You Got to Be Kidding Me!

The Golden Rule

Posted in Economics, Politics by Stacy McMahon on February 28, 2009

So I was listening to C-SPAN Radio this afternoon, and Ron Paul was talking. He started off with a great libertarian take on the GOP’s current situation. Among other things, he said that Obama talked a good game about ending the Iraq war before he was elected, just like Bush talked a good game about ending “nation-building” before he became president and initiated two major nation-building projects. It was a great speech.

Then he launched into a rant about how the Federal Reserve is a plot to take away our freedom, the monetary system can’t possibly work, and justice can’t be restored to the universe until only gold and silver are legal tender.

Gold Standard believers tend to sound like conspiracy theorists, especially when they spin vague conspiracy theories about how central banks and monetary policy are tools of de debbil in his war for our immortal souls. The thing is, if big government is de debbil, then they sort of have a point.

Sort of.

There’s nothing magic about gold. It’s shiny, and as a group we have 4,000 years of social conditioning to believe it’s valuable. And it does have intrinsic value. Gold doesn’t corrode, break, flow down the drain, or evaporate on a hot day. It’s neither flammable nor edible. If you put an ounce of gold under your mattress, in 1,000 years it will still be an ounce of gold, exactly as it was when you put it there. You, meanwhile, will be gone with the wind.

And if that works for one ounce of gold, then it works for two ounces, and three, and ten, and so on. If you have three pieces of gold and I have four, we have a reliable way to compare what we have. And it will be mean the same thing tomorrow, the next day, and any day after that.

To put it another way, gold’s durability makes it an excellent medium for storing information. Better, maybe, than paper – though the stuff they print money on is pretty tough. But how about bits and bytes? The thing is, money is basically a point system, so any reliable way of storing everyone’s point total will do.

That said, there is at least one argument in favor of the gold standard, and it’s an important one because it’s precisely why governments prefer paper money. If gold is the only currency, then the world’s money supply is controlled by exactly one thing – the amount of gold people can dig out of the ground. But if gold isn’t the standard, then the money supply is whatever the people with the printing presses say it is.

He who gets to print money is king, and it’s good to be king. Let’s say you took out a mortgage last year for $500,000. This year, you realize you can’t make the payments. Now, you or I would have a couple of options. We could take a second job, sell some stuff and cut back on other expenses, or sell the house and find a less expensive place to live.

But if you can print money, you have another option. You can print money until there’s twice as much money out there as there was last year when you took out that mortgage. Twice as much money means each dollar is worth half as much, so now your mortgage is effectively just $250,000. Great, right? Except that everything that’s valued in money is also worth half as much. For example, everyone’s salary. And to make matters worse, anything you import from foreign economies now costs twice as much. If you’re the USA, that includes gas and heating oil. Some workers might be able to step up to higher-paying jobs, but most will make minimal gains (if any) and retirees are just going to have to get by with half the real income they had before inflation.

But it works out great for politicians, who can ensure their reelection by running up the public debt to pay for patronage programs (or ‘pork’) and then printing money to pay down that debt. Rinse and repeat. The best part, for them, is that the more the government devalues the currency, the more the people – most of whom don’t quite get how this works – will appreciate the government spending programs. The worse things get, the easier the sell is. We’re from the government, and we’re here to help!

Maybe Ron does have a point…

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3 Responses

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  1. lekowitz said, on February 28, 2009 at 5:44 am

    Nice post. I want to add that ‘bits and bytes’ money would mean we would find it more difficult to buy illegal things. I could barter for my weed, but I’d rather just pay cash. And who knows what the government plans to criminalize in the future.

  2. Clint said, on February 28, 2009 at 7:03 pm

    no cash = fascism

  3. […] Standard v Fiat Money Posted in Economics by Stacy McMahon on March 1st, 2009 So besides my last post, I also had a status msg on Facebook with my reaction to Ron Paul’s rant about gold. Among […]


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