Why Gold?

Nat posted this question:

Really, as an investment right now, any commodity is a good buy. I would say gold, guns and bullets are pretty valuable. So your second question is really the one i am asking about. Why should we peg the dollar to gold and not some other natural resource? Gold has no true value. Its pretty, is used in some manufacturing, has a history, but other than that, useless.

I would again recommend that anyone who has this question read Murray Rothbard’s essay Case for the 100% Gold Dollar. It succinctly answers this very question. So as to not just rehash what Rothbard argues, I’d like to make this a hypothetical exercise. 

Pretend for a moment that the government had no power to issue money or to declare legal tender. A lot of people have a hard time with this because they feel that money inherently comes from the government, but they are wrong. As I say in my book, money is a self-organizing principle of a community. So at the beginning we would see various communities using different commodities as money. Perhaps the East Coast would settle on using gold as their money, but let’s say Nevada preferred Silver, except for this one town in Nevada which has decided to use cigarettes. 

So we had those three commodities being used as money in three different places. That may seem crazy, but it’s not in any way different that the situation we have today with different countries standardizing on different fiat monies with no backing whatsoever. When I go to Canada in a couple of weeks I an going to exchange some of my American Dollars for some Canadian Dollars; returning to our hypothetical example, if you were visiting the East Coast, you would exchange your silver currency for gold. In this way, the free market would determine both the exchange rates of all of the commodities used as money. In addition, each person in a given community would be allowed to chose what form they wanted to store their wealth in. 

So you can think of this hypothetical exercise as a grand social experiment regarding money. As the communities began to trade more and more with each other, there would be a tendency to standardize on one particular money so that trade could be normalized across more communities. Whatever this grand money would have to be would have to meet certain criteria:

1. People would need to value it. 
2. It would need to be scare. (So oxygen is out until the air is so polluted we can’t breathe it anymore).
3. It would need to be easily transported.
4. It would need to be rendered into standardized units.  
5. It would need to be a store of value across time. So it would need to not be easily perishable. 

Ok, let’s come back from the hypothetical experiment for now. In this thought experiment we learned that money is a self-organizing principle and that as communities traded with each other there would be a tendency towards adopting the same money as your trading partners.

Now here’s the kicker. This experiment has been run already- more than once. Precious metals always seem to become the desired money upon which communities settle. I can’t tell you why it is that humans value precious metals, but we do. So the reason I’m saying we should return to gold now is because it the money that societies have always gravitated towards for at least the last 4000 years or so.

Now I’m not saying that gold will be the money of the human race for the next 4000 years.  Perhaps in the future we will develop a Star Trek fabricator that, in addition to piping hot Earl Gray tea, will render as much gold as you could possibly ask for. The commodity of choice in the Star Trek Universe might be Dilithium crystals or antimatter, because that’s what makes society go. But that world won’t evolve over night, and if and when it does evolve, gold will be tradable as a commodity for these dilithium crystals right up until we technology got to the point where we had complete control over all matter. 

In the meantime, if you are still not convinced that gold should serve as our money, and Article I, Section 10 of the US Constitution which reads that “No state shall… emit bills of credit; make anything but gold and silver coin a tender in payment of debts” still hasn’t convinced you, then know that I as a free market person respect your right to call for any form of money you wish. We can it is conceivable that we could always start the experiment over and allow all communities to start trading in their own money, but I’d be prepared to put a heavy wager on precious metals coming out on top. 

In terms of the world we live in today, you are correct in saying that any natural resource can conceivably be used as a money to back a currency, but bankers are still partial to things they can put in their vault. Even in today’s world, where every effort has been made to demonetize gold, every central banker in the world will still show and accept it to be shown on a balance sheet as asset. That’s saying something. So if gold is still used as a money amongst central bankers today, despite all of the efforts to the world’s governments to deny it’s use as money, then that’s really saying something.

The one final thing I want to point to is that virtually all commodities in the world are lower today than they were a year ago, except gold. It is the commodity that people have fled to as they have lost faith in the system. So much so that many bullion dealers haven’t been able to keep gold coins in stock. What do you think the odds are that people are going to suddenly stop valuing it?

So, my question to you is, “Why not gold?”

Is It Feasible to Return to a Gold Standard?

I’ve gotten a couple of questions from a couple of different readers regarding how feasible it would be to return to a gold standard. The argument goes something like, “If our national debt $9.6 Trillion dollars, and gold is $900 an ounce, how on Earth could we return to a gold standard since we don’t have nearly enough gold ounces.”

This question confuses the current market value of gold with what a gold standard is. A gold standard is merely a commitment that a currency is now redeemable at a set quantity of gold and does not have to in any way mirror the current market value of gold. The US government could return to a gold standard today if they wanted to by committing to redeem all US dollars into gold at the ratio of $1,000,000 per ounce. Under this standard, the US would now need $9.6 Million ounces or roughly 300 tons, which is easily done. Now a lot of you might be thinking, “But that’s way too high a value of gold,” but you’re again confusing the current market value of gold with a government’s commitment to support it. Setting a high value like $1M an ounce means the government has set a very low bar for itself in terms of gold redeem-ability; somewhat like an out of shape person deciding they can only manage five sit-ups a day to begin. 

Once the exchange rate would be set, the marketplace would adjust to reflect this new reality and probably soon reflect the new exchange rate. That means that, from that point forward, gold really would be $1M an ounce! “But that’s preposterous!” you want to blurt out, but be patient. You see, the entire exchange rate of goods and service would soon reflect this new information, and we’d pretty quickly start to see other prices rising to meet gold’s new price. That would mean you’d probably see oil selling for $100,000 a barrel, and the average rate of labor becoming somewhere around $10,000 an hour. Yes, the adjustment period would no doubt be a bit hairy, but once it was all done, the US would be on a gold standard once again. (Incidentally, if you’d like a more elaborate and gradual plan to implement the gold standard, I’d recommend you check out G. Edward Griffin’s The Creature from Jekyll Island.)

Now once this gold standard was in place and the market place had had time to adjust to the new reality, the government would have to start making some harder choices. If it wanted to implement a new entitlement program or conduct another war, it would have to ask itself “Where are we going to get the gold to do this?” And if it couldn’t? Well, no gold means no program.  No war.

You see, the reason for the confusion at the beginning is that the government has just been conducting whatever programs and wars it wanted to over the last few decades. They have had to face the same question of “Where are we going to get the money to pay for all of this?” but they have been able to answer with, “We’ll just print it.” That’s why the gold standard was eventually abandoned and why our liabilities are so far in excess of our ability to pay that the mere thought of entertaining a gold standard causes the mind to boggle at the discrepancies.

That gold is trading at such a low level in comparison to this nation’s liabilities is no accident. The US Treasury and the Federal Reserve have been working very closely to have the US Dollar maintain its value despite the fact that it continues to be printed at will. In essence, this exercise has allowed us to peek behind the curtain and see that the “Great and Powerful Dollar” is really a construct that is carefully maintained by a few people in the know. This is also why I’ve chosen to entitle my book, “What Do You Mean My Money’s Worthless?” There is simply no way this nation can afford to repay its liabilities and the value of the dollar is going to be the ultimate casualty.