There is a popular notion, at least among American libertarians and gold bugs. The idea is that people will one day “get woke”, and suddenly realize that the dollar is bad / unbacked / fiat / unsound / Ponzi / other countries don’t like it / . When they do, they will repudiate it. That is, sell all their dollars to buy consumer goods (i.e. hyperinflation), gold, and/or whatever other currency.
Redemptions Balanced With Deposits
No national currency is gold-backed today. In a gold-backed currency, each currency unit begins life with someone who chooses to deposit his gold coin in exchange for the paper currency. And it ends life with someone redeeming the paper to get back the gold coin. A good analogy is bone in the human body. One process is constantly removing bone material. And another process is growing more. What seems to be a static bone, with fixed length and mass, is constantly being torn down and rebuilt. The seemingly stable bone is actually in equilibrium between two opposing forces.
So it is with the gold standard. Some people are redeeming paper to get the gold coin. Others are depositing gold coins to get paper. The seemingly stable gold standard is actually in equilibrium between two opposing processes.
We often hear that governments hate the gold standard because they cannot print gold. This is true, but there is another reason. When people don’t like the interest rate or the soundness of the banks, they withdraw their gold coin. What had seemed to be stable, is no longer. This has nothing to do with quantity of currency or gold. It has everything to do with honesty.
Thus our definition of inflation is not based on increase in quantity (or its assumed consequence, rising prices). Inflation is monetary counterfeiting. It is borrowing without means or intent to repay.
For some odd reason, people tend to want to pull their gold coins out of a bank that engages in this practice. It’s a real head-scratcher. Someone should write about this mystery…
Anyways, in the gold standard (i.e. in a free market for money and credit), people have a choice. They can deposit or redeem their deposits. It is never safe for the banks and the government to presume how people will choose.
In making once-redeemable currencies irredeemable, governments have disenfranchised the people. If you don’t like a bank deposit, perhaps because its interest rate is too low, you can withdraw irredeemable central bank notes. However, those notes pay zero. So you are out of the frying pan, and into the fire. Also, the central bank lends to the government and the banks. So its paper has the same risks.
Declaring Currency to be Gold Backed
Many people think that a government could make its irredeemable currency gold-backed once again. But this is like trying to make a dead bone, live again. The currency no longer has either process: deposits or redemptions. The government would be starting—in the best case—with a great gold hoard. It also has a vast quantity of paper currency, some of it productive and much of it counterfeit. And there’s no way for the people to differentiate.
Who would deposit gold into such a system?
Aside from that slight little problem, neither the government nor the banks quality to borrow gold today. They do not have a gold income, nor do business enterprises.
To declare a “gold standard” today, can only mean a gold price-fixing scheme. With no deposits—no willing depositors, and no productive purpose for a gold deposit and hence no interest on gold—it will be a one-sided process. There will be demand for gold by people who hold paper, but no corresponding demand for paper by people who own gold.
