Discussions of reform proposals for our currency money system often include discussions of a particular element: gold.
For many, the reintroduction of a gold standard is the most convincing solution for the obvious problems caused by our currently mostly bank created money.
In fact, such a new money order could hardly be simpler and more accessible to imagine: instead of fiat currencies, whose creation must be regulated and controlled, a quantified amount of pure gold simply becomes the measure of value for all goods and services and thus a generally comprehensible backing for money. If one speaks of a gold standard instead of a gold currency, such as gold in the form of coins, what is meant is that one does not pay directly with gold but still uses paper notes, less valuable metal currencies and also digital currency units as a medium of exchange. But of these only so many may be brought into circulation that the emitter can change back into gold. Thus the money supply is directly tied to the gold reserves of the issuing institution. This can be a national central bank or a private monetary institute, so long as its gold reserves can be checked and their security guaranteed.
While many other proposals for monetary reform require lengthy explanations, the gold standard offers a direct, easy to grasp solution, because most people will accept gold backing as secure and valuable. Histories of money usually describe the origin of money as the introduction of the first coins, typically gold coins, which simplified primitive barter trade and finally led to our modern money system. This presentation of money is historically inaccurate. An uncritical acceptance of gold as a solution to monetary problems is also simplistic. According to anthropologists and historians, barter trade was never the origin of collaborative societies and a gold standard hides behind its glittering facade a host of severe disadvantages for a monetary order:
- A gold standard severely diminishes the ability to regulate the money supply. Today this is mostly in the hands of private banks through the creation of bank loans. The issuance of these loans is mostly driven by expectations of short-term gain and the outlook for growth in any particular sector. Many monetary reformers would like to reduce this huge power to influence, which is today used in many countries in favour of speculative financial business and to the disadvantage of the real economy. A gold standard represents the opposite extreme, in which the money supply can no longer be matched to the liquidity requirements of the economy. Particularly in times of recession, this can have fatal consequences. This is why, in times when a gold standard was practiced, the idea of a silver standard was always popping up, because this would have enabled a larger money supply. At the beginning of the Great Depression of the 1930s, it was countries that abandoned the gold standard that recovered more quickly and introduced other money creation mechanisms (compare NPR, Planet Money, Episode 253 Gold Standard R.I.P.).
A gold standard makes it difficult to achieve a balanced (world) economic order. If the range of available monetary policies is predetermined by the possession of gold reserves, then power and ability to influence will be further entrenched in favor of the owners of gold on the introduction of a gold standard. Thus social, developmental and also environmental policies will be bound to purely economic interests. Naturally this argument assumes the embedding of monetary solutions in a politically ideological context. Supporters of a gold standard implicitly do this too, as the following points show.
- The value of gold is just as culturally determined as the value of money created in other ways. The “intrinsic worth” of gold, which its supporters often appeal to, is also only a market value, which indeed has been relatively stable throughout history but is not pegged to any economic use value, but rather to the aesthetic and cultic qualities attributed to it. It is not only a native American saying that you can’t eat money but also in industry and technology other raw materials are regarded as ‘more valuable’ than gold. Hence the suggestions from the field of complementary currencies to use other useful resources such as for example renewable energies or combinations of various raw materials (see Lietaer’s Terra proposal) as the basis for measuring value and as guarantee of value for currency units.
- A stricter gold standard was never at any time an exclusive and sustainable monetary instrument. Gold coins in the ancient world, in the Middle Ages and in modern times always circulated alongside other currencies created and backed in various ways (see Felix Martin, Money – the true story). And the example of more recent monetary history, namely the Bretton-Woods world currency system of the post World War II period was also never based on a strict backing of the money supply through gold reserves and finally had to be dropped by the USA in 1971 precisely because of the inflexibility mentioned above.
The reintroduction of a gold standard would indeed be an easily imaginable and apparently easy to implement monetary reform but it would simultaneously be economically and politically crippling – particularly with regard to the further development of money as a democratic tool for shaping societies.
Only in combination with various complementary currencies targetted at particular needs, can a gold backing for particular purposes be convincing (see Bodensee-Taler). In that sense the relative success of Bitcoin can be explained by its many references to “digital gold”, even if this is factually inaccurate (see Bonus systems and business currencies).
Considering all the misunderstandings around gold as a stable and apparently tried and tested basis for currencies, it is not surprising that the idea of a gold standard has greater claims made for it in the discourse of monetary reformers than it really deserves.