The Follies of Gold

The Republican platform includes a plank to form a commission to study a “metallic standard” for money. Possibly the politicos want to attract the Ron Paul vote since he has continued to advocate a gold standard as a form of economic discipline. I don’t know much about the politics of the gold, but I know a commission will be a waste of time and there will not be a gold standard in the United States or anywhere else.

Many years ago, before banks, gold circulated as a medium of exchange, but it was heavy and inconvenient from the beginning. Enterprising entrepreneurs opened gold depositories where people could store their gold safely. Depositors received a paper certificate as proof of their deposit.

If a depositor decided to buy a horse and wagon he would mosey over to the depository to make a withdrawal. Very quickly everyone got tired of going to a depository just to do a simple transaction. Soon the paper certificates began to circulate as money instead of the gold.

Very quickly the people running the depositories began to notice that buyers making withdrawals were followed by sellers making deposits. Then they realized they did not need to keep all of the gold deposits in the vaults to cover their customer withdrawals since withdrawals were followed by deposits. By keeping records of deposits and withdrawals they learned the maximum percentage, or maximum fraction, of the gold in the vaults they could loan out at interest without jeopardizing their ability to cover withdrawals of their customers.

That was the birth of the modern fractional banking system used by the United States and every other country in the universe. Banks hold a fraction of their reserves to pay on the deposits of their customers. From the beginning there were banking cheats and chiselers who made loans beyond the maximum safe percentage and were unable to cover their customer withdrawals. Banking abuses brought efforts to regulate banks; legal reserve requirements were imposed.

In 1999 the Clinton administration signed off on a banking deregulation bill pushed by the banking industry. The cheats and chiselers returned and just as before they were unable to cover their customer account withdrawals and had to be bailed out by the government and the Federal Reserve Bank.

Gold is a commodity and like any other commodity it fluctuates in price. When gold is money then changes in the price of gold will ripple through the economy causing inflation or deflation. From the beginning it was necessary for the government to stabilize the price of gold by holding large inventories to sell in a shortage, or buy in a surplus. Managing gold inventories was subject to the erratic success or failure of mining ventures and the erratic whim of hoarders and speculators.

In 1933, the United States left the gold standard, announcing it would no longer convert dollars to gold at a fixed price. Banks were allowed to designate other assets than gold as reserves, which make it easier to manage the money supply. Other countries followed and in 1971 the gold exchange standard for international payments ended by mutual agreement of the international community.

Using gold as money creates many problems that have to be solved, but has no benefits of any kind. It does not impose discipline because money is always a human decision. Humans decide what it is and how much of it there will be. The Republicans know this, but they are willing to pander for the Ron Raul vote. What Ron Paul thinks he is doing I have no idea, but gold as money is dead.