The Question of Gold Money: Is There Enough? (by Republicae)Submitted by Republicae on Mon, 06/22/2009 - 19:27
The most commonly held misconception is that the supply of gold, either globally or in U.S. reserve, is insufficient to serve as money. One of the common adages pertaining to gold is that there is not enough flexibility in the money supply to sustain the growing needs of either the U.S. or global economy, thus the only option is fiat.
Of course, the ones that hold such misconceptions are the very ones who support, most whole-heartedly, the fiat system and the power it allows both the government and central bankers of the world. Another claim, among many, is that a gold monetary system would make it difficult for a country to isolate itself from the economic woes of the rest of the world. Strange, but it appears that the fiat monetary system is much more problematic in such terms. Yet another claim is that a gold monetary system does not permit wide exchange rate changes and is resistant to government controls over both domestic and international trade and the payment of that trade. That of course, is true, but such restrictions on the ability of government to place such controls only allows for a freer market. All of such claims are usually found in those circles of people who are either centralists or globalists or both.
Factually of course, none of the criticisms about a free market gold monetary system are true, they are fabricated either intentionally or held out of a stance of complete ignorance of monetary mechanics. Gold cannot be easily regimented by governments or, for that matter banks and it does not lend itself therefore, very well to regimented economies.
Because of the nature of gold money, it also tends to thwart government controls over international trade, making true free trade without government intervention and regimentation, a real possibility. In fact, gold money makes it difficult for governments, including our own, not only to intervene in the economy, but it makes it far more difficult for governments to control the citizens of their countries.
The fact is, contrary to the popular opinion, there is absolutely no shortage of gold which can be used as money, nor would the supply of gold impeded economic growth to any degree because it is not the supply of money that creates economic growth, but the creation of capital wealth which utilizes the exchange nature of gold money that creates economic growth. I wonder why people who advocate the “short supply” issue never consider that the vast majority of gold that has been mined from the earth over the last 5 to 10 thousand years is still in use today, it can still be accounted for. That is an amazing fact about gold and begs several questions for those who hold the view that there is not enough gold to serve as money in the modern economy. What has all that gold done throughout the millennia? It has been traded in one form or another, but it all remains. Gold is perhaps one of the most guarded metals of all times, valued and retained in some type of circulation despite all the efforts of governments and banks to hoard it and restrict its movement.
Like the economic policies we contend with today, the monetary policies are simply a product of ideas, which have, for the most part, been popularized and thus accepted as factually true. It constantly amazes me that so many people rarely question anything they are told, but accept it at face value despite proofs to the contrary. Even the entire organization of the modern economy is based upon popularized ideas, accepted without much question, especially today.
The entire concept that there are monetary requirements within the economy that somehow exceed the supply of gold, hence there must not be enough gold to serve such an economy and maintain or expand its growth. So many seem to accept this concept without further inquiry. How odd it is that governments and their economists promote such concepts, well perhaps it is not odd at all, but should be expected since governments hate the limitations of gold upon their centralized planning. Of course, most people appear eager to accept such axioms and accept, again without questioning, the idea that the function of government is both to issue and therefore regulate the value of money through central bank planning and policy. Many are most dogmatic in such beliefs that any departure from the idea that there is simply not enough gold to serve the economy is heresy or perhaps worse, that it is nothing more than a fantasy.
The fact is that under a gold monetary system there is no need to regulate or manage the money supply, the market does that perfectly well itself. The free market determines both the demand for and hence, the supply of money circulating within the free economy. An expanded money supply, as with the fiat monetary system, does not, I repeat, it does not equate to greater wealth or overall prosperity in a country; the opposite is true about the expanded supply of fiat money. Perhaps one of the greatest reasons that the expansion of fiat money does not equate to greater prosperity is that as it expands its purchase value declines. Fiat money eventually develops an impotent utility, whether it is issued by a central bank or directly by a government, the results are the same. Fiat currencies always tend to generate economic booms and it will always, without exception benefit debtors since it gives the illusion of wealth and affluence, but these benefits are short-lived as economic distortions, so prevalent in managed economies, present themselves and expose the true nature of the so-called wealth created through fiat monetary expansion.
Without such monetary inflation the government would be limited, unable to employ vast hoards of bureaucrats, new programs, agencies and the accumulation of hard assets throughout the country. Fiat money is a favorite tool of politicians, it allows them to easily reward their supporters and assure their constituents remain faithful to their political cause.
As Mises and Rothbard stated, correctly I might add, the increase of the fiat money supply confers no actual benefit whatsoever. The real problem with such increases is that it simply redistributes both income and actual wealth. It is also responsible for numerous economic disruptions, mal-investments and the misallocation of economic production.
The fact is that even the expansion of a gold monetary supply will not directly impart a social benefit; only the expansion of the use of gold money imparts a social and therefore economic benefit to society. Thus, in an actual free market economy where gold is money, the total stock of money is irrelevant as long as there is no government intervention in the market or government regimentation of the gold supply. The market will always, without exception, determine the proper supply of gold money to the demand of the market.
Perhaps one of the most amazing qualities of gold money is that any given quantity will render full utility as a medium of exchange within a healthy free market economy. Remember, it is not the quantity of money that imparts social benefit, but the quality of that money and the exchange fungibility of that money that imparts the social benefit. We are so accustom to thinking quantity that it is difficult for most people to grasp the concept. Free market economics, without government intrusion, will regulate the purchase value of the money as it is utilized. Thus if the stock of gold money is large the purchasing power will adjust downward; conversely, it the stock of gold money is small the purchasing power of the money will adjust upward.
While we tend to “fear” inflation and deflation today, the fact is that a degree of both inflation and deflation in a free market economy is not only to be expected, but welcomed since it is a correcting factor within a free market to bring about equilibrium. Contrary to the opinions of those who support a fiat currency system, there is absolutely no wealth that can be neither created, nor economic growth achieved simply by changing (i.e. expanding) the supply of money within the economy; in other words expanding that supply. That is not the way wealth or economic growth is created. Gold money is simply the means of exchange upon which growth and wealth become mobile within the economy. Amazingly, so many people, especially those in our government, actually believe that it is necessary to expand the money supply to create prosperity when the fact is that the expansion of the fiat money supply, along with the myriad of ancillary policies, only serve to depress prosperity.
Money is only the medium of exchange, nothing more. Adding to the supply only dilutes the purchase value of the individual units of money causing an impotency of exchange. The fact is that the only thing that actually enhances prosperity is when money of full purchase value, such as the asset value of gold, is used as a medium of exchange in the production of both consumer and capital goods within the economy.
Factually, there is more than enough gold in existence to use as a medium of exchange without ever mining another ounce. It should also be noted that even when gold is used as money, it does not, nor has it ever consumed the supply of commodity gold in the hands of people around the world. No one melted his or her gold jewelry when gold was used as money. Why? Perhaps because the supply of gold money, at least under a free market system, was ample to generate wealth in society. The only thing that mining gold does is enhancing the commercial use of gold, not the monetary use of gold.
It is important to understand that both gold money and fiat money adhere to the economic principle known as the “law of costs”. As such, gold has always retained its relative value opposed to paper fiat money which will always, without exception, eventually revert to the value of the commodity it is made from: paper! Economists, at least orthodox economists such as of the Austrian School, recognize this long standing law which declares: “over the long-term, the market price of freely reproducible goods tends to equal the costs of production.” The “law of cost” is equally applicable to gold money as it is to paper money; neither is immune to this economic law. The dangerous propensity that paper fiat money has is that its exchange or purchase value must be artificially maintained far above the costs of manufacturing it otherwise it will be exposed for what it really is: worthless paper. The problem, of course, is that governments cannot restrain themselves or their expansion to keep paper fiat money at a consistent or high purchase value, thus fiat currencies always fail and the economies built upon such systems collapse.
There are always those who raise the question about the proper supply of money and are quick to question if the supply of gold is sufficient for a massive economy. Amazingly, they cannot place a realistic or objective factor that could determine the demand for money; therefore it is impossible to determine the proper supply of money. There is no economist, no central banker or politician who has either the power or the ability to determine the proper supply of money, either fiat or gold money for that matter. Only the free market can make such a determination and it is powerful enough to manage it without government or central banking influences. The simplistic view held by so many people is that the supply of money must be massive or must be able to be expanded to meet the ever-expanding needs of the economy, thus the importance of government and central banking regulatory power to ensure that the money supply is well-managed. Of course, demand for money, at least in a free market, is based upon value judgments, not objective facts that can be qualified by a central bank or politician.
Perhaps the greatest illusion created through the fiat monetary system is that of face value. Most people today look at the face value of money and equate that face value with actual value, or purchase value when that is completely false. Yet, such illusions only serve the political and elite class, not the prosperity or freedom of the People.
In a sound monetary system working within a free market, the demand for money is completely connected to the purchase value or quality of that money. That is not the case in a fiat monetary system since very few people understand that the face value of such a monetary system always conceals the true value of the currency.
Economically, the nature of gold money is such that, even with savers and investors, in every transaction the buyer of a product or service reduces his monetary holdings while the seller of a product or services increases his monetary holdings, which, in real terms means that the money stock has remained unchanged through the myriad of economic transactions taking place at any given moment. The production of wealth therefore, is not dependent upon the supply of money, but upon the actions of those who use that money to produce and the actions of those who purchase those products. As such, all potential buyers and sellers are guided by their subjective valuation they place on the economic benefit allowed by the medium of exchange (i.e. money). Thus, all economic expansion, at least in a free market gold monetary economy, is not dependent upon an expansion of the money supply, but only the quality of that supply and the use of that supply as transactions take place within the economy.
After all, look at the current economic condition of this country; if the expansion of the money supply actually created wealth then every person in this country would be genuinely wealthy. Unfortunately, that is not the case, and it is particularly not true of fiat money, no matter how expansive the supply may be.
To Be Continued…