Sunday, November 23, 2008

The Gold Standard Debate

If you remember back to the presidential primaries my favorite public servant Ron Paul continually brought up the topic of the gold standard. Briefly, this is a monetary system in which paper notes (dollars) are freely convertible into fixed quantities of gold. This is different than the system used all over the world today, fiat currency . Here your money has no intrinsic value, only the mandate from the government that it must be accepted. For a brief history of the US dollar watch Part 1 of this video. Part 2 gives the usual arguments for the gold standard.

The main complaint about our current system is that is allows for too much government involvement. We've seen countries like Venezuela and Zimbabwe fall apart because the government prints too much money. Inflation is essentially an undercover tax. The more money that is printed, the less value your money has. Governments are able to bypass usual taxation roadblocks and do what they want. This is why Ron Paul says the gold standard can be so helpful. Tie money to a real resource and it takes the power out of the government's hand. In many ways Mr. Paul is right. The gold standard allows for less government meddling and the worry of inflation becomes extinct. But there is one major flaw to this argument.

The fiat system relies on a credible government that promises to never dilute the money supply. However, a nation on the gold standard essentially relies on the same thing. A country that changes to the gold standard can just as easily change back. So again, the system is based on the reliability of the government. However, I am willing to recognize that the gold standard can place one extra obstruction to bad policy, but it's not the solution.

The solution is to have a government with strong barriers to government interference. This can be done through strong constitution, which the US has one of the strongest (for being a relatively young nation we have one of the oldest surviving constitutions). A credible government can also be created by an effective press. With all the complaints against our media, it is still comparably free (Russia recently banned the use of "crisis" and "decline" on TV).

A final way to ensure an effective government is to become educated on the issues and voice them. Hence this blog post.

2 comments:

  1. Here's a related story on the Somali Shilling:

    http://angry-economist.russnelson.com/somali-shilling.html

    They have a successful paper currency with no government involvement! Although it's really just a commodity-backed currency where the commodity is paper.

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  2. Interesting story. One thing I haven't figured out is why money is even an excepted form of transfer. It is after all, just paper.

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You are the reason why I do not write privately. I would love to hear your thoughts, whether you agree or not.