 Returning to gold money
Steve Saville
email: sas888_hk@yahoo.com
Jun 17, 2008
Below is an extract from
a commentary originally posted at www.speculative-investor.com
on 15th Jun, 2008.
A lot of the world's problems
stem from the abilities of the government and the banking system
(the central bank and the private banks) to inflate the supply
of money. This is because the inflation: a) distorts price signals,
leading to the misdirection of valuable resources and slower
economic growth, b) supports the expansion of government power
and thus leads to a less-free society, c) benefits leveraged
speculators and the asset-rich at the expense of conservative
savers and the asset-poor, leading to greater wealth disparities
than would otherwise exist and to resentment amongst those who
are on fixed incomes or at the bottom half of the economic ladder,
and d) supports the militaristic objectives of governments. The
problem of inflation would not occur, however, if gold were the
general medium of exchange because governments and banks cannot
create gold. This prompts the following questions:
1. How can we get from where
we are now to the point where gold is money?
2. Will gold return to its
historical role as the general medium of exchange within the
foreseeable future?
The first question is easy
to answer. Most serious advocates of returning gold to its position
as the official currency of the realm concoct detailed plans
as to how a gold-based monetary system should be structured and
implemented, but if gold truly is the best money then such plans
are neither required nor desirable. All that would have to happen
is the abolition of the central bank and legal tender laws, thus
leaving the market free to choose the general medium of exchange.
If gold is, as we believe, ideally suited to perform the monetary
role, then market forces would inevitably cause it to recapture
this role if such forces were allowed to operate.
Gresham's Law states that bad
money chases out good money, but Gresham's Law only applies when
legal tender laws force people to accept the bad money at face
value. In the absence of legal tender laws the good money will
chase out the bad because people will refuse to accept the bad
money in exchange for their valuable goods, services and assets.
In other words, if gold is
the best form of money then returning gold to its monetary role
will not require any additional laws or institutions. It will,
instead, simply require the removal of some existing laws and
institutions. In particular, there should be nothing in a country's
constitution that specifies what the general medium of exchange
should be, and the government should certainly NOT be granted
the power to coin or print money or to otherwise exert influence
over the supply of money. For example, the writers of the US
Constitution committed a grave error when they stipulated what
the money should be (gold and silver coin) and granted Congress
the monopolistic right to coin new money, because in doing so
they unwittingly opened the door to the monetary mischief that
has since occurred. If the US Constitution had said anything
at all about money it should have said something along the lines
of: "The government shall stay completely out of the money
business."
The bottom line is that there
should not be any "official" money. Based on thousands
of years of history we can be very confident that if left to
its own devices the market will choose gold, or the combination
of gold and silver, as money, but the main point is that the
market must be left to its own devices.
By the way, we don't mean to
imply that the transition from the current government-managed
monetary system to a new system based solely on market forces
would be simple, smooth and painless. Mountains of debt and derivatives
have been amassed on the premise that there will always be plenty
of monetary inflation, so it might be necessary to phase the
central bank out over a number of years rather than eliminate
it in one fell swoop.
The second question is impossible
to answer. Governments and banks will never willingly give up
the right to create new money, so the only way that gold could
ever again become the general medium of exchange is following
the total collapse of the current system. In other words, it
is very unlikely that the control of money could ever be wrested
from the government and returned to the free market in the absence
of a total monetary breakdown. And even then, there is no guarantee
that a gold-based system would rise from the ashes of our current
system.
Apart from the government/bank
alliance's desire to maintain control of the money supply, ignorance
is the biggest obstacle facing the return of gold to its traditional
monetary role. The vast majority of people, including some intelligent
and thoughtful people, believe the dual fallacies that the supply
of money must grow at a certain rate to support economic growth
and that in times of stress the government can help the economy
by increasing its borrowing/spending (financed by increasing
the money supply). Also, very few people understand the link
between the rising prices that they complain about and the increase
in the supply of money, a lack of understanding that the representatives
of governments and central banks take every opportunity to nurture.
For example, the statements
emanating from this weekend's meeting of G8 finance ministers
were worded as if rising commodity prices were the CAUSE of the
problem rather than a SYMPTOM of what was happening to money
(as far as we can tell, the increase in the supply of money was
not even mentioned). For another example, at this same meeting
US Treasury Secretary Henry Paulson should have 'brought the
house down' when, according to this article, he "urged countries
to let markets work, not rely on subsidies". This really
was a funny thing for him to say given that the subsidies and
tariffs put in place to protect the US ethanol and sugar-growing
industries are probably the second most important cause of rising
grain prices. The image of a pot pointing at a kettle and yelling
"You're black!" springs to mind, and yet most people
take such statements at face value.
For some strange reason, despite
the continual flood of lies spewing forth from the halls of government
and the mountain of evidence that economic well-being and freedom
from government meddling are positively correlated, there is
a general distrust of the free market.
Steve Saville
 email: sas888_hk@yahoo.com
Hong Kong Regular financial market forecasts and analyses are provided at our web site:
http://www.speculative-investor.com/new/index.html. We aren't offering a free trial subscription at this time, but free samples of our work (excerpts from our regular commentaries) can be viewed at: http://tsi-blog.com
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