Returning to the Gold Standard is Foolish
Returning to the Gold Standard is Foolish

By Daniel Goldman | Politicoid | 28 Dec 2019


It's also brilliant.


In 1933, the US government wanted full control over the ability to manipulate and create its currency, and so it largely abandoned the gold standard. No country in existence today relies on the gold standard. Some argue that the government simply needs to be able to control the supply of its currency in a more direct way. But there have been so many issues that have arisen because of the choice.

If governments could treat their monetary supply responsibly, things might be different, but unfortunately governments tend to spend, and they create more money just to be able to spend more. As a result, government issued fiat currencies have become significantly devalued over time. The US dollar in particular loses roughly 5% in purchasing power, year after year. Since 1964, it’s lost about 90% of its purchasing power. Such inflation leads to other issues, such as a disconnect between wage growth and cost of living increases. 

Because of these kinds of issues, some want the country, and the rest of the world, to return to the gold standard. Unfortunately, a lot has changed since the early 30s and it’s really not practical to return to the standard, in its traditional form. The biggest issue is that there simply isn’t enough gold. The global monetary base is roughly $12 trillion, while the total amount of gold mined throughout history has a current value of roughly $12 trillion as well. It would take every ounce of gold mined just to back the current monetary base. 

Can’t we just let gold increase in price until there is enough of it to back our currencies?

It might make sense that if there isn’t enough gold at around $1,500 an ounce, we could just let gold deflate until it’s value is enough that there is enough gold available. Gold could of course just blow up to $100K an ounce and then there would be enough, but that’s not practical. While in some ways the relationship between gold and the USD, or whatever other government issued fiat, is arbitrary and it may make sense that we could just let deflation happen, such deflation would have many drastic consequences that makes the idea unfeasible. 

For one, it would drive the price of jewelry that uses gold up by roughly that amount as well. A 14K gold ring that costs $150 or so now would cost over $10K if gold deflated by the desired amount. Someone might spend $150 on a nice little gold band, but not $10K. That’s almost enough to buy a car. Such price increases would drive jewelers out of business, and essentially eliminate gold based jewelry. It would also drive up the cost of electronic equipment that relies on gold in its production.

Essentially all demand for gold, aside from government demand, would cease. Industries associated with gold would crumble, and gold mines would essentially just become entities dependent on the government to function. So in trying to bring us back to a gold standard, such actions would actually destroy consumer use and holding of gold. 

But Hasn’t Gold Risen Before?

It’s true that gold has increased by a significant amount, in terms of USD pricing. The same is true for silver, which is one reason why we know that the USD is such a sh*tcoin. However, what would have to happen here is not just an increase in fiat pricing, but rather an increase in purchasing power to cover the purchasing power of the monetary base. Imagine two troy oz of gold being able to purchase a small house or a 14K gold wedding ring being the same price as a used car. That's the kind of price increase that would need to happen. And it would also have to happen over a short period of time. Indeed, it’s because gold has a rather stable purchasing power, in terms of other goods and services, that it’s so useful. A rapid increase in the cost of gold, in terms of other goods and services, would be incredibly destructive. 

Satisfying The Gold Bug in Me

I’m not going to deny it. I’m a gold bug. I love gold, and silver as well. They’re great materials. They have a lot of intrinsic value, in part because of our own evolutionary history driving us towards liking shinies, and also because of its industrial uses. Gold and silver should be available as a form of currency, and laws preventing it are disgusting. But I have to reconcile my desire to see gold as a currency with my understanding of the limited availability of the shiny metal. 

I also like crypto, but it really does suffer from its own problems. There’s little intrinsic value in these virtual assets, and if the blockchain fails, we have nothing to show for it. Luckily there are ways to enjoy the best of both worlds. And there are a number of options. There are a few gold backed cryptoassets already. Most of these systems unfortunately work the same way the gold standard did. But we can’t use a system that relies on having physical holdings equal in value to the amount of currency in circulation, not only for the reasons mentioned above, but also because we would need to trust that the organization always has a proper amount of gold in storage. 

Luckily there are indirect ways to peg a cryptoasset to the price of gold, utilizing trusted oracles, and various contracts. DAI uses this system to peg its Ethereum based token to the purchasing power of the dollar. A similar method could be utilized to peg a cryptoasset to the purchasing power of gold. This system, unlike a dollar pegged system, would allow for a truly stable currency, associated with an asset of real world value, without needing to have so much of the real asset that it would deplete the world’s supply.

A Golden Future

The system of government issued fiat needs to end. Unfortunately, a pure gold backed system just isn’t feasible. It would destroy industries connected to gold. And up until recently, we really didn’t have the option of returning to the gold standard. It is odd that a virtual monetary system, which is completely disconnected from real world assets, could give us the option of returning to the gold standard, but it can, and hopefully over the next few decades we’ll take advantage of this system.

In the future, we may very well hold gold, as well as silver and other physical assets in our pockets, and in our safes, and use physical gold and silver when we want to make certain purchases in person. But we would also keep a gold backed currency in our virtual wallets, moving around these assets just as easily as we would if the currency were a purely virtual one. In this way, many purchases can remain anonymous, and we can continue to hold tangible assets with real world value, while also being able to take advantage of all of the benefits of a digital currency when we want or need to. It will truly be a golden future.


Daniel Goldman
Daniel Goldman

I’m a polymath and a rōnin scholar. That is to say that I enjoy studying many different topics. Find more at http://danielgoldman.us


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