A great defense of the gold standard!

The following is a comment posted to an article titled "Was Ron Paul Right About the Gold Standard?" at this link:
http://blog.beliefnet.com/crunchycon/2008/11/was-ron-paul-ri...

It is by far one of the easiest to understand defenses (for those of us whom monetary policy confuses) for returning to the gold standard that I have read lately. Hope you enjoy it as much as I did.

Tom deSabla
November 26, 2008 10:20 AM

There are a lot of misunderstandings here on this board.

First off, the idea that the gold standard did not work is stupid. Of course it worked. For the people. it was and is governments and their apologists who didn't and don't like it because it limits their power.

The most serious economic problems we've had are post fed.

Most of you don't seem to realize the chronology here. We did not "struggle to come up with a financial system that can handle the explosive growth of the modern age ever since the dawn of the Industrial Revolution." Not true at all, we had a system already and it was working perfectly. Prior to WW1, we had a working, stable international system that settled all international currency imbalances in gold. This system supported a huge amount of trade worldwide, and it never required huge amounts of gold to change hands.

Basically, it was self-correcting in that, if a nation were to import too much without producing, it's counterparty nation would simply receive gold FOR THE DIFFERENCE. This need to pay imbalances in gold WAS the discipline that nations needed to prevent them from living beyond their means. It worked just fine, until governments that wanted to war screwed it up.

By that time in history, we weren't on a "pure gold standard" anymore anyway - what we had was a system where Real Bills of exchange were circulating among producers and suppliers of goods. These bills, spontaneously and temporarily ciculating as money, allowed for the expansion and contraction of the money supply as needed, without constantly revaluing gold, and supported all the trade the world needed.

These bills were the precursors to what we now call "commercial paper." Central Banks were not needed to issue, discount, or manage these bills at all. It was largely this aspect of the free market in money and interest rates that Central Banks were instituted to control and then eliminate, and that's exactly what they did do.

Now, fractional reserve banking is theft, but governments allowed it even before we went off the gold standard. This practice, not the gold standard itself, is what led to the runs on banks prior to the fed. Fractional reserve banking is not inherent to the gold standard at all.

As to people losing capital due to a return to the gold standard, this is silly too. If their dollars were to lose value compared to gold or silver, then their dollars were set to lose value against goods and services anyway. Staying with a fiat system IN NO WAY protects anyone's wealth or savings, in fact, it insures that it will be lost.

Everythingwe have done since before WW1, including Bretton Woods, has been done to attempt to replicate the working system we had before with the gold standard and bills of exchange. The only problem is that the system we had EVOLVED and didn't allow for governments to have so much control over money and interest rates. We've been trying to have our cake and eat it too.

The problem is simple - a gold/silver/metallic standard works for the people of the world but is unpalatable for governments that desperately want to grow and control more and more aspects of people's lives. So, they try this and that, hoping to plan a system that is better than the one that evolved - BUT THEY CAN'T.

Now, of course, after so many years have passed, denial is very deep, and many folks do not understand money anymore. First off, what is so bad about a little deflation? We had a mild deflation between 1800 and 1913 - didn't hurt us at all. The dollar actually bought more while the economy steadily grew. That's a good thing. Why people act like it's bad, I don't know. Why people act like such a thing can't happen in our modern economy, I don't know either.

Paper money can't "outstrip" the amount of gold available, because the dollar, or any money for that matter, can simply be revalued relative to gold. Again, this process can't suddenly make the dollar worth less than was going to happen anyway; it simply re establishes the worth of gold to it's proper level.

In any case, as posters have pointed out - there is no need to suddenly institute a forced revaluation by government fiat. All we need to do is legalize competing currencies. Legal tender laws must be abolished.

As to a gold standard being subject to the same human failures as fiat money, such an assertion is ignorant. Pointing out that FDR revalued gold against the dollar, thereby hurting people, proves nothing about the gold standard. Just because a stupid president mucked with the standard and stole the people's gold does not mean that there was something wrong with the standard itself. It merely means that we should never have let him do it.

If FDR had went around killing people, does that mean that laws and morals against murder were useless, just because someone got away with it?

The whole point here is that stealing everyone's gold, and then making sweeping revaluations is much harder than just printing up what you need, and bamboozling a bunch of suckers, which is all they have to do now. Regardless of the fact that there have been revaluations of gold, the fact is that it DOES enforce discipline on government spending and currency issuance. Just go look at a chart of either, and see that there are two big trend changes - a smaller one in 1933, when FDR stole the gold, and a much bigger one, when Nixon reneged on Bretton Woods by refusing foreign dollar holders their promised option to trade their excess dollars in for gold.

The issue is a lot simpler than many of you posters are trying to make it: In order to have a viable and growing economy, the people must be able to save and delay consumption. People must have the proper interest rate information in order to invest in plant and industry that is really needed. As we can plainly see, this current system does not afford these things. In fact, it completely discourages them.

People must have a viable and completely legal means to save, long term. Paper money does not work for this purpose long term, which is why we have no savings as a nation. This alone, is reason enough to re-establish a monetary standard or allow competing currencies.

It is not, and never will be fair, or sustainable, for people to work all week to earn paper money that the government, through central banks, can simply create with no work at all. It is a fundamentally unjust idea, and it has never worked, is not working now, and isn't going to work.

It doesn't matter if you're in the year 1700, 1800, 1900, or 2009, the issues are the same.

Can true capital be created by central banks or governments by a printing press or computer?

NO.

Can a real economy long survive with cheap paper that is created from nothing and backed by nothing, chasing and buying real goods that people sweat and bleed to produce?

No.

In the end, all such systems will collapse, as they must, and people will trade real things, and use real money that has inherent value again, whether statist fools who know nothing about money like it or not.