Gold Standard vs. Debt-Free Fiat Currency

Recently, I've been listening to advocates from both the gold-money crowd and the debt-free fiat money crowd. Personally, I've always thought that the gold-standard was the best policy under which to issue money, but I've heard fiat-money supporters make a compelling argument in favor of a debt-free fiat money. In this article, I'm gonna discuss what I think are the pros and the cons of both. First we're gonna discuss two major problems which plagues our money system today which would support the argument in favor of fiat money.

Fiat money supporters believe that the solution to monetary reform would be to grant government the power to issue a paper currency and for government to also control the quantity of that currency. Their belief is that if government were to control the issuance of money, there wouldn't be any debt owed to pay to a central bank. As it currently stands, all money in circulation has to be borrowed into existence through The Federal Reserve (our nation's central bank) with interest attached, which puts government in a debt that it could never repay. That is why I laugh when politicians discuss their plans to pay off the national debt. Their commentary may impress those that don't understand how money works, but I know better. Paying off the national debt would be impossible without taking ALL of the nation's money out of circulation. And if that were to happen, we're looking at a global economic collapse.

This very same crowd also believes that banks should operate under the full reserve lending system. Currently, we operate under what it known as Fractional Reserve Banking (FRB). FRB allows a bank to lend far more than they have in actual reserves. For instance, if a bank holds $100 in actual deposits or reserves, they can lend out $900. When they approve you for a $100k mortgage with a small down payment, they just type the remainder in the computer and the money is there. Essentially creating money out of thin air. The majority of the money in circulation (or that we think is in circulation) was created in this manner. This allows a bank to collect interest on money that they don't even have. A bank can collect interest on $100k while only holding reserves of $1k for that $100k. This scheme works just as long as depositors never withdraw their money in large amounts at once....a run on the bank.

Now that we have those two issues out of the way, let's talk about the gold standard. First, there was the gold standard, in which each paper dollar (note) represented a fixed amount of gold. These notes were convertible into actual gold coins. Then came the Bretton Woods agreement, which worked like this:

Under the Bretton Woods Agreement (BWA), the U.S. Dollar was redeemable in gold (except domestically). The fixed price of gold was $35 an ounce (today gold is $1252.20 an ounce as I type this), and one U.S. dollar was the equivalent of 1/35th of an ounce of gold. During this time, The Federal Reserve could print only enough money to match the country's gold reserves. For example, if they had one ounce of gold in storage, they could only print $35. As you can see, the gold standard provided stability to our currency. Now comes the BWA. Under this agreement, it was determined that the U.S. Dollar would become the world's reserve currency due to it being linked to gold. In a sense, that would link all the other country's currency to gold as well. The U.S. til this day is still the world's reserve currency, despite the abolition of the gold standard.

We've outlined the basics, which should give you a full understanding of each point being discussed, now let's get into which system would make the better monetary system. The argument from the fiat-money crowd is that since gold is controlled by the world's central banks, issuing money backed by gold would still put control of our money supply into the hands of a small group of bankers. I can't argue with that. However, gold does have a proven track record of providing economic stability. But...the economy was still subject to manipulation (systematic crashes) even under the gold standard by simply contracting the nation's money supply --- this is exactly what caused the great depression. But an economy that uses fiat money is even easier to manipulate. There have been historical accounts of countries simply flooding a rival country with counterfeit money, thereby causing massive inflation.

Now we have the issue of inflation. Gold money has had a history of keeping inflation in-check, whereas, economies with fiat money would experience periods of hyperinflation. This goes back to fiat money being very prone to manipulation. Since fiat-money can be printed without limit (due to the fact that it isn't tied to anything with intrinsic value), governments will print money and use inflation as a hidden tax on the public. Under the gold standard, government didn't have that luxury. The money that government printed had to match their gold reserves. For instance, if the U.S. had 1 million ounces of gold at $35 an ounce, they could print only $35 million dollars.


Under the current system which the U.S. operates, the government DOES print money relentlessly, but that money has debt attached to it. Because of that, we've experienced rampant inflation over the years...since we dropped the gold standard in 1971. Inflation, by the way, typically occurs when there are too many dollars chasing too few goods. The obvious solution to stabilize an economy with a large money supply would be to ramp up production. But as anyone can see for themselves, production and manufacturing has actually declined significantly in America. Most jobs that are being created are being created in the service sector. While at the same time, we import the goods that we consume instead of manufacturing them at home, and with a weak currency, that leads to a higher cost of living.

Let me ask you this --- do you think it's possible for a blue collar worker to raise 8 kids and support a wife in today's time? You might have answered "Hell No! Not unless you're wealthy." Well, prior to 1971, this was entirely possible because the cost of living remained stable due to a reasonable money supply and there were plenty of domestically made products to go around. I'm sure that anyone who grew up during the mid 1900's could validate what I've stated. 

In the end, it comes down to this:
I'm in favor of a money system in which the money is tied to a commodity of intrinsic value. It doesn't have to be gold. Just as long as it is a commodity that is in high demand. That way, the money actually represents an in-demand commodity that is redeemable. When you understand that, you will see that the money which you receive for your product or service isn't paper but a note representative of a commodity which you could actually use. With fiat money, it doesn't work that way. If there were ever a time where the government declared a fiat currency worthless, it would lose all of its value. It would be lights out!