Gold’s slow-motion comeback as money rapidly accelerated in 2022. Ghana announced it is looking to buy oil with its gold instead of using US dollars. The Chinese have revealed their vast gold purchases as they diversify away from the US dollar.
And the Russians pegged their currency to gold, with the chairman of the Duma committee on energy demanding that nations looking to buy Russian energy, “pay either in hard currency, and this is gold for us, or pay as it is convenient for us.”
But the naysayers are hardly going away. So, let’s review their top 10 favourite reasons why gold just can’t keep up with fiat money. Well, my version of their arguments, anyway…
Number 10: there is not enough gold (or silver) in the world to serve as money
Let’s begin with the obvious. We know that central banks the world over have printed money at near-exponentially growing rates for years. There is now so much paper and electronic money floating around the world that gold (or silver) cannot possibly be expected to keep up with this wonderous expansion.
You can’t print gold, after all: you need to find it, dig it out of the ground, refine it, etc. That’s a hugely expensive and time-consuming process which practically ensures a stable rather than exponentially growing supply of the stuff.
Of course, we know that an exponentially growing supply of money is a good thing. How else can an economy hope to grow, especially one bearing an exponentially rising debt burden? We need all that new money to pay all that new interest, don’t we?
And don’t forget, most things keep getting more expensive, like food and fuel. Don’t we need more money to pay for all that too?
What about government entitlements that keep growing in size? If we didn’t have a constant flow of new money, how on earth would we pay for all of that? It is essential that we keep the printing presses rolling. And gold prevents that.
Number 9: gold and silver are old-fashioned and cumbersome
Here’s another obvious one for you: Gold is HEAVY! Who wants to carry gold coins around? They might be nice and shiny, but to me, gold looks even prettier around a lady’s neck or wrist.
The more you think about it, in an age of electronic, plastic or internet money, the whole concept of coinage begins to seem a bit anachronistic. Who even uses small denomination coins anymore, except as household poker betting tokens? I suppose larger coins are still of some use, but let’s face it folks, even those are almost worthless anymore. Coinage is just so passé!
Sure, coins used to have some value. When I was young and I watched Little House on the Prairie and The Waltons, I was amazed that at the general stores or other retail establishments a penny actually bought a range of items and with a few nickels and dimes you could purchase much of what was on offer!
But why bother with coins today? I use plastic or electronic money for almost everything. Sure, that money still references dollars, or euros, or sterling, or yen balances of a bank account. But hey, it would be just so barbaric to reference a gold or silver account instead, wouldn’t it? As if banks even hold enough cash on hand for large withdrawals anymore, much less gold or silver.
Oh, and an ounce of gold, at a whopping $1,700, is just way too expensive for most commerce.
So, not only is there not enough gold in the world as per Number 10 above; what gold there is, is too expensive to serve as a useful money!
I suppose that we could use fractions of ounces of gold instead of full ounces, but most people struggle with fractions, including me. Silver might be more useful, but at over $30/oz, it wouldn’t really work for making change now, would it?
Number 8: gold restrains economic growth
OK, this reason is a little bit wonkish, but if you’ll bear with me, I’ll explain why gold-backed money would put the brakes on the healthy growth the world has been experiencing all through this prosperous modern period of an exponentially rising money supply: indeed, it might even send us back to the poor house.
We already touched on this with Number 10, but let’s go off on a tangent here. You see, back when gold was money, people were poorer. Way poorer. And economic growth was often much weaker.
I mean, before the Industrial Revolution, we didn’t even have machines to do basic work like farming, so people had to have loads of children just to get basic work done, resulting in a cycle of poverty. Sure, a handful of landed aristocrats held most of the wealth, and they did just fine, but really, do we want to go back to that sort of wealth disparity?
And as for the Industrial Revolution, it was such a fluke. Sure, it led to the most rapid economic growth in history in most of Europe, North America and Japan, but it would probably have been way more rapid had money growth been exponential instead of stable at the time.
That said, inflation didn’t actually work out so well in France, where exponential money growth destroyed much of the economy in the late 18th and early 19th centuries. But hey, how else to finance that Revolution of theirs?
The American Revolution was also hugely inflationary – those worthless continentals and all. But wasn’t it a huge overreaction for the US federal government to choose silver coinage as the inaugural US federal money?
For that matter, had Napoleon just kept on inflating, rather than paying his soldiers in silver coin, he might have won the wars against us Brits and others who refused to inflate their currencies.
And why did the Americans experiment with gold- and silver-backed money for so long? Imagine how much faster they would have industrialised had they just kept on printing continentals instead! Ah well, hindsight is 20:20.
Perhaps technology wouldn’t exactly regress if we went back to gold- or silver-backed money, but you never know. Some people talk like that. And certainly most of the innovations of modern times would never have taken place had we been on gold-backed money.
Think about all those green technologies that promise to solve our energy problems someday. Things were just fine before we started consuming all the carbon stuff and now we’ve got to get back on track. Only exponentially growing money can fund these programmes that aren’t yet profitable.
Imagine what would happen if money were backed by gold? We would be dependent on energy and other technologies that actually made fundamental economic sense. No, that would be a huge mistake.
Number 7: the gold standard caused the interwar depressions
It is blindingly obvious that the gold standard was the cause of the interwar depressions. Not WWI. Not the massive inflation to pay for WWI. Not the widespread destruction of European industry. Not the Russian Revolution and industrial collapse. Not the 1920s hyperinflations and revolutions in central Europe. Not Churchill’s decision to re-peg to gold at the pre-war rate. Not the Fed’s stock market bubble of 1927-29. Not the Fed’s failure to allow the money supply to expand naturally with gold reserves in 1930-31. Not the artificial wage supports introduced by President Herbert Hoover and continued by President Franklin Roosevelt. No, the gold standard caused it all. Really. It did.
Number 6: rules can be broken
Returning to the obvious, this reason is so simple a child can understand it. Rules are nice on paper, but we all know they can be broken. Just because a country is on a gold standard doesn’t mean it can’t just devalue and leave.
Britain and Germany did so in 1914 and inflated like crazy to pay for WWI. The United States devalued the dollar some 60% versus gold in 1934 and left the gold standard entirely in 1971.
Let’s face it, if rules can be broken, what’s the point of having them in the first place?
The claim that gold-backed money is stable and prevents runaway inflation is just hogwash. Whenever governments choose, they can ditch gold-backed money, devalue and create as much inflation as they desire. They can even hyperinflate if they like. What’s to stop them? They set the rules. Gold advocates are just so naïve!
Number 5: gold-backed money favours the United States versus the rest of the world
For those of us residing outside the United States, we’re sometimes concerned that the country has the largest gold reserves in the world. If the world went back on a gold standard, then the United States would be even more powerful than it already is.
It would throw its weight around even more, use that gold to pay for an even larger military and open up more bases abroad, including places where they aren’t even wanted, like in Bulgaria. The United States might even start more wars, as if it hasn’t started enough already, financed as they are with the Fed’s printing press.
Now history does suggest that war and inflation go hand in hand. Certainly this was the case in the 20th century. The French Revolution and Napoleonic Wars were hugely inflationary in continental Europe. The Thirty Years’ War was hugely inflationary too, ruining the previously prosperous Habsburg economies. Then there was the American Revolution, financed with those paper continentals.
But today, things are different. Really, they are. If the world were on a gold standard, there would be more wars, notwithstanding that these would be far more difficult to finance.
On another note, the US economy imports far more than it exports. Wonks call this a “trade-deficit”. Really wonkish types have a more expanded term called a “current account deficit”. If the world went back onto a gold standard, then the United States would need to use its gold reserves to pay for net imports, instead of just printing more dollars. And at current gold prices, the United States would not even be able to cover one year of its current account deficit!
Imagine, the United States would be unable to keep importing more than it exported! It would be forced to become a more competitive economy and it would need to save and produce more and consume less! The horror!
We all know that the US consumer is the only thing keeping the global economy afloat. To whom would China or others export if not to the US consumer? What a ridiculous idea!
Well, it’s just not going to happen. Keynesians like Paul Krugman know that there is just no other way to grow economies than with exponential money growth to finance consumption. Saving is the quick road to the poor house.
Borrowing your way to prosperity has worked so well in the past, why would anyone possibly want to stop now? After all, savings is the four-letter word of Keynesian economics. Let’s just not go there.
Number 4: gold favours gold-mining countries over others
If you go back to gold- or silver-backed money, you are providing a huge subsidy for those countries producing the money. Why give them the printing press, when we can keep it for ourselves?
Remember, the power to print exponentially rising amounts of fiat currency is the key to economic prosperity. We don’t want countries rich in natural resources to benefit at our expense now, do we?
Sure, many countries rich in gold are in Africa or other underdeveloped regions. They’re poor. They’re backward. Some are near-dictatorships. Many dictators depend on us and our foreign aid, financed as it is with our printing presses. Why, if we could no longer print that foreign aid into existence, these poor countries would have to help themselves instead! No, they’re just too backward for that.
Imagine that the value of gold and silver mines in Africa and other poor parts of the world soared as these metals were re-monetised. Why it would be like what happened to the Persian Gulf countries when oil became a highly valuable commodity back in the 1970s. They became rich! Today those economies are among the wealthiest in the world. They mostly export far more than they import and they have built up huge sovereign wealth funds for the future.
But Africa being as screwed up as it is, they can’t be expected to spend their wealth responsibly. They need the United States, UK and other countries to show them how to do it. Like what gas-guzzlers to buy. Or how many flat-screen TVs per McMansion to have. Or how to administer a post office, or a national railway system, national health service or quality state education.
No, rebalancing global wealth toward Africa and other poor regions is bad enough. Giving them control over their own wealth is just plain irresponsible. We shouldn’t do it and so we shouldn’t return to gold-backed money.
Number 3: gold favours the rich
Notwithstanding the observation above, today most gold and silver privately held is in the hands of the wealthy. They’re already rich, why should we make them even more so? Wealth inequality is a serious problem, why make it worse?
We all know that exponential fiat money growth in recent decades has helped to prevent even greater wealth disparity. Sure, in much of the world, the wealth of the top 1% has risen exponentially relative to the middle-class since the 1970s, when the world went off the gold standard and the age of exponential money growth began, but that is mere coincidence.
It is true that real wages grew quickly under the gold standard, which created the largest middle-class in history, but even then there were those nasty Robber Barons who became far richer than they deserved. Some of them were enlightened enough to realise this, like Andrew Carnegie, who gave away most of his fortune.
Economic progress is OK as long as people don’t get too rich from it. So let’s keep creating wealth by printing money but make certain that those that get too rich give it away. Or else.
And no, I don’t think this is the reason for the shrinking middle class. I think that is because, notwithstanding clearly heroic attempts, we are still not printing enough money.
We shouldn’t be too concerned that the banks and owners of capital are the primary beneficiaries of fiat money expansion, as they have first access to the new money. After all, we want our undercapitalised banks to start lending again so we can continue on our borrowing and consumption binge. How else are the banks going to lend us money if we don’t create it in the first place? Sure, we have to pay them interest on it, but rates are low so we shouldn’t care.
Yes, inflation is historically associated with wealth disparity and sound money is associated with a growing middle class. But that was before we came up with the modern welfare state that automatically transfers money from the wealthy to the poor, that is, unless the wealthy find ways around the tax code by creating trusts and endowments, purchasing tax-exempt securities or acquiring assets that tend to rise in price with inflation. But they don’t really want to avoid tax, do they?
Wealthy US investor Warren Buffett, for one, says he wants to pay more tax. Of course he is allowed to do that, as the US Internal Revenue Service has a special facility for those who wish to pay more than their mandated share. Sometimes I wonder why he doesn’t. Maybe words speak louder than actions.
Number 2: PhDs know what’s good for us
We all know that someone with a PhD is smarter than we are. They’ve got the degree to prove it. Some PhDs even have degrees in economics, which is unbelievably complicated. How else could one understand how exponential money growth creates wealth? How you can borrow your way to prosperity and save your way into the poor house? How importing more than you export is sustainable? How coercive central planning is superior to voluntary, free-market exchange?
Let’s face it, we may all be equal, but PhDs are more equal than others. If we didn’t have them telling us what the price of money should be – or the rate of interest if you prefer – we would just lurch from one economic calamity to the next. The Great Depression would seem a cake walk by comparison, as would our current economic malaise, which they say isn’t a depression, even if it feels like it to most.
If you need more proof, just look at those fancy buildings that central bankers work in. They’re impressive. So are the headquarters of the big private banks. These guys are obviously successful and important, so there is no good reason why they shouldn’t be telling us what to do.
They even have a name for what they tell us to do: free market capitalism. I’m not entirely sure what the “free” part of that means, as most things aren’t free, except of course those provided by the government.
The problem with gold- or silver-backed money, you see, is that the PhDs would no longer have the ability to manipulate money for our benefit. And since they know precisely what the supply of money should be, we shouldn’t be concerned that they might create too much of it, or too little for that matter. The exponential amounts they’ve been creating since 2008 are “just right”, as Goldilocks might say.
Also, PhDs have all sorts of fancy statistics that only they understand. This is because they create them in the first place. PhDs are smart enough to do that. So when the Office for National Statistics tells you that consumer price inflation is 9.43%, it doesn’t mean 9.42%. Or 9.44%. No, it means 9.43%.
This precision is important as it determines how many billions of new money those at the Bank of England need to create (or destroy) to ensure that they eventually meet their 2% inflation target. If they’re having trouble doing that, however, it’s not their fault. They’re PhDs.
Number 1: if given a choice, we would always prefer fiat money over gold-backed money
As I’m not a PhD, I’m not qualified to go around telling people what to do.
One suggestion I wouldn’t make is that people should be allowed to choose the money they use. We really don’t need such choice. We also don’t want it. If we did, we wouldn’t have legal tender laws that prevent choice in money in the first place, would we? After all, is choice a good thing?
No, it’s just a source of confusion.
So for all you gold bugs out there, go ahead and purchase some jewellery for your loved ones as holiday gifts. But please, drop all the nonsense about using it as money. Imagine you gave your spouse, or your children, or your relatives, gold and silver coins instead. They wouldn’t be able to use them as legal tender; they wouldn’t be able to wear them as jewellery. Their only “use” would be as that four-letter word for Keynesians: SAVE. What a way to show a lack of holiday spirit. ‘Tis the season to borrow and spend folks, as indeed it has been since the world left the gold standard in 1971.
Contributing Editor, Fortune & Freedom