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The Gold Standard: Solid as the Paper It's Written On


Governments can and do change the rules of the currency game at will, and at any moment.

One often hears proponents of gold-based currency systems remarking that fiat currencies are nothing but "pretty pieces of paper" or "colored confetti" that are products of a system of legalized "counterfeiting" and "institutionalized fraud." Presumably, these sorts of references are made to highlight the supposedly solid, unassailable, and durable qualities of gold-based monetary arrangements as compared to the fragile, manipulable, and ephemeral qualities of fiat paper monetary institutions.

A few years ago it might have been possible to write off such commentary as the rants of an ideological fringe. In today's world this would be a mistake as it's clear that the ideas animating such rhetoric have penetrated deep into the mainstream consciousness, being propagated by prominent media personalities and touted by respectable analysts. In particular, these ideas have proved to be powerfully persuasive to a disaffected public that's besieged by a grave economic crisis and is looking for answers.

Therefore as people reflect upon the merits of gold-based monetary systems relative to those of fiat currency institutions, it's important to keep in mind a basic fundamental fact: The gold standard is a piece of paper.

The Gold Standard Is a Piece of Paper

That's right. The institution of the gold standard is nothing but a piece of paper on which it's written that a unit of a particular currency (e.g. USD) can be redeemed for a specific quantity of gold.

These pieces of paper on which gold-based monetary charters are written can be -- as they historically have been -- used and discarded in much the fashion of toilet paper.

This is how the gold standard life-cycle works: The government and/or citizens of a country spend beyond their means and acquire large debts. These debts are accounted for in units of the country's currency -- a currency which presently contains, or is convertible into gold at a legally fixed currency-to-gold ratio (exchange rate). The government, often encouraged by private debtors, decides to create new debased money containing, or convertible into reduced quantities of gold. Debtors, including the government, can now use the devalued currency to cancel their old obligations (acquired at the old currency-to-gold exchange rate).

Therefore, the first step in this scheme is to take the paper that the previous gold-standard law was written on and toss it into the trash bin. Second, with the stroke of a pen, a novel gold-to-currency exchange rate is etched onto a brand new piece of paper, and voila! A brand new spick-and-span gold-standard currency has been legally established to replace the old one! Finally, the new legally established exchange rate is then affixed on newly minted debased metallic coins and/or paper bills that the government and private debtors are then able to use to pay their debts. Rinse and repeat a few years/months later when the magnitude of public/private debt is once again deemed to be too onerous to be paid with money convertible at the current currency-to-gold exchange rate.

This, in a nutshell, is the sordid history of gold-based money, from pre-classical times to the Classical Age, from the Middle Ages through the Renaissance, and right up through the Modern Era.

The Golden Illusion

By providing a facade of value and solidity, gold standards have provided an illusion that's enabled governments and various private interest groups throughout human history to perpetuate mass fraud on their populations. The fraud I'm referring to, of course, is the surreptitious confiscation of the fruits of citizens' labor and savings through the process currency debasement.

Gold standards are a sort of "Jedi mind trick" in which people are fooled into thinking that the purchasing power of the money they hold -- whether paper or metallic -- is safe and secure because of the gold that supposedly backs it. However, the truth of the matter is that the value of any and all forms of money, whether paper or metallic, isn't worth much more than the paper that the monetary charter is written on. Governments can and do change the rules of the currency game at will, and at any moment.
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