Friday, October 21, 2016

Thoughts on the Gold Standard

Written on October 21st, 2016

Edited and Expanded on October 25th, 2016

     It has been said that all of the existing mined gold which currently exists in the country, would not be enough to support backing the national currency with gold deposits. I do not doubt that this is true.
     However, I believe that if the federal government were to practice fiscal solvency and responsibility, balance the budget, eliminate the budget deficit, and take steps toward paying off the debt, then not as much gold (and other precious metals; namely silver, palladium, and copper) would be needed to back the currency.
     This is because eliminating the federal budget deficit would make it unnecessary to engage in Quantitative Easing and Operation Twist -type programs, which essentially involve the Department of the Treasury printing new paper fiat currency "out of thin air". As a result, debt is built into the value of the dollar; thus, the value and purchasing power of the U.S. Dollar is diluted, and inflation increases.
     It is this Quantitative Easing, and inflation, and building debt into the value of the dollar, which cause currency users to spend it more quickly than they otherwise would. Inflation causes the money to "burn a hole in the pocket" of the currency user; some call this effect "the inflation tax on savings". The value of the dollar is declining as it sits in Americans' pockets; this gives currency users an incentive to spend money now - or as soon as possible - rather than spending it later, and rather than saving it for the long-term.
     As a result of all this, people spend most of their money to buy ordinary consumer goods that they need on a day-to-day basis; instead of saving that money, and instead of spending their money on things that they will need for the long-term - namely, and most importantly, homes - items that are long-term stores of value.
     It is important to note about gold - and other precious metals - that they have more value in their exchange than they have in their use (at least in terms of productive, personal use to the average person, who possesses the metals for non-industrial purposes). Although gold and silver have industrial uses in electronics - and arguably some personal use in jewelry and silverware - they have little use to the average person, who possesses them for savings purposes.
     These facts render the value of precious metals' uses as currency, greater than their value for productive industrial uses; and it is the conversion of these metals into their productive industrial uses which gives the metals their high store of value as a medium of exchange. Widespread agreement among consumers that goods which count gold and silver (etc.) among their raw materials, are beneficial, is what makes precious metals viable currencies.
     To recap: if the budget were balanced, the debt were paid off, inflation were driven down to zero, and the purchasing power of the dollar were stable and / or rising, then as a result, overall fiscal policy were to incentivize savings instead of immediate spending.
     If that were to happen, then people would be able to devote more attention to spending money towards procuring their long-term needs, such as houses in which they can live for decades (rather than towards obtaining the goods and services which they need every day), then the necessity of engaging in trade and commerce would decrease overall. This is because the more expensive long-term needs could be more easily obtained, due to the positive impact which inflation relief has upon savings. Decreasing sales taxes, excise taxes, luxury taxes, customs duties, imposts, and tariffs, could serve to further offset the disincentivizing effects on purchasing which are created by the "inflation tax on savings" which budgetary insolvency makes seem necessary.
     When people can easily afford what they need, they save more, they spend less value, they don't have to work as many hours, and they have extra time left over to devote to planning their purchases in ways that save them even more time and money in the process.

     With (1) diminished consumer need to buy expensive long-term items, (2) strengthened purchasing power that makes it just as much easier to buy short-term goods (as compared to long-term goods), (3) more money in savings accounts, and (4) less money being spent in the marketplace; less currency would need to circulate in order to ensure that the medium of exchange reaches all the people it needs to, and reaches them in the amounts and value necessary to buy what they need.
     And when less currency needs to circulate, lower amounts of a value-storing medium of exchange  need to exist in order to back up the value of the U.S. Dollar. Simply put, the gold standard would be much easier to implement given successful implementation of the fiscal reform measures which I have outlined above.
     Speaking strictly in terms of the currently dominant paper fiat currency (as opposed to precious metals), less "faith and credit" in the treasury and banking systems are required to prop up this rapidly depreciating, failed, arguably unconstitutional currency.
     Here's to hoping that the value and purchasing power of the U.S. Dollar will be saved before our currency becomes yet another failed faith-based program.

No comments:

Post a Comment