Murray Rothbard’s outstanding short book, “What Has Government Done to Our Money?”, gives the answer to this question from the point of view of the Austrian school of economic thought. Here’s my edited version of Rothbard’s main point, drawn directly from the summary of chapter one (read the whole book at http://www.mises.org/money.asp):
“All money systems originated by necessity from a useful commodity chosen by the free market as a medium of exchange. The unit of money, historically, was simply a unit of weight of the monetary commodity—usually a metal, such as gold or silver. In a market relatively free from government or other coercion, the commodities chosen as money are left to the voluntary decisions of free individuals.”
On to my thoughts about the matter:
Historically, gold, silver, and some other metals have frequently been chosen by free individuals as the monetary commodity due these metals’ superior abilities to serve as long-term stores of value. The properties that make metals good long-term stores of value include their intrinsic value (for ornament, industrial use, etc.), their durability, and their fungibility (i.e. their ability to be sub-divided without reducing their intrinsic value).
For many obvious usability reasons, the free market eventually evolved systems of paper money (originating in paper receipts given by banks in exchange for actual commodity deposits) to facilitate trade. This separation of the paper representation of the commodity from the commodity itself gave rise to opportunities for fraud; for example, a bank could issue more paper receipts for commodities than they actually had in deposits—once customers found out, a bank run might ensue, and the last person to try to get his money out of the bank would find himself with nothing.
Skip ahead in history, and today’s currency markets are dominated by government fiat money, backed solely by the “full faith and credit” of the issuing government. Governments have seen the opportunity to exploit the free market innovations of commodity money and paper money, and they have done so by becoming the monopoly provider of money within their own borders. Though governments usually try to manage their fiat money responsibly, the great incentive to commit fraud that exists with paper money is impossibly difficult for governments to resist when they are unchecked by currency competition. So then you get this escalating series of problems:
1.) When the government allows only a single currency to be used for trade by its people, and when the government also possesses the sole means of producing that currency, then the government has at its disposal a mechanism (printing money, and preventing the use of other currencies with the force of law and military) for taking things of value from its people without producing anything of value in return.
2.) If the government takes too much of value from its own people without providing anything of value in return, the people will eventually feel oppressed and may try to overthrow the government or switch to an alternate currency. So the government would be politically motivated to provide something the population perceives as valuable and/or to control inflation so its people continues to be willing to use its currency as the common medium of exchange.
Now consider what has happened due to the United State’s historically unprecedented opportunity to become the “reserve currency” of the world. After World War II, we were able to use our superior currency strength to negotiate a position of unbelievable economic power: the world would accept our currency at a fixed exchange rate with gold! This effectively meant that the government could “print gold”, since foreign nations agreed to accept our paper as such. Now consider what might happen (or, depending on your point of view, is happening/has happened):
3.) If the the government saw an opportunity to expand the population who uses its currency outside of its national population, it would make good political sense to do so, since the government would then be able to distribute the effects of inflation over a larger population. Then when the government wants to appropriate value by printing more money, a smaller percentage of the value seized would be coming from its own people, so it would run a smaller risk of being overthrown by its own people.
4.) As the foreign population using the currency grows, the government would be able to appropriate more and more value from the foreign populations via inflation, and then pass that value along to its constituents to solidify its hold on power. The economic risk to the government’s own economy is that the value appropriated by the government and passed along to its constituents could cause a drop in the constituents’ own productivity and innovation, as they need to strive less to produce things of value and solve real problems because of the ease of taking things of value from foreign populations without working themselves.
5.) The risk to the currency-printing government then comes when the foreign populations begin to feel oppressed by the externally-imposed inflation. The foreign populations would be economically motivated to switch their medium of trade to a different currency, thus freeing themselves from the currency-printing government’s inflation tax. The currency-printing government would be politically motivated to force any dissenting foreign populations to continue using its currency. Political, military, and economic conflict would seem to have to ensue.
Some people might disagree with this analysis. I imagine most people within our government would. However, I find it intriguing that most people accept our currency inflation as “normal” currency behavior, considering what we know about the un-inflationary (and indeed slightly deflationary) behavior of commodity-backed currencies of the past. And I always find it suspicious when the government suppresses competition. Why suppress currency competition within your borders unless you’re afraid the people will stop using your currency?
So, for me, the bottom line is: Why gold? Because using gold to back a currency checks the power of the currency issuer to inflate the currency, which is effectively just counterfeiting or stealing.
Composing members:
0
Composing members:
0
