Wednesday, March 16, 2011

A Gold standard would not be a cure-all

Some interesting comments on the idea of reverting the US to a gold standard instead of fiat currency:

Another Case Of Severe Recto-Cranial Inversion

The title is a bit inflammatory, I admit. :) Basically, though, the article makes sense. To summarize, proponents of the gold standard posit that it would alleviate inflation due to replacing fictitious fiat money with "real" money, i.e. gold. Inflation would supposedly be alleviated due to the naturally limited supply of gold.

The linked article uses history to prove that this is not what would necessarily happen. Part of the problem is that the supply of gold and the value of gold are two different things. In other words, it is incorrect to assume that something, anything, has some inherent and stable value, when the reality is that virtually nothing does. (Even food and water, which clearly have inherent value, do not have inherent stable value. They also wouldn't be very useful as currencies.) The other part of the problem relates to who controls the supply of gold. Cartels tend to form, and cartels inevitably function for their own benefit, not the general good. They can, and will, manipulate the supply for their own profit.

Consequently, when when gold has been used as a currency in the past, inflation and deflation ran rampant in wildly erratic variation, causing a lot of suffering for a great number of people.

Of course, this doesn't necessarily mean that a gold standard would be a bad idea, it just means that people aren't being realistic about it. It would certainly not be a magical cure-all for our economic woes, most of which are simply the result of human corruption, greed and stupidity.

The article goes on to address what the author believes to be the real problem, namely inadvisable lending. He's probably right.


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