Gold Standard

If we rely on the knowledge that has been provided by (state) education, we will most likely think that it is something primitive, old-fashioned, and for today's modern times completely unusable; is this really true?

In my previous article “Increasing money supply” you, dear readers, could have read about why the current banking system is harmful, how it damages us, and I have said many reasons for rejecting it as a rotten and despicable instrument of state control and robbery; I fully realize, however, that if I criticize something so categorically, I cannot only be saying that everything is wrong without showing you how things could work differently and better, so in this article I will be talking about the gold standard. And what does that even mean? If we rely on the knowledge that has been provided by (state) education, we will most likely think that it is something primitive, old-fashioned, and for today’s modern times completely unusable; because who would nowadays go shopping with a purse full of gold and separate a half a gram at the cash desk? Those who already know more about this subject, and as a result of which the idea above seems to be an absurd one, I hope they will forgive if I start from the beginning because we are moving to an area where the obscurantism of (state) education system has caused unexpected damages.

The essence of the gold standard is not that people would pay physically with gold, but only the fact that the currency they use is convertible to gold in a fixed ratio; then we say about such currency that it is “backed” by gold, which in practice means that each banknote is a voucher for a specific amount of gold. Even for cashless payments the gold standard is no problem: instead of having dollars or euro in your bank account, you can have, for example, milligrams of gold, which also applies to all prices; when the owner of such an account comes to the shop where he buys a piece of bread for one milligram of gold and pays it with a credit card, this milligram of gold will be transferred to the seller’s account. This does not mean, of course, that all payments are unconditionally cashless because banknotes can be exactly the same as today, except that on the banknote there will not be written an amount in the non-backed currency (such as the dollar) but the weight of gold for which the banknote is convertible. The most fundamental difference compared to the current state is that the bank has the obligation to pay gold for banknotes on request to its money holders; but if the bank is not able to do this, it becomes untrustworthy and is likely to collapse soon. Thus, if one of the banks starts issuing vouchers for non-existent gold and generating money from nothing (which is currently happening today), it risks losing the credibility of customers and also the possible bankruptcy (in today’s system banks constantly lend money they do not have and they can do that, because such money does not have to be convertible to anything).

Often, it is also possible to find the argument of gold standard opponents that there is not enough gold “for the needs of today’s society” so all the world’s money cannot be backed by it. Well, this argument would be valid if the price of gold, expressed in current currencies, could not change; but because such a premise is already nonsense at first glance, this argument about the lack of gold is not correct: if there are X dollars in circulation and if the banks hold a sum of Y milligrams of gold, then if the gold standard was introduced, one dollar would be convertible for Y / X milligrams of gold, and it is almost irrelevant how many dollars and how much gold is involved; in the same way it is possible to back any currency by gold without changing anything except the gold price and the possibility of making money from nothing (the reasons why it is undesirable can be found in detail in the previous article).

Is there, therefore, a need for any state intervention that will force banks to issue money that is convertible to gold? This might be surprising but the answer is NO; it will suffice if the state doesn’t force anyone to accept some currency, create artificial barriers to enter the banking industry, or even save bankrupting banks with taxpayers’ money (which are necessary conditions because if banks earn profits but losses are paid by the state, they will have – and they already have – a tendency to risk more). In the free market, the phenomenon called “hostile clearing” can happen between competing banks; the essence of this strategy is that one or more banks buy the banknotes of another bank and then they demand gold for the notes at one moment. If that bank is not able to meet such a requirement, it becomes untrustworthy and loses its clients, that is a purely free-market tool by which competing banks supervise each other without the need for state intervention; a good example is “Bank of Scotland” and “Royal Bank of Scotland”, which in the 18th century were “patrolling” each other, preventing the economic crises which were affecting neighboring England. Why do the states not leave the banking area and give it to the hands of free people? Well, unfortunately, the answer is very simple: although this would help most of the people, there wouldn’t be a system financing the politicians’ whims and nobody would probably buy the state bonds (under the current conditions and to the extent so far); and which government would purposely lose this option?

Česky: https://www.mises.cz/clanky/zlaty-standard-1544.aspx