
Not the artificial wage supports introduced by President Hoover and continued
by FDR. No, the gold standard caused the Great Depression. Really. It did.
NUMBER 6: RULES CAN BE BROKEN
Returning to the obvious, this reason is so simple a child can understand
it. Rules are nice on paper but we all know they can be broken. Just because
a country is on a gold standard doesn’t mean it can’t just devalue and leave.
Britain and Germany did so in 1914 and inflated like crazy to pay for WWI as
explained above. The US devalued the dollar some 60% versus gold in 1934 and
left the gold standard entirely in 1971. Let’s face it, if rules can be
broken, what’s the point having them in the first place? The claim that gold
or silver money is stable and prevents runaway inflation is just hogwash.
Whenever governments choose, they can ditch gold money, devalue and create as
much inflation as they desire. They can even hyperinflate if they like.
What’s to stop them? They set the rules. Gold advocates are just so naïve!
NUMBER 5: GOLD (OR SILVER) MONEY FAVORS THE US VERSUS THE REST OF THE
WORLD
Now for those of us residing outside the USofA, we’re sometimes concerned
that the US has the largest gold reserves in the world. If the world went
back on a gold standard, then the US would be even more powerful than it
already is. It would throw its weight around even more, use that gold to pay
for an even larger military and open up more bases abroad, including where
they aren’t even wanted, like in Bulgaria.
The US might even start more wars, as if it hasn’t started enough already,
finananced as they are with the Fed’s printing press. Now history does
suggest that war and inflation go hand in hand. Certainly this was the case
in the 20th century. The French Revolution and Napoleonic Wars were hugely
inflationary in continental Europe. The 30years’ war was hugely inflationary
too, ruining the previously prosperous Habsburg economies. Then there was the
American Revolution, financed with those paper continentals. But today things
are different. Really, they are. If the world again used gold as money there
would be more wars, notwithstanding that these would be far more difficult to
finance. On another note, the US economy imports far more than it exports.
Wonks call this a ‘trade-deficit’. Really wonkish types have a more expanded
term called a ‘current-account deficit’. If the world went back to gold money
then the US would need to use its gold reserves to pay for net imports,
instead of just printing more dollars. And at current gold prices, the US
would not even be able to cover one year of its current-account deficit!
Imagine, the US would be unable to keep importing more than it exported! It
would be forced to become a more competitive economy and it would need to
save and produce more and consume less! The horror!
We all know that the US consumer is the only thing keeping the global
economy afloat. To whom would China or others export if not to the US
consumer? What a ridiculous idea! Well, it’s just not going to happen.
Keynesians like Paul Krugman know that there is just no other way to grow
economies than with exponential money growth to finance excessive
consumption. Saving is the quick road to the poor house. Borrowing your way
to prosperity has worked so well in the past, why would anyone possibly want
to stop now? After all, savings is the four-letter word of Keynesian
economics. Let’s just not go there.
NUMBER 4: GOLD FAVORS GOLD MINING COUNTRIES OVER OTHERS
Here’s another simple one: If you go back to gold- or silver money, you
are providing a huge subsidy for those countries producing the money. Why
give them the printing press, when we can keep it for ourselves? Remember,
the power to print exponentially rising amounts of fiat currency is the key
to economic prosperity. We don’t want countries rich in natural resources to
benefit at our expense now, do we? Sure, many countries rich in gold are in
Africa or other underdeveloped regions. They’re poor. They’re backward. Some
are near-dictatorships. Many dictators depend on us and our foreign aid,
financed as it is with our printing presses. Why, if we could no longer print
that foreign aid into existence, these poor countries would have to help
themselves instead! No, they’re just too backward for that.
Imagine that the value of gold and silver mines in Africa and other poor
parts of the world soared as these metals were re-monetized. Why it would be
like what happened to the Persian Gulf countries when oil became a highly
valuable commodity back in the 1970s. They became rich! Today those economies
are among the wealthiest in the world. They mostly export far more than they
import and they have built up huge sovereign wealth funds for the future. But
Africa being as screwed up as it is, they can’t be expected to spend their
wealth responsibly. They need the US, UK and other countries to show them how
to do it. Like what gas-guzzlers to buy. Or how many flat-screen TVs per
McMansion to have. Or how to administer a post office, or a national railway
system, or quality state education. No, rebalancing global wealth toward
Africa and other poor regions is bad enough. Giving them control over their
own wealth is just plain irresponsible. We shouldn’t do it and so we shouldn’t
return to gold money. (Please don’t think I’m racist BTW. Really. I’m sure
the same is true of all those politicians and bureaucrats who believe that,
without foreign aid, many African countries would end up like Argentina or
Venezuela. Or Greece even.)
NUMBER 3: GOLD FAVORS THE RICH
Notwithstanding the observation above, that gold or silver money would
bestow greater wealth on countries rich in those particular natural
resources, the fact is, today most gold and silver privately held is in the
hands of the wealthy. They’re already rich, why should we make them even more
so? Wealth inequality is a serious problem, why make it worse? We all know
that exponential fiat money growth in recent decades has helped to prevent
even greater wealth disparity. Sure, in the US, the wealth of the top 1% has
risen exponentially relative to the middle-class since the 1970s, when the US
went off the gold standard and the age of exponential money growth began, but
that is mere coincidence. It is true that real wages grew quickly under the
gold standard, which created the largest middle-class in history, but even
then there were those nasty Robber Barons who became richer than they
deserved. Some of them were enlightened enough to realize this, like Andrew
Carnegie, who gave away most of his fortune. Economic progress is OK as long
as people don’t get too rich from it. So let’s keep creating wealth by
printing money but make certain that those that get too rich give it away. Or
else.
We shouldn’t be too concerned that the banks and owners of capital are the
primary beneficiaries of money expansion, as they have first access to the
new money. After all, we want our undercapitalised banks to start lending
again so we can continue on our borrowing and consumption binge. How else are
the banks going to lend us money if we don’t create it in the first place?
Sure we have to pay them interest on it, but rates are low so we shouldn’t
care. Yes, inflation is historically associated with wealth disparity and
sound money is associated with a growing middle class. But that was before we
came up with the modern welfare state that automatically transfers money from
the wealthy to the poor, that is, unless the wealthy find ways around the tax
code by creating trusts and endowments, purchasing tax-exempt securities or
acquiring assets that tend to rise in price with inflation. But they don’t
really want to avoid tax, do they? Warren Buffett, for one, says he wants to
pay more tax. Of course he is allowed to do that, as the IRS has a special
facility for those who wish to pay more than their mandated share. Sometimes
I wonder why he doesn’t. He could dump his tax-exempt munis and hold taxable
bonds, for example. Or he could pay out dividends, taxed as ordinary income,
rather than purchasing outstanding shares through buy-backs. Or he could live
in a state with high taxes, rather than in low-tax Nebraska.
Given the complexity of the tax codes in most developed countries, I
suspect there are thousands of ways that Warren or other rich people could
pay more tax if they wished. Maybe actions speak louder than words. Of course
middle-class families don’t have access to fancy tax planning, as it tends to
be rather expensive. Really fancy tax planning requires writing new items
into the tax code, something that tax lobbyists do full-time on behalf of the
wealthy. No, middle-class folks just have to pay up to compensate for all
those loopholes that most never hear about until the government decides that
they are no longer politically expedient. In practice, this means that the
welfare state is primarily a redistribution from the middle-class to the
poor. But no, I don’t think this is the reason for the shrinking middle
class. I think it is because, notwithstanding clearly heroic attempts, we are
still not printing enough money.
NUMBER 2: PHDS KNOW WHAT’S GOOD FOR US
Back to the obvious, we all know that someone with a PhD is smarter than
we are. They’ve got the degree to prove it. Some PhDs even have degrees in
economics, which is unbelievably complicated. How else could one understand
how exponential money growth creates wealth? How you can borrow your way to
prosperity and save your way into the poor house? How importing more than you
export is sustainable? How coercive central planning is superior to voluntary,
free-market exchange? Let’s face it, we may all be equal, but PhDs are more
equal than others. If we didn’t have them telling us what the price of money
should be—or the rate of interest if you prefer—we would just lurch from one
economic calamity to the next. The Great Depression would seem a cake walk by
comparison, as would our current economic malaise, which they say isn’t a
depression, even if it feels like it to most.
If you need more proof, just look at those fancy buildings that central
bankers work in. They’re impressive. So are the headquarters of the big
private banks. These guys are obviously successful and important, so there is
no good reason why they shouldn’t be telling us what to do. They even have a
name for what they tell us to do: Free-Market Capitalism. I’m not entirely
sure what the ‘Free’ part of that means, as most things aren’t free, except
of course those provided by the government. The problem with gold or silver
money, you see, is that the PhDs would no longer have the ability to
manipulate our money for our benefit. And since they know precisely what the
supply of money should be, we shouldn’t be concerned that they might create
too much of it, or too little for that matter. The exponential amounts
they’ve been creating since 2007 are ‘just right’, as Goldilocks might say.
Also, PhDs have all sorts of fancy statistics that only they understand. This
is because they create them in the first place. PhDs are smart enough to do
that, you see. So when they tell you that consumer price inflation is 2.43%,
they don’t mean 2.42%. Or 2.44%. No, they mean 2.43%. This precision is
important as it determines how many billions of new money they need to give
to the banks to ensure price stability and full employment. If they’re having
trouble doing that, however, it’s not their fault. They’re PhDs.
Speaking of ‘price stability’, since when is 2.43% growth in prices
‘stability’? Wouldn’t that be 0.00%? They designed the statistics, so why on
earth did they choose to set ‘stability’ at 2.43%? I suppose I would need a
PhD to understand that.
NUMBER 1: IF GIVEN A CHOICE, WE WOULD ALL PREFER FIAT OVER GOLD OR
SILVER MONEY
As I’m not a PhD, I’m not qualified to go around telling people what to
do. Sure, I make suggestions from time to time, because I have a Master’s
degree. I even make strong recommendations on rare occasion, because I have
an honors degree. (If I only had an undergraduate degree, I wouldn’t even
make suggestions. Without any degree, I suppose I wouldn’t open my mouth.)
One suggestion I wouldn’t make, however, is that people be allowed to choose
the money they use. I mean, what would be the point of that? We might all
choose to use a different money, no one would accept these monies from each
other, and so we would never engage in commerce except through direct barter.
We all know how inefficient barter is. It is why money was created in the
first place. And who created money? Well seeing how they control it, I
suppose it must have been PhDs. There were no doubt PhDs in ancient Lydia, where
coinage originated, no? The Lydian PhDs may have had the original idea but it
was the Greek PhDs who supplied most of the coinage for the Hellenistic
world. They knew just how much to mint. Even non-Greeks used the Greek
coinage, because they liked it. (Here’s a puzzle: Were the myriad non-Greeks
who chose to use Greek coinage also PhDs? If they were so clever, why didn’t
they mint their own coins instead? Are some PhDs cleverer than others? I’ll
have to revisit this at some point when I haven’t been drinking wine.) Then
there were the Romans. Now these guys were clever. So clever that they built
a huge empire, with lots of impressive buildings, roads and aqueducts. They
were so clever they even discovered how to manipulate money through
debasement. They were so clever they even discovered how to manipulate money
through debasement. This really got going in the 3rd century, which happens
to correspond with their decline. But that’s just coincidence. My more
educated readers might know that the Roman Empire eventually split in two and
that while currency debasement continued in the Western Empire, which all but
collapsed entirely by the 5th century, the Eastern Empire maintained sound
coinage and lasted until the Turkish siege of Byzantium in 1453, roughly a
thousand years later. But that’s just coincidence too. Empires that debase
money tend to last longer. Really.
Anyway, back to this topic about choice in money. We really don’t need it.
We also don’t want it. If we did, we wouldn’t have legal tender laws that
prevent choice in money in the first place, would we? After all, is choice a
good thing? I try to do some shopping for my family once a week. My wife
makes out a helpful shopping list with various staple items like ‘butter’.
Then I go to the market and find my way to the butter section and suddenly
I’m facing a wall of butter. It’s unbelievable. There’s salted and unsalted;
Irish, British or Continental. There’s varying sizes, shapes, qualities, type
of cow involved, oh my. And all my wife wrote was ‘butter’. So now I’ve got
to get on the phone, I’ve got to ask her to be more specific, and so I call
her and she’s changing the baby’s nappy, and she can’t talk, and she’s tired
and can’t believe that this is the umpteenth time I’ve gone to do the
shopping and yet I always call asking for some clarification, be it for
‘butter’ or ‘detergent’ or ‘kitchen roll’ or God knows what. Look, I’m not a
PhD and my wife knows it. So why does she expect me to be able to read her
mind? Anyway, I’m sure I’ve made the point clear that choice is a bad thing.
It is just a source of confusion. So in the same way that my wife should just
tell me what to purchase (as long as she is specific BTW) the government
should tell us what money to use.
But just for the sake of argument, let’s entertain the fantastical notion
that legal tender laws were repealed and we could use whatever we desired as
money. Nothing would change. I mean, come on, we would just go on using
dollars, or euros, or pounds, or yen, or whatever. Who in their right mind
would actually bother to evaluate the relative merits of all of these
different currencies, or of gold and silver as alternatives? Are some better
stores of value than others? Perhaps. But I tell you, for most of us it would
be just like looking at that intimidating ‘butter wall’ in the supermarket.
We would take one look at it, shudder, and walk away.
Quantitative easing changes nothing. Remember, the PhDs are in charge of
our economies and they know exactly how much our money should be worth. Those
of us concerned that our money might lose purchasing power are just being
paranoid. Choice is dangerous. Think Adam and Eve and you’ll get my point.
Those arguing in favor of monetary freedom, of choice in money, of repealing
legal tender laws, they’re just like that nasty snake Lillith in the Garden
of Eden, the source of all trouble I tell you. So there you have it. Nowhere
would choice be so harmful to commerce as with money itself. Even if
legal-tender laws were repealed no doubt we would all continue using the
stuff we already are. So for all you gold bugs out there, go ahead and
purchase some gold or silver jewelry for your loved ones as holiday gifts.
But please, drop all the nonsense about using it as money. Imagine you gave
your spouse, or your children, or your relatives, gold and silver coins
instead. They wouldn’t be able to use them as legal tender; they wouldn’t be
able to wear them as jewelry. Their only ‘use’ would be as that four-letter
word for Keynesians: Saving. What a way to show a lack of holiday spirit.
‘Tis the season to borrow and spend folks, as indeed it has been since August
1971.
View the entire Research Piece as a PDF here...
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