Gold as Money: FAQ
*Additions and criticisms welcome!*
Here are some responses to common objections about the use of gold as money:
1. There simply is not enough gold for it to be used as money.
This is just like saying “we cannot possibly measure the size of microbes because inches are too large”. An excellent counterpoint to this line of thinking is to ask “what amount of gold will make it acceptable for use as money?”
Once a money is established, any stock of money becomes compatible with any amount of employment and real income. There is never any need for more money since any amount will perform the same maximum extent of needed money work: that is, to provide a general medium of exchange and a means of economic calculation by entrepreneurs. [Source]
The total amount of gold that has ever been mined is 142,000 tonnes. If half of that gold disappeared, it would still be viable to use as money, and prices of goods would simply adjust downward to fit the quantity of money.
2. At current market prices, all the mined gold on earth is worth $4.5 trillion. This is much less that all the currency that has been printed in the whole world!
The price of gold in terms of pieces of paper is irrelevant. After all, fiat currency notes can be printed with very little effort at all. For purposes of transition, the price of gold can be adjusted (by fiat if necessary) to that all central bank money holders can convert their money into gold.
3.What’s stopping you from using gold as money now?
Legal tender laws. Central bank money is legal tender for all debts, public and private. Your taxes are payable in central bank money. Contracts in gold coins will not be defended in the same way as contracts in dollars or euros (e.g. if somebody defaults on a gold contract, compensation may be payable in central bank money)
4. The money supply must grow at the same rate as the economy.
No it doesn’t. Prices are not independent of the money supply. The quantity of the money supply overall does not matter (See 1.). If the amount of goods and services increases, while the money supply stays fixed, prices of all goods and services will fall.
5. But deflation is bad, isn’t it? If the purchasing power of money constantly rises, doesn’t that mean an end to investment? Entrepreneurs will surely prefer to safely hide their money under the matress instead of taking the risk of investing.
Falling prices are surely a good thing!
The answer to the second question is no. While it is certainly “risk-free” to keep your money under the bed, it comes with a very real opportunity cost. Investors have a peculiar trait: they prefer goods in the future to goods in the present. In other words they forego consumption today and prefer a larger return later.
So a deflationary economy a nominal return (i.e., $1) becomes $1.10 when repaid compounds the real return (i.e., the purchasing power of $1.10 is now $1.21)
The desire for future goods may increase the desire for investment.
6. When did falling prices ever coincide with economic prosperity?
The period between 1873 and 1896 in Germany and the United States was a time of deflation. Prices for goods fell at an annualised rate of 1.6%. Gross Domestic Product grew at an annualised rate of 3.6%.
Innovations in manufacture, chemistry and railroads made the 1880s the most productive decade in the history of the United States – and one of the most prosperous.
Rothbard, Murray N.; The Case for a 100 Percent Gold Dollar
Hulsmann, J. G.; Deflation and Liberty
Hoppe, Hans-Hermann; The Misesian Case Against Keynes
Measuringworth.com (charts and figures)
Hat tips to Graham of the Irish Liberty Forum for his insights here.
Cheers to David Z for his insghts here.