Gold Backed Money

Author: Minuteman 2016-05-21 0 Comments

A guest blog by Patriot, Alex Hamilton

Does it really make sense to use gold as a way to back paper money?

Let’s take a simple scenario to try and figure it out by taking a closed system of people and trades.

Assume you have 1,000 people that each have a trade and they market to other people within the group and all people earn 1,000 dollars each week. Let’s say you have 1,000 ounces of gold in reserve and gold is priced at $1,000 per troy ounce.

If every person does their job and gets paid $1,000 each week and all goods and services are traded in such a way as each person earns $1,000 per week then everything works fine, but what if 100 new people enter the group either through immigration or children becoming working age and they go to work. If you don’t have a way to increase your gold reserves so that you can increase the money in circulation then where will the money come from to pay the new workers? Do you take a little from each of the first 1,000 people, which would be deflation? Do you inflate the value of the gold and print more money, which would be inflation? Do you try to move the money faster through the network of people so that you have increased the velocity of money?

It appears to me that using gold as a way to back the currency has the same problem as just trying to print money based on the needs of the people.

If an economy is growing and creating the need for more money in circulation then whatever form of money is in circulation must be increased enough to match the growth. The problem with only paper money is if the people involved with printing the money want to favor a certain group, they can print money and put it out it in the hands of that certain group. But if you have money backed by gold, whoever prints the money can still circumvent the system. In the end it is all based on the scruples of the people printing the money.

Now if the money is actual gold and you only used the gold money placed in circulation, then you would stop the inflation of the money. This would then limit the growth of the economy to the amount of gold in circulation. This would stifle growth since there would be a limited amount of money in circulation. It is possible that some of this problem could be solved by increasing the velocity of money, but it would still be very limiting.

After careful thought, I assume that the only way to have unlimited growth is to have fiat money with prudent over-site by an independent outside party. This is exactly the original purpose of the Federal Reserve. We did not trust the politicians in Congress to control the money so we started the Federal Reserve. Unfortunately, as with all things run by humans, eventually the over-site party needs another over-site party to keep it honest and on and on and on.

In spite of man’s best efforts, eventually all fiat money systems will collapse and the system must be replaced by a new system. For this reason you must protect yourself from the eventual failure by owning as much gold as you possibly can, since it is the only commodity that has stood the value test for over 5,000 years. As for me I put 10% of all my income into gold and silver each month.