Inflationomics

The 21st Century Gold Standard is Already Here

Some advocates of the gold standard look to the past and idolize the way it was during the 19th and early 20th centuries.  They point to the Coinage Act of 1792, where a dollar was defined as 371¼ grains of pure silver, and gold was fixed at a ratio of 15 to 1 relative to silver.  “If only we could fix the dollar to a set quantity of silver again,” they lament.

Unfortunately, over the years, the U.S. government has moved away from the strictures of gold and silver and moved to a fiat currency.  The U.S. civil war was the first excuse to require citizens to accept paper money; i.e., legal tender.  The panic of 1907 and World War I led to the adoption and use of the Federal Reserve Bank to further dilute the value of the U.S. dollar.  WWII and Vietnam were additional excuses, until, today, we don’t need an excuse.  We just print more dollars because we can and because we have to fight poverty, crime, drugs, money laundering, tax evaders, ISIS…you name it.  In short, government spending is considered to be good and necessary…it may even bring about more inflation, which is also considered to be desirable.

So, when people talk about a return to the gold standard, what they really want is to tie the value of the U.S. dollar to a quantity of precious metals, in an attempt to limit government spending by restricting the government to the quantity of precious metals it has on hand for redeemability; i.e., to live within its means.  But governments won’t be limited this way…honest money requires honest government, which requires honest voters, not people who want government to solve all their problems by giving them something for nothing.

In my opinion, the dishonesty and hunger for power that drives politicians and governments must run their course before an honest money can be adopted.  That means that the fiat currencies must be destroyed by giving people all the money they want (and destroying it in the process) before people will realize that an honest money is the best long-run solution to the world’s monetary problems…that there’s no such thing as a free lunch.

Today, the price of gold and silver, as stated in paper currency terms, floats from minute to minute and is freely exchangeable.  Depending on the “market price” (which is manipulated) and the markup by the dealer, you can obtain gold and silver at any time.  You just have to shell out enough paper money and you can buy almost any quantity.  Even central banks are doing it.

The bottom line is: as long as it is legal to exchange your paper money for precious metals, we have a flexible gold standard and all paper currencies are measured against that standard; i.e., the purchasing power of gold.  The exchange rate doesn’t have to be fixed by some government, it can be determined by the market.  In the long run, if a government acts foolishly, its paper currency will become worthless and other, more responsible, governments will enjoy the fruits of their honesty.

Robert F. Sennholz

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