The deep myth at the heart of the gold standard
AEIdeas
One political/policy fallout from the Global Financial Crisis — and the accompanying monetary easing and rise in public debt — has been the reemergence of the gold standard as something the center-right talks about. Unlike the fiat money US dollar, a gold-backed dollar — a dollar linked to something tangible — would prevent monetary mischief by government.
On a recent EconTalk podcast, this issue came up as host Russ Roberts chatted with Yuval Harari of Hebrew University, the author of Sapiens.
Harari: Modern money has no value in itself. But as long as everybody believes in the same authority — let’s say, the Federal Reserve in the United States — and everybody trusts the stories that are told by the Federal Reserve and by the Treasury and by the President, then this trust enables them to trade effectively. At the most basic level, I think all money is made of trust. It can be in physical terms, money can be gold or silver or paper or even electronic data. But at a deeper level, all money is made simply of trust.
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Roberts: I think a lot of people have a misunderstanding of where the value of money comes from. I think you have it almost 100% correct, and I think you have an insight that is, that is very, very deep about money and I want to get to. … Because most people think, ‘Well, there is value to money. There used to be — because it used to be backed by gold.’ And it’s no different today. ‘Backed by gold’ doesn’t have any meaning whatsoever. It’s still a trust system. What the ‘backing by gold’ did was make it more probable that you could trust it, as long as there wasn’t a lot more gold discovered. And so I think people don’t like paper money. They want real money. There’s no such thing.
Harari: Gold, just like paper–I mean, you can do more things with paper than with gold. Today in electronics maybe you can do something with gold. But for most of history, gold was a completely valueless metal. The only things you could make from gold were artifacts with cultural value, like jewelry or statues or crowns. You couldn’t make a sword or a plowshare out of gold. It’s a very soft metal. … The only value, again, is people trust it.
There might be a reasonable case for returning to the gold standard — I’m not a fan — but it’s really just another trust-based currency and should evaluated as such.
An important value of paper money is that it is mandated by the Federal government for paying taxes.
Are you sure about that? Except for a little pocket money, I never touch cash. Everything happens electronically with the rare exception when I write a check.
If tomorrow all money were backed by gold, how would I know the difference?
It all depends… on the stability of the government and social structure, the pressures from externalities, and the availability of basic resources.
There is nothing intrinsically valuable about gold other than its demand for some electronics and jewelry applications… certainly not to the level at which the metal is stockpiled.
Paper money and electrons are certainly all based on trust which can go bust in times of great crisis; e.g. Germany in WWII.
The only medium exchange with intrinsic value is bartered goods which are inefficient and chaotic in normal times. If the doomsayers are correct, then guns and ammo, alcohol, food, and medical supplies are the bottom line when all else fails. Hopefully, we are nowhere close to that.
People should read Alan Greenspan’s 1966 essay “Gold and Economic Freedom” first. Quite the eye opener.
Whatever its flaws, Irredeemable government-issued money is backed by far more than mere trust. It is backed by that government’s tax and police powers. Fail to pay taxes in the money issued by the tax-levying government and you risk being sent to prison.
One problem with the current iteration of fiat money is that the gatekeepers, member banks of the FRS, have developed a lucrative system where they skim against the labor and risk taking of the rest of us. I am becoming more receptive to a basic income approach to creating money. It puts the financial industry on an equal footing to the rest of us. Right now, they are first in line for profits, with no risk of losses.
Trust is certainly fundamental, whether it be in the fiction of an all powerful government or in the value of an otherwise useless metal.
Maybe that’s why we punted and print it with “In God We Trust”–as if that made it any better.
Gold has been synonymous to money for most of human history. Fiat money essentially steals from most of us and enriches the elite. The main difference is that fiat money can be manipulated and created in endless amounts.