POLITICAL OPINIONS#25: GOING BACK TO THE GOLD STANDARD

INTRODUCTION:

 

It is certainly not a mystery that the US dollar has depreciated in value over the past couple of years. What is even more evident are the disastrous economic repercussions of inflation in regard to currency. We have a plethora of historical context for the perils of inflation to a nation’s economy. One of  the most glaring examples of  inflation being detrimental to a nation’s economy was the devalued currency of the Ancient Roman empire. It was even noted that high taxation coupled with the devaluing of Roman currency vastly contributed to the economic crisis that led to the down fall of the Roman Empire. Historians have also noted this was also around the time the Roman’s supply of “war treasures began to dry up”, despite greatly expanding their military (http://www.history.com/news/history-lists/8-reasons-why-rome-fell).

 

I  suppose many of you are wondering why I am drawing an allusion to the history of Ancient Rome, when my blog is fixated on politics and philosophy. The reason is that there really are  some disturbing parallels to Ancient Rome and the United States. The most striking commonality is our issue with the depreciation of the value of our currency. At one time in America’s history, the value of our currency was backed by our nation’s supply of gold in Fort Knox, Tennessee. Currently, the value of American currency is determined by the government,  versus substantiation by  a commodity of high value. In other words, our currency is only backed by the word of the  U.S. Government .  Our currency is what is known as Fiat Currency. Fiat Currency is money that “…. is accepted as money because a government says that it’s legal tender….” (http://www.dummies.com/personal-finance/investing/how-the-fiat-system-works/). So in a sense, you could extrapolate that to mean that our government determines the value of our currency.

 

I personally believe that instead of going down the avenue of utilizing a fiat currency system, we should go back to the gold standard. Why have us be based on purported claims of value, when it could be based on a commodity of high intrinsic value? It is important to remember that a claim with no solid validation is merely words.  I personally do not feel secure knowing that my nation’s economic livelihood is based on good faith versus anything of tangible value. When you evaluate the reality of our legal tender, it makes you question why people are so suspicious when it comes to bitcoin.

 

 

HOW AMERICA SECEDED  FROM THE GOLD STANDARD:

 

The  United States utilized the Gold Standard for backing currency until the 1910’s,  due to the occurrence of World War I. However, while the Gold Standard was revived in 1928, via the form of gold-exchange standard, “….. they supplemented their central-bank gold reserves with currencies (U.S. dollars) that were convertible into gold at a stable rate of exchange….”.  Nonetheless , this currency backing system was relinquished under the economic turmoil of the Great Depression. However, several decades later in 1971, the U.S. gold supply was at a significantly low level. Even after several revivals of the gold standard in the United States in varying manifestations, due to the  mounting  debt surpassing the value of our gold supply, we had to officially relinquish this form of currency backing. We now rely on the Fiat money system for determining value of U.S. currency. (https://www.britannica.com/topic/gold-standard)

 

PROS & CONS OF THE GOLD STANDARD:

 

I am really trying my best to be objective here in regard to this issue, but there were not too many sources that were uncontaminated by bias. The Atlantic and The Economist  were both ardently anti-gold standard, and of course, on the other side of the fence, anything that Ron Paul had any association with was overwhelming pro-gold standard. It is quite apparent how this issue has been tainted by the biases of others. Let me attempt to be neutral here while I go over the positives and negatives associated with the Gold Standard of currency backing.

 

Here are some of the positive attributes of utilizing the Gold Standard for backing up our legal tender. First and most importantly, the Gold standard restricts the ability of Government so it cannot manipulate the value of currency through “price inflation”. In a sense, it would be a resolute safeguard for preventing artificial depreciation of currency, by disabling the ability of financial institutions and the government from doing so. Also, it helps assist stability in international trade, through creating “fixed patterns of exchange rates”.

 

Now just for the sake of objective reasoning, here are some of the disadvantages of using the Gold Standard. The first drawback is that the amount of gold that is freshly mined would not be equal to the amount of money for America’s contemporary economic needs.  Another counterpoint is that it would not protect us from naturally occurring inflation and depression impacting the global economy.  A third disadvantage is that converting back to the Gold Standard would be a lengthy process with a myriad of growing pains, especially in regards to the amount of debt that the United States owes.

(https://www.britannica.com/topic/gold-standard)

 

DISCUSSION:

From viewing the effects of inflation throughout history, we can see that it has caused a plethora of economic stability issues. It was one of the contributing factors to the collapse of Ancient Rome, and pushed a post-World War I German to the throes of desperation (a major factor in Hitler rising to power). While the Gold Standard does have its disadvantages, it would be an excellent safeguard against market manipulation through artificial inflation.  Under the Gold Standard, the increase or decrease in the value of our currency would be based purely on the natural ebbs and flows of the market versus the artificial devaluing of our currency.

 

We certainly see the impact of inflation every time we go to the store to pick-up a few items. While factors such as supply and demand of a product and fuel costs impact  retail prices, the value of currency does as well. Fifty  years ago, the average income was lower than it is now, however, that same dollar went a lot further. While the other factors cannot be veered away from, we still need to acknowledge that the value of the U.S. dollar has slipped significantly and this is kind of grim issue.  Remember the photos from your High School history book of post-World War I Germany. Painfully gaunt, emaciated people with wheel barrels of paper tender to buy a mere loaf of bread.

 

While that gruesome example may not be precisely how it plays out for the United States, would you personally want to take that chance? I know that I wouldn’t. Nevertheless, many malign going back to the Gold Standard as being a nearly cartoonish idea. So what I would like to ask these individuals, what do you propose to do? Continue on this self-destructive path of reducing the value of our currency to the point that toilet paper is of a higher value? While I am far from an economist, in my eyes this is economic suicide. The question becomes for how much longer can we continue to compromise the integrity of our currency? We have been artificially devaluing it for approximately 50 years now, and I personally cannot see how it has been advantageous in the long term. Maybe my narrow perspective needs to be broadened? However, I am very concerned about the economic status of this country and it seems as if few are really willing to compose a solid solution.

 

 

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Author: invertedlogicblog

In pursuit of liberty, philosophical thought, and Austrian Economics.

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