The Gold Standard Myth

To quote Peter Palms, he wrote, “There is a great mystique surrounding the nature of money. It is generally regarded as beyond the understanding of mere mortals. Questions of the origin of money or the mechanism of its creation are seldom matters of public debate”.

In reality, there is no “mystique” at all about why we use “money” – it is simply because it has proven to be the most convenient and efficient way to arrange the exchange of goods and services. That really is the only purpose for having a money system – to act as a medium of exchange. “Money” has no other practical use unless it can be used to buy something.

Peter then asks, “What is money? The first step in this manoeuvre was to scramble the definition of money itself.”

What is Money?

Peter does start off on the right track by asking the question, “What is money” but then refuse to answer it. He waffles on with all sorts of explanations from other people and deliberately side-tracks the question by going into “money supply”. It is only much later that he finally comes up with the definition that “money” is simply a medium of exchange.

He then chooses to complicate the issue by spending a lot of time in breaking “money” into various subjective categories, some of which do have a relevance in manipulating the way money is used in today’s environment.

All the history Peter then goes on to expound is not really useful, as neither is the creation of the Federal Reserve System, and especially the spurious claim about the “supremacy of gold”.

It often is argued that gold is inappropriate as money because it is too limited in supply to satisfy the needs of modem commerce. …… but, upon examination, this turns out to be one of the most childish ideas imaginable.”

That above patronising and completely false statement is not at all “childish” when one is speaking logically and honestly.

If, as Peter claims, “45% of all the gold mined ….. is now in government or banking stockpiles” what practical use is this gold serving by being stuck in a vault?

He then goes on to correctly say, “the supply is not even important” and follows this up by distorting and manipulating what he earlier claimed to be the definition of “money”. The claim that the “function of money is to measure the value of the items” is totally incorrect. That “function” is entirely in the hands of the buyer and seller. ”Money” is simply the medium that provides the convenient exchange of “assets” in accordance with the way the buyer and seller values the asset.

In a sense, “money” does “serves as a yardstick” for the value of goods and services but whatever is used as “money” can serve that function. There is absolutely no valid reason why any particular substance cannot be used to serve as “money”, provided the substance has two characteristics.

Those two characteristics are, firstly, the substance used needs to be a universally accepted “money” token, and secondly, the substance needs to come with some form of guarantee that it is not used to create a false token.

The False Claim that Gold can control the Money Supply

Peter then makes the reasonable and logical statement that “The amount of gold in the world does not affect its ability to serve as money, it only affects the quantity that will be used to measure any given transaction.” While that statement is correct it is used to imply that only the metal of gold itself can be used as the “money token”.

So, according to Peter, if a society needs more money, instead of using 1 oz. coins we must reduce them to ½ oz. coins to increase the money supply. It should be obvious that the money supply has to increase with a growing population. As that population grows it would seem we are eventually forced to reduce the “coins” to grams, and eventually to milligrams. Surely, you can see how impractical this must become if we are to extrapolate it to today’s environment?

Ahhhh, but we have a solution to that problem. What we can do is to create some paper notes and say that a certain number of these “notes” can be exchanged for 1oz of gold. Great, problem solved. Except, what is to stop anyone doing a “Roosevelt” – confiscate all the physical gold and pay everybody at the going exchange rate (a little over US$20 in paper notes at the time) and then unilaterally change the exchange rate to US$35 an oz. The Government can then write a huge new amount in the account ledger for the value of all the gold confiscated? An accounting figure, incidentally, that does not need to result in printing one single extra dollar note.

A bloody marvellous trick and it worked beautifully.

So, what is to stop any government from arbitrarily deciding to value their gold stock at whatever exchange rate they choose, in relation to whatever form of paper money they create?

Actually, in truth, there is absolutely nothing to stop any Government from doing that, other than perhaps, a sense of responsibility and a bit of prudence, or maybe, some constitutional restraints if a nation happens to accept the rule of law as the basis for their society.

The Unspoken Problem with the Idea of a “Gold Standard”

However, there is another problem with the idea of using “gold” as the medium of exchange. What happens if a country does not have access to a supply of ‘gold”? Are the “gold bugs” claiming that the country cannot have a money system to use as the nation’s medium of exchange?

Surely, it is logical to accept that every society, especially in today’s environment, must have a universally accepted and guaranteed token they can use as their medium of exchange for the daily buying and selling of goods and services? It is virtually unimaginable that a modern society could exist without such a token.

Even Murray Rothbard is correct in saying, “We come to the startling truth that it doesn't matter what the supply of money is. Any supply will do as well as any other supply.”  

Although Rothbard and all the other “free marketeers” are wrong in tying “free markets” to a gold standard and decrying the influence of Governments.

The logical Reason for Creating Governments

Doesn’t it seem logical that we create Governments to serve a public purpose for improving the welfare of the society we live in? If we live in a “democracy” we certainly don’t create a Government to deliberately make our lives difficult. Unfortunately, that seems to be what happens for a lot of people because of the stupid economic system that is still based on the now redundant “gold standard”. The limited supply of gold has long been used as the foundation for claiming there must always be a limited amount of money available to spend. Fortunately, that obsolete system was eventually abandoned by Richard Nixon in 1971, although never really accepted by the orthodox school of “economics”.

As the Government is really the only legal entity in a position to declare what is to be used as a nation’s legal tender, and in a position to guarantee the authenticity of that legal tender by punishing counterfeiters, shouldn’t the Government be the sole authority to create and issue the nation’s supply of money?

There is no such thing as “Natural Laws” relating to “money”

There is absolutely nothing “natural” about “money” – it is purely a manmade concept that does not occur in nature. And certainly, there are no “natural” laws associated with the creation and use of “money”, as Peter is trying to propose. Every “law” related to “money” is an invention of us humans, exactly as is the concept and practice of “accounting” for restricting the way “money” is used.

“Money”, as a medium of exchange, does not need any intrinsic value as long as it comes with the two essential characteristics – universal acceptance and the guarantee it is not false “money”. If the “money tokens” fulfill those criteria then the society will accept them as their essential medium of exchange without the need of any coercion. That fact is totally and unquestionably proven from today’s experience. More than 90% of most nation’s money supply is nothing more than some digital notations on a spreadsheet as a result of punching numbers on a computer keyboard. Digital “money” is nothing more than some specks of dust floating around in cyberspace. Unfortunately, the Governments of the world have defaulted on their responsibility to their people by legitimately allowing the private banks to use this practice of creating interest-bearing credit out of thin air.

Controlling a Nation’s Supply of Money

That practice and the lack of properly rationalised conditions for controlling the amount of “money” a society needs are the fundamental flaws in the current and historical system for creating “money.”

In criticizing the flawed way fiat “money” is currently allowed to be created and used, Peter is totally correct, but that has nothing to do with the need for a gold standard. The flaw is really the responsibility of humans elected to govern in the best interests of their people and failing to live up to that responsibility.

The quantity of “money” needed for any given society is a separate issue to the issue of defining what is to be used as the “money” tokens.

For some absolutely stupid reason, we have shackled ourselves to the idea that whatever we need to do can only be done if we have enough “money”. It no longer matters whether we have all the resources, all the materials, all the people, all the experience and all the know-how to do what is needed, it simply can’t be done unless we have enough manmade “money” to do it.

Now, that is totally crazy.

The Issue of the two Categories of Supply and Demand

But Peter Palms is actually correct in saying that the “long-term stability of prices…” is a desirable aim for most people, and it should also be for a responsible Government. He is also correct in saying that this is a factor related to, “supply and demand”. What he doesn’t explain is where this “demand” comes from, nor does he identify what this “demand” consists of.

“Supply and demand” have absolutely no dependence on a “free market” and it certainly has nothing to do with “gold” as a medium of exchange. “Supply and demand” comes in two categories – “needs” and “wants”.

Everyone living on this planet has definite “needs” if they are to survive. Food, water, clothing, and shelter are things that we can classify as “essential needs”. In today’s environment, there are a host of other basic things that have become “essential” for maintaining our minimal acceptable standard of living.

To a degree, individuals can supply some of these essential needs for themselves, but it makes much more sense if we join together and cooperate in fulfilling the demand for the greater proportion of our society.

Isn’t that why we choose to form Governments, to fulfill these essential demands for the betterment of our society and the general welfare of the people? That question, of course, depends on how one perceives the creation of a governmental system. Is a “Government the creation of the people or is it an entity that is created, by some sort of “divine right” to control the people?

The question of Inflation and Deflation

Peter makes the statement when talking about price stability, “The reality has been a small but steady increase in purchasing power (about 1 percent per year over the past 70 years) that has resulted from the gradual improvement in technology. This and only this has improved the standard of living and brought down real prices-as revealed by the relative value of gold”.

Unfortunately, Peter has equated the “purchasing power” of the individual to the wages most people depend on for their survival. In reality, the wages people earn only represents about 30 to 35% of the cost of producing anything. Hence, this is the reason why so many people are forced into debt to achieve the standard of living that has become the norm for a lot of countries.

The reason why prices vary, and like the price of gold, have virtually always increased, is because of inflation.

There is nothing “natural” about “inflation” or “deflation”, they are purely accounting terms created by humans as a result of manmade procedures for dealing with the supply of “money”.

Essentially, the principle reason we have inflation and deflation is really because there is a poor connection between the amount of “money” available and the quantity of goods and services available. Of course, the climate has a significant impact on the supply and demand of many commodities and that makes it difficult to stabilise prices, especially in the short term.

As far as I can find, there has never been any attempt to equate the productive capacity of a nation with its consumption capacity and in relation to the population demographics. If these three factors can be monitored in a relative balance, then inflation and deflation cannot become significant problems.

The Vital Importance of Consumption in Every Economy

Throughout history, nobody has made any serious attempt to strike a balance between the productive capacity and the consumption capacity within a society. Production has long been mistaken as the driver of an economy when, in reality, consumption is always the most important element in the equation.

It is a sad fact that getting purchasing power to the consumer without putting them in a stranglehold of perpetual debt has never been a focus of “economics”.

There seems to be a very significant misconception of the “capitalist” system where its focus always appears to be on production. The real key to success for the system depends entirely on consumption, not production.

It is absolutely pointless to produce anything, anything at all unless it is to be consumed.

It is the customers who are the absolute necessity for the capitalist system to survive or any economic system for that matter. It is the customers who need the purchasing power to consume what is produced, and it is always the customers who are the source of every single dollar of “profit”. Production does not create one dollar of profit until the production is consumed.

The real focus of the capitalist system should be ensuring that the maximum amount of purchasing power must be delivered to the hands of the customers. And in every case, the customer of the end product is always the people.

The false concept of “self-regulation”

There is simply no evidence, nor justification, for assuming that human nature can be self-regulating, and can survive without the need of some rules to govern its behaviour. Every concept of “free markets” will always involve the behavior of people and that is why rules and some form of governance have to be a necessity. 

Because the idea of self-regulation is really an idealistic fantasy, there needs to be an independent authority to set the rules for ensuring the safety and protection of the customers, and also the workers. Customers need protection from unsafe and unhealthy products, and from any dishonest practices of the “free marketeers”. The workers need protection from the exploitation of unscrupulous employers whose primary motivation is the maximising of profits.

In terms of the “free market” and the capitalist system, virtually nothing can be done for anybody unless there is a profit to be made. But the truth is, no “capitalist” system can survive in a society if there were no independent authority to provide the essential needs of the customers. Those essential needs are listed above, and from a “democratic” perspective, it is the people who grant the Government the authority and responsibility to provide those needs without being conditioned by the notion of “profitability”.

Perceiving the Role of Government

The problem, of course, is how one perceives the role of Government? Is the idea of a Government a creation of the people set up to serve the people or is the Government some sort of entity created by some “mystical power” that is beyond the control of the people?

If a Government is considered to be a power within itself then the people are condemned to do as it says. If the Government is a creation of the people, which under the idea of “democracy” it should be, then so is the creation of a money system that can be designed for the benefit of all the people and not just one class.

The Foundation for the Idea of a “Gold Standard”

So, the idea of a “gold standard” is really just an abstract concept derived for historical and traditional practices. Mostly, those practices related to the idea that there are certain aristocratic groups of people who are “born to rule” over the mass of people who were born to do as they were told. Thus, “gold” was always seen as the “property” of the “rich and powerful” and not something that should be distributed amongst the “riff-raff” of society.

That really is the foundation for the idea of a “gold standard”.