Good As Gold
There are a precious few remaining loons who advocate a return to the gold standard, but it is useful to examine their premise and remember why we had a gold standard. Aside from glitter, gold has little inherent value, but the supply is limited by what we can pan for or dig up.
Paper money serves two essential purposes. It is a medium of exchange. In this function, it facilitates a division of labor and replaces barter. It’s second function is to be a storehouse of value. Money accumulated and invested today enables future consumption. If you save money today and invest it, you will be able to buy food, shelter and clothing when you are too sick, too old or too lazy to work.
The reason that our paper money was convertible to gold at a fixed rate until the Nixon administration was that paper was not trusted as a storehouse of value. History demonstrated that monarchs, politicians and financiers had often manipulated/depreciated the value of paper currency. The temptation to create money by running the printing press or the equivalent thereof has seduced indebted governments throughout recorded history. After WW II, the dollar became the world’s reserve currency (replacing the pound sterling). Its backing by gold convertibility, plus the dominant position of the American economy, turned the American paper dollar into the world’s trusted storehouse of value. The strength of our economy, the modest level of our indebtedness, our fairly high level of transparency, and our currency’s free convertibility into all other currencies allowed its perception of reliability to endure even as we abandoned the gold standard.
Being a reserve currency economy confers huge advantage. We can import goods and services; pay in dollars; and some of the dollars never come back to be redeemed. They are held in the world’s central banks as reserves. Several small countries use the dollar as their only currency. A number of others are partially dollarized. When dollars do come back, a substantial percentage is in the form of investment in Treasury instruments, stocks, bonds or real estate. We import goods and services and the suppliers of those goods and services use our payments to run their own economy or to invest in our economy. If our retarded President understood these simple facts, he would quit bitching about trade imbalances. We end up with cheap merchandise. The Chinese end up owning Treasury bills that pay almost no interest.
Trump’s passionately Progressive opponents are equally stupid. They believe in MMT (Modern Monetary Theory), which posits that we can simply print money to finance all manner of social welfare with no repercussions. In effect, they have taken over our fiscal policy. We are heaping on debt in the trillions. The Fed has started rapidly increasing the money supply again. When the Fed buys Treasury offerings or other bonds, it is the EXACT equivalent of running the printing press. At some point, holders of dollars or investments in our economy will get nervous and head for the exits. Confidence in our paper will evaporate.
If we do not come to our senses, the dollar will lose its status as the reserve currency. It will probably not be replaced by the Euro or the Yuan. Leaders in Europe and China are no more fiscally sound than our current policy makers. I’m not sure what replaces paper currency as a storehouse of value (maybe gold), but we will have discarded a tremendous asset without even giving the matter a serious thought, and the world will be a lot less prosperous as a result.
