The nice thing about being a libertarian is that I have front-row tickets to the very best conspiracy theories. Other people have their George Soroses, their global warmings, their corporate shadow governments and their Koch brothers. We have those too, but we go one better: we go gold.
Gold has a long history in human commerce. It fulfills all the requirements for money: it is limited in quantity, it is easy to standardize, to transport, to divide and measure — it will not corrode or die. For some mystical reason, humans like gold. It is pretty and shiny and has a nice mellow tone when you whack it.
In one form or another this has been enough to ensure gold’s use in the economy since the dawn of human history. Governments have experimented with other forms of currency from time to time, but most nations reverted to gold (or a bag of precious metals) eventually. It was only in the first half of the 20th century that nations as a group turned from backed money to fiat money, which is money that exists by legal imperative, or “fiat.” Fiat money has no intrinsic value; it is good for nothing other than a means of transaction. “Backed,” or commodity-based money is money that has value and utility aside from its use as a means of transaction. Believe it or not, huge conflicts have been fought over the difference.
The advantage of a fiat currency is that it is not limited by the availability of any particular commodity. It can be expanded to keep pace with economic growth to minimize deflation, it does not face shocks due to large amounts of the commodities entering or exiting the economy (California gold and Nevada silver rushes, anyone?). Its lack of intrinsic utility means it will never get melted down for its metal content.
The advantage of commodity-based currency is that it is limited by the availability of particular commodities. The value of its component sets a lower threshold for its total value, ensuring that its trustworthiness is not restricted to the apparent trustworthiness of its associated government. Governments and banks cannot issue unlimited amounts of currency to fund wars, takeovers, or expensive programs.
In the early stages of the Great Depression, President Roosevelt issued Executive Order 6102, which kind-of-sort-of confiscated gold coinage from citizens and into the national treasury. He then revalued gold from approximately $20 per ounce to whatever seemed expedient, thereby expanding the dollar value of the government’s holdings because aggregate demand was imploding and the New Deal required a lot of money.
In 1971, President Nixon closed the Gold Window, ending the ability of foreign governments to redeem dollars for gold at a fixed rate. Before then, other nations could exchange dollars for gold at a fixed (though modifiable) rate. Now the dollar floats free; it is backed by nothing other than the expectations of those who use it.
Dollars can still be exchanged for gold but at a ratio determined by the market; currently around $1,500 per ounce. Beginning in 1965 the metal content of dimes, quarters and half-dollars was changed from silver to cupronickel clads. A silver dime is now worth almost $5.
It all seems very much like water under the Hoover Dam at this point. Gold was confiscated. Stuff happened. We moved on. But we haven’t moved on; the Great Recession has fanned the fires of curmudgeons across the States. A surprising number of people want to return to a backed currency, and certain politicians who will not be named (Ron Paul 2012) have pushed the idea for years because fiat money is a creation of the state and requires the state to provide the stability and security that makes it viable. Commodity money is a creation of the market and requires only the mutual agreement of traders to maintain its worth (though the state provides useful standardization services). The primary point of contest between these two forms of money is this; should the state be “wide,” or should it be narrow? Should money be under tight control or not?
The answer depends on which view of economics reflects your sociopolitical beliefs (there is no neutral school of economics). Fiat currency can be created without bounds so it provides an easy way for the government to spend without taxation. When the price of money is reduced, so is the price of power. The value of a fiat dollar is determined by the total number of such dollars in circulation; inflating the number of dollars reduces the purchasing power of each dollar. By pumping new money into the system as it sees fit, the government can transfer purchasing power from those who have dollars to those who receive them. In this way, a fiat currency allows governments to create an “invisible tax,” shifting wealth without having to reduce anyone’s number of dollars. To hold the keys to such power must be nearly irresistible.
Since the value of a commodity currency is based on its metal content, government redistribution is difficult. For better or for worse, the government can only redistribute what it first gets its hands on. A commodity-based currency is therefore one which encourages the evolution of the status quo and discourages external interference.
If the government should widely transfer wealth then it should have the tools to do so; if not, then not. What is important is to realize just how tangled and messy the topic of money is.
Economics is a deeply ideological field and all claims deserve to be soberly questioned. More often than not, we take the default path because someone (perhaps we ourselves) has a vested interest in us taking it. The beliefs we hold deserve to be the products of honest struggle.
Even as commodities, gold and silver act as currency, rising in response to demand as the world loses confidence in the major fiat currencies. They’re not investments — they don’t create wealth — but they can be a decent store of wealth.