The Golden Fetish

As our political discourse continues to swirl downward towards the event horizon of golden-plated toilet bowl, there is one issue that usually dominates the elite airwaves and news sites but has been placed relatively on the back burner this year until just recently: the Federal Reserve. Shrinking the enormous balance sheet, unwinding all their $4.5 billion of bonds accrued in the financial crisis and interest rate hikes are on the agenda, and will be the first challenges faced by incoming Chairman Powell.  As an April 5, 2017 statement from Chairwoman Janet Yellen explained, “Provided that the economy continued to perform about as expected, most participants anticipated that gradual increases in the federal funds rate would continue and judged that a change to the Committee’s reinvestment policy would likely be appropriate later this year.” [1] Fast forward to today and the internal debate at the FED still rages on whether they will go through with the rate hike. On the periphery, (or perhaps not quite so on the periphery judging from the anti-monetary policy rhetoric given to congress in person by “expert economists” ahead of Janet Yellen’s summer testimony), there is a small minority that continue to blame Federal Reserve for any and all economic problems since the removal of the Gold Standard in America. How does their logic hold up?

Advocates for the gold standard will insist that fiat currency inherently causes price inflation which in turn creates overspending and massive amounts of money printing. They would conclude that the Gold Standard would produce deflation which could convince consumers to save money rather than spend it[2]. However, prices did not stabilize once the gold standard was replaced with fiat money as the main currency during the Great Depression. These advocates will go to insist that the private citizens right to redeem dollars for gold was revoked by FDR in 1933, and then the “central banks” were removed the ability to do so by Nixon in 1971[3]. The most important argument that advocates of the Gold Standard press is that government intervention creates market Bubbles in the first place. Governments tend to intervene within markets in case of emergencies, but Neo-classical and Austrians say that it’s because of government control over currencies, it causes all the discrepancies in the market when it comes to pricing. The over influx of fiat money circulating around the free market will cause money overall to be devalued as worthless. In the end, Gold would be used as a backup of paper money, that is why the government stores copious amounts of Gold, it is in case of some emergency. But if gold was destabilized, silver would be able to hold the price of Gold in place, hence the Law of Supply and Demand is making Silver into the new equilibrium because of the consumption of Silver within the market itself. Not only would that be the case but the amount of labor spent on finding gold would be shifted to silver and vice versa if countries were able to find more resources such as gold and silver. No matter how stable the market will be, the government will have enough resources to back the economy for a brief period, making it easier for companies to regain their capital gains on production and investments.

Now there are many problems as to why the gold standard cannot work in today’s world. Money by itself is essentially nothing, its presented as value because people use it for commodity exchange(M-C-M), the buyer pays the seller money because it’s a medium of exchange where both are determining the worth of value. We can see this happening as old as 1,100 B.C, with the Chinese changing the medium of exchange from tools and weapons to ornaments and replicas because that was desired due to an advance of technology for the aristocracy. As time progressed the Chinese could replace coins to paper money by 600 B.C and by the time Marco Polo arrived in China by 1200 A.D., Paper currency was used as an official currency, detracting counterfeiters as much as possible. In Europe coins were regularly used until the Enlightenment came as well as the American Revolution, causing a shift in thought on what to use as currency. At that period of history, the value that society produced through commodity exchange was Gold, its best and only option[4]. Fast-forward to 1903, where several countries had gold and silver being official co-existing measures of value. However, in this present age, every commodity (Gold and Silver) are subject to constant fluctuations in value. If for example both are made legally the same value by law, then the payments would have to be made in the metal whose value is falling. Even if silver were taken out of the example, it would still not function properly because if gold prices are rising, the value of gold will serve as a price, not as the value of the commodity itself. If gold by its own is valuable, it will be worth more than the commodity it will be exchanged for. An example would be “if the cost is worth 10 grams and the price of gold doubles, the buyer won’t give all 10 grams for that coat, they’ll demand they only pay 5”[5]. Another point that needs to be addressed is the reason why the government (more specifically the U.S. government) stores up tons of gold? The reason as to why this happens is because it’s for an emergency in times of economic meltdown. Say for example you own a business, you depend on a certain product like eggs for your business to survive. The economy then experiences a shortage of eggs but you find out that there is a trend to sell bread and butter.  Instead of waiting for eggs to sort its own supply out, you will have to reinvest on bread and butter in case of another market crash occurs. This in turn will help you keep the eggs that you should take advantage of a rise in demand later for such eggs. This would be the same case for the individual citizen, they would save all their gold rather than spend it, and overall, we can see that government and society often share the same motives and that is to survive.

The two best arguments against the Gold Standard remain the history of the Great Depression and modern day crypto-currency. Of course, the Gold Standard was not the major factor behind the Great Depression, it was one factor that stopped countries from advancing out of the depression.

“The authorities may have been hesitant to abandon the gold standard, but the rise of unemployment rendered them increasingly reluctant to defend it. Balancing the budget was a conventional remedy, but governments were hesitant to raise taxes or cut support for veterans, pensioners and the unemployed in the deepening economic distress. Left-leaning governments like Britain’s were least prepared to apply such cuts, but they also had to convince the markets of their fiscal rectitude if their defense of the gold standard was to succeed. If they proved reluctant to raise taxes, the markets might attack, and the government would fall for having failed to defend the financial foundation of the nation” (Eichengreen and Temin, pg. 199)[6]

Abandoning the Gold Standard meant increasing the money supply for most governments. They had to do this because Capitalism was in a process of changing its forms of value and production, making it sustainable for a new currency to balance out prices for consumers. Yes, governments intervened throughout Great Depression and World War 2, but after the war, the economy was in full swing of production, making use in loans and government contracts to improve the profit margins of many corporations.

Now with today’s standards, even Gold is an outdated currency from the past and there are better alternatives. One such alternative is the ever popular crypto-currency Bitcoin, and ironically enough it is pushing into conflict American libertarians against the old Austrian economists on the Gold Standard. They declare that the government has no control over Bitcoin itself, making it self-sufficient for a new market against the government itself.

“If it hasn’t become clear by now, I hope you can see why Bitcoins (or another similar currency like it) are superior to a gold standard. They simply can’t be inflated. It can’t happen. And further, since there is no bank issuing the notes, there is no one group of people who can use the power of the press to influence the public or political class with the bribery of free money…This core problem must be addressed by gold standard advocates if they want to argue that gold is superior to encrypted digital currencies like Bitcoin. Since gold cannot be shoved down a transmission wire unless the gold standard advocates want to argue that all transactions must be made with physical specie, they have no possible way of getting around this one fatal flaw with the gold standard” (Suede, June 21,2011)[7].

Gold was one of the only useful currency back then because it could not be arbitrarily inflated and met with requirements of scarcity, divisibility, fungibility, and recognizably better than any other physical commodity. But now due to technology and the overall situation surrounding geopolitics, the Gold Standard would be unreliable and unproductive in an international market that we have today. We can see it happening in consumer demand of domestic products, we can see the currency is so entwined with the State that politicians who want to turn back the federal reserve are faced with intense scrutiny by interest rates not in control and public outrage. Gold isn’t bought or sold anymore, its usefulness and value is in obtaining it rather than exchange. This exchange won’t happen unless human behavior changes its perception of it and by the time people will accept it, technology will find a way toward a new currency for capitalism. That or the economy will collapse due to the massive contradictions that are commodity exchange as well as overconsumption.


 

[1] Cox, Jeff. (April 5, 2017). “The Federal Reserve wants to start unwinding the 4.5 Trillion…” Retrieved From https://www.cnbc.com/2017/04/05/fed-set-to-unwind-balance-sheet-this-year.html

[2] Gleason, Stefan. (May 12, 2016). “What Can Gold Do for Our Money?” Retrieved From https://www.soundmoneydefense.org/news/2016/05/12/relinking-gold-and-silver-to-our-currency-000032

[3] Murphy, P., Robert (March 16, 2009). “Defend the Gold Standard”. Mises Institute. Retrieved From https://www.mises.org/library/defend-gold-standard

[4] Beattie, Andrew. (December 29, 2015). “The History of Money: From Barter To Banknotes.” Retrieved From http://www.investopedia.com/articles/07/roots_of_money.asp

[5] Kautsky, Karl and Unrhue, Jason. (June 13, 2016) “Marxist Economics Made Simple”/ “The Economic Doctrines of Karl Marx”. Retrieved From https://www.marxists.org/archive/kautsky/1903/economic/index.htm\  37.

[6] Eichengreen, Barry and Temin, Peter (N.A). “The Gold Standard and the Great Depression”. Harvard Press. Retrieved From http://isites.harvard.edu/fs/docs/icb.topic467999.files/October%2022%20and%2027%20-%20Trade%20Money%20and%20Finance/Eichengreen.pdf

[7] Suede, Michael (June 21, 2011). “Against the Gold Standard”. Libertarian News. Retrieved From https://www.libertariannews.org/2011/06/21/against-the-gold-standard/