Gold on the Comeback Trail?

The financial crises or disaster, really, that is happening world-wide is making many people again seriously consider gold as money. Gold never circulates as money today, and never will as long as Legal Tender laws require the acceptance of paper currency and debased coins as lawful payment.

This is an example of Gresham’s Law, first spelled out by Thomas Gresham four-hundred-and-fifty years ago in a letter to Queen Elizabeth. This law is about as simple as they come: “Bad money drives out good.”  Gresham noted that people hoarded the coins that were not debased nor clipped, and spent the coins that were. Thus, the “bad” money drove the good money underground and also out of the county because foreigner traders, who were not bound by the Legal Tender laws, could refuse to accept the bad money.

One of the fundamental uses of money is as a store of value. Because governments in industrialized countries around the world are printing money to bail out banks and other lenders and to “stimulate” their economies with make-work projects (more accurately described as pork-barrel spending to buy votes), people are realizing that paper money is likely to become less valuable at a rapid rate at some point in the not-too-distant future.

The government officials in charge of this fiasco are hoping that low interest rates and other forms of  “easy money”  will cause people to forego saving and engage in more spending.  This is also the theory behind one-time stimulus payments that are expected to be part of the administration’s plans to get the economy going.  It won’t work.

History has shown over and over that people tend to hoard one-time payments. Estimates are that about 83% of the 2008 payments were saved and about 17% was spent.  Public works projects are great for buying votes but do little to contribute to sustained economic growth.  If it was possible to spend a country to prosperity, then Argentina would be an economic powerhouse.  It isn’t, and you can’t.

Using gold as money, or backing our currency with gold is an idea that both liberals and conservatives should love.  Liberals because it makes war far less likely when the county has to spend precious gold to finance its wars; and conservatives because it would take away the governments ability to manipulate the economy (and the voters) for political purposes.  

A gold-backed currency, along with the abolition of the Federal Reserve (highly unlikely!), would be the greatest transfer of power from government officials back to the people since the beginning of our Republic.  The current system has worked well to make us all debt-slaves.

There is much more to say about this topic but that will have to wait for another day. What do you think?


One response to “Gold on the Comeback Trail?

  1. Dennis Grimski

    Good article and I agree, “bad money drives out good.” In this vein, I am wondering if you believe the proposed $3 trillion bail-out will eventually lead to hyper-inflation for the USA in two years. It seems like printing all this money, and going further into massive debt, can only lead to this, to bail-out the debt we are accruing? Thoughts?

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