Answering Taylor’s Questions

My good friend Taylor asks three questions:

1. My point here was that while I agree there is much historical precedent for the value of gold there is no promise it will continue to be valued. In that regard gold is no more valuable than paper money. People have historically wanted gold, so it has value. People currently want cash, so it is valuable. The value is arbitrary; it is valued because people want it. The major difference seems to me to be that people have wanted gold longer than they have wanted dollars. The ” intrinsic value” is still a man-made convention, why does it matter what medium it applies to?

2. It is one thing for my dollars to become worthless from hyper-inflation a-la-Germany in the 20’s, it is quite another for my elected officials to vote to make my dollars worthless over night. Yes, I understand you point that they have been voting my dollar to be of less value for decades, but the marginal inflation we have experienced so far I can stomach, and plan for. Overnight worthlessness of everybody’s savings could cause riots.

3. This brings up another question I have had regarding the gold standard. How does it accommodate its inherent lack of elasticity? I. E., if a Spanish Galleon carrying billions in gold is sunk and unrecoverable there are sever consequences to the market and to commodity values. If one of the US Fed Banks is incinerated, and billions of paper dollars are lost the Fed can quite easily reprint those losses and the impact would seem to be minimal. Similarly, gold is a much more scarce commodity compared to paper. What happens when we have mined it all?

The question of whether and why gold is valuable seems to come up a lot. I’m not sure why; outside of land, I can think of nothing that humans have consistently held to be as valuable as gold and silver have proven to be. Humans have valued many things through each age of human development such as dyes during the Roman times, spices during the Middle Ages, and oil today, but precious metals have been held to be valuable during each and every age.

If we wanted to use a commodity based form of money, we could chose between many forms of wealth currently valued in today’s society. We could use oil reserves (for instance) as a basis for a currency. Oil is a scarce commodity whose value does not depend on the health of the government that is issuing the money and is available in standard units of accounting, but precious metals also have all of these quantities. In addition, precious metals have the further advantage in that they have: a much longer history of being held as valuable; a more dense form of wealth; easier to store; and far more resistant to destruction.

Now I do often hear the argument that humans could just decide that they don’t want gold anymore and it would lose it’s intrinsic value. I don’t really see how that’s possible given how many thousands of years we have favored the stuff, and, even in that highly unlikely scenario, it would still have a value as money so long as the nations of the world agreed to value it as such. Which is just my way of saying that it’s silly for us to worry that gold may one day lose all value given that right now our entire economy is based on something that inherently has no value at all!

Regarding Taylor’s second question, I must confess that I find it extremely unlikely that we could voluntarily go back to a gold standard. Today’s dollars are trading at a much higher level in terms of goods and services than they would based on the comparative fundamentals of our America’s assets compared to its liabilities. Were the US government, to enact a gold standard it would have to set the value of the dollar at a level where it could be faithfully backed by the assets at hand, in which case the dollar would have to be valued far lower.

Taylor is correct is saying that we risk revolt from the citizenry because they would perceive that the government had acted to reduce the value of their currency. This would actually be an misperception on their part, because a continued mismanagement of the currency will eventually make it worthless (hence the title of my book), but people don’t understand these things. In part that’s by design. Politicians obfuscate the real cause of inflation away from their own mismanagement of the currency and instead blame whoever is in reach- greedy merchants, speculators, and other nations attempts at currency manipulation. People seem to have gone along with these explanations, and the true is probably too painful for them to accept. 

This is why I have resigned myself to the eventual collapse of the American way of life. To attempt to adopt a more rational and sustainable economic policy is simply political suicide at this point. People can not willingly give themselves over to the hard discipline of a gold standard if they have any belief at all that they can continue to prosper under the gluttony of a fiat money system. I instead believe it my calling to simply educate those of us who are ready to listen and consider the simple truth of this situation so that the idea will have time to germinate in people’s minds. My hope is that, after the collapse of the American Empire, that we can return to the policies that made us a great people to start with.

Regarding Taylor’s last couple of questions, gold’s strength is in its inelasticity. If elasticity where the best path to prosperity, then Zimbabwe would be a world power by now. Inelasticity forces discipline on a society and a government. To pursue a policy of inflation with an inelastic currency means that eventually a correction must occur. The same is true in an inelastic currency really, but the correction can be delayed for a far longer time. The benefits of an inelastic currency is that there is a shorter period of time between monetary abuse and the painful correction that it more closely links cause and effect in the minds of the people. I consider this a good thing. 

Regarding Taylor’s last question, gold will still possess all of the appropriate qualities of money even if we were to take every last bit of it out of the ground. The money supply does not need to expand in accords with the populace. Indeed, as I point out in my book, one of the most prosperous times for us as a nation was after the Civil War. From 1870 to 1900 the population of the United States was expanding while the money supply was actually shrinking because of the retirement of “Greenbacks” (our first experiment with fiat money) from circulation. It was one of the only times in American history that the buying power of the common’s mans wages actually grew steadily and our GDP expanded at the most rapid pace in our history.

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