I just finished reading, for the umpteenth time, the argument that gold should be bought because the gold standard will replace untrustworthy fiat currencies. I have expressed doubtabout this view before. What makes it even more disappointing this time around is that the thesis was made by someonewhose analysis I usually respect.
It is incorrect to assert that gold standards prevent governments from fiddling with the currency. The history of gold is full of sovereigns that regularly flouted gold backing of currencies. Most of them resorted — often surreptitiously — to issuing more currency than allowed by the stock of gold in the national vaults. And their disregard led to going on and off the standard at will. Read a book on economic history. You cant trust a gold standard either.
If a country wants a currency that cant be debauched, it has to have a few clauses in its legal code or constitution that forbids excessive issuance of paper currency. The clauses will specify that politicians and officials who create inflation in consumer and/or asset prices will be subject to sanctions, such as removal from office. This would provide a much more certain restraint on government.
Whena better way exists to impose monetary discipline, as though the above arrangement, there is no particular need for a gold standard– especially when it comes with substantial risk, as the history books show, of horrendous economic depressions. Price stability, defined to include consumer and asset prices, can be secured with much less risk of depression within the framework of a fiat currency buttressed by legal sanctions that protect against printing an amount of currency that disturbs price stability.
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Blogs & Comment
Gold standard not the answer
By Larry MacDonald
I just finished reading, for the umpteenth time, the argument that gold should be bought because the gold standard will replace untrustworthy fiat currencies. I have expressed doubtabout this view before. What makes it even more disappointing this time around is that the thesis was made by someonewhose analysis I usually respect.
It is incorrect to assert that gold standards prevent governments from fiddling with the currency. The history of gold is full of sovereigns that regularly flouted gold backing of currencies. Most of them resorted — often surreptitiously — to issuing more currency than allowed by the stock of gold in the national vaults. And their disregard led to going on and off the standard at will. Read a book on economic history. You cant trust a gold standard either.
If a country wants a currency that cant be debauched, it has to have a few clauses in its legal code or constitution that forbids excessive issuance of paper currency. The clauses will specify that politicians and officials who create inflation in consumer and/or asset prices will be subject to sanctions, such as removal from office. This would provide a much more certain restraint on government.
Whena better way exists to impose monetary discipline, as though the above arrangement, there is no particular need for a gold standard– especially when it comes with substantial risk, as the history books show, of horrendous economic depressions. Price stability, defined to include consumer and asset prices, can be secured with much less risk of depression within the framework of a fiat currency buttressed by legal sanctions that protect against printing an amount of currency that disturbs price stability.
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