With the recently concluded Republican National Convention, attention continued to direct towards the Clint Eastwood appearance or the Todd Akin interview. This is regrettable given the serious financial issues facing the nation. A little discussed plank of the 2012 GOP platform included the following about the gold standard,
“Now, three decades later, as we face the task of cleaning up the wreckage of the current administration’s policies, we propose a similar commission to investigate possible ways to set a fixed value for the dollar.”
Anytime a discussion of the gold standard emerges, there is a chorus of those (often economists) denigrating its adoption since it is considered a “relic of the past” or simply a precious metal for use in jewelry. Peter Schiff, President of Euro Pacific Capital and author of The Real Crash: America’s Coming Bankruptcy, argues that Americans will demand a return to the gold standard as the economic crisis worsens. Who is right?
To understand this issue, one has to understand the history of money, why it exists and what represented money. In Escaping Oz: Protecting your wealth during the financial crisis, I spent the first chapter, entitled “Origin of Our Problem”, discussing money and wealth. One of the interesting things in this chapter is how the very definition of money changed. Here is the definition of money from the 1968 Webster’s dictionary,
“Standard pieces of gold, silver, copper, nickel etc. stamped by government authority and used as a medium of exchange and a measure of value”
This is what the online version of Webster’s said when I published the book in 2011,
“Something generally accepted as a medium of exchange, a measure of value, or a means of payment”
See how the definition changed? At one time we linked metals, precious or otherwise, to our money and subsequently we decoupled them. In Escaping Oz, I defined money as,
“a medium of exchange, that is a unit of account (something measurable), and a direct store or representation of wealth.”
Money by itself is not wealth but a medium used for the exchange of wealth. If we use money for the exchange of wealth, it should represent wealth. The money we use today whether in the form of credit in banking cyberspace or paper bills and coins does not fit the Webster’s definition from 1968 though it does fit Webster’s contemporary definition. Money today only fulfills two out of the three criteria of my definition. While money certainly is a medium of exchange (everyone accepts it) and a unit of account (easily measurable), it is not a store or representation of wealth. By the last point, I mean that the money we have does not directly represent wealth. At one point in our history, money was a proxy for gold and silver. Why is this significant?
In Chapter 1 of Escaping Oz, I explain why we need money and how money evolved in our economy. The need and the evolution of money is essential to understanding the discussion of the gold standard. Some argue that a return to the gold standard would do nothing to eliminate the cycles of boom and bust in an economy, and they are correct. Money, per se, has nothing to do with cycles of booms and busts. These cycles are a function of human action. People create the cycles, not the existence of money. If, however, we have unit of money that is not a store of wealth (what we have now), then those cycles can be far more severe than they would otherwise. As long as we continue with fiat money, we will have severe cycles of boom and depression. Our current economic depression results from an accumulation of unproductive debt due to the ease of creating this debt, in other words our flawed money.
This debt and its obligations will not be paid. There is simply not enough productive capacity or taxing power to accomplish this feat. What lies ahead is debt repayment and repudiation. If there is nothing to regulate how we create money, since our money is not a store of wealth, we are destined to continue these pernicious cycles. Having a monetary standard will not thwart economic expansion as some claim. The country achieved plenty of growth during times of monetary standards.
If you doubt the value of a monetary standard consider the following. Why do the treasuries of nations continue to hold gold? Why not sell since it is simply a barbaric relic of the past?
Jim is the author of Escaping Oz: Protecting your wealth during the financial crisis.