In light of the most recent fiat money debacle a return to some sort of gold standard would be a very simple solution to the economic mess we have created.
More often than not, the best solutions to complex problems are simple ones. It’s a concept scientists and mathematicians call ‘elegance.’ Conversely, complex solutions are more likely to create chaos, making matters only worse. That’s a concept I call lunacy, and it has been driving the Fed since we abandoned the gold standard in 1971.
The trouble is, central banks are mired in a single school of economic thought based on the precept that governments can create wealth out of nothing and should use that power to subvert the free market whenever it is deemed expedient. To the average Joe, whose thinking is built on the bedrock of common sense, there is something fishy about that.
When there was a gold standard, Bernanke argues, “there was no flexibility for the central bank to lower interest rates in recession or raise interest rates in an inflation.”
Inflation is most directly felt in rising prices, but think of what that means. If the same cartload of groceries costs $10 more than it did the previous month, the value of those groceries to the consumer didn’t go up – the currency used in payment for them lost purchasing power.
Inflation is simply the result of an overabundance of currency in the system. When the supply of currency rises, its unit value falls. And who controls the money supply? The central bank.
In other words, Bernanke argues that the gold standard would interfere with the central bank’s ability to manipulate the economy in situations that wouldn’t exist under a true gold standard. A simple misconception underlies that strikingly convoluted bit of reasoning.
Opponents of a return to the gold standard argue that it would create a catastrophic loss of wealth because central banks hold far too little gold in reserve to cover even a fraction of the money supply. But fiat money cannot constitute wealth.
Fiat money is just a commodity that is created out of nothing and has no value in a free market beyond that to which two parties agree in open exchange. The purchasing power of currency is therefore inherently unstable and wealth thus created is but an illusion.
On the other hand, gold’s purchasing power has held virtually constant for millennia. Wealth held in gold cannot be created or destroyed on the whims of any government, and it will endure while the false wealth of fiat money is reduced to worthlessness.