Yesterday two readers of the Wall Street Journal weighed in against hard money. Steve Connor rejects the idea of a gold-backed dollar because the supply of gold can’t be controlled, using the hypothetical example of “a technological breakthrough enabling inexpensive extraction of gold from seawater,” with the result being a a gold-water hyperinflation, I guess. Mr. Conner is also concerned that untrustworthy foreigners have all the gold and control its supply.
So Connor supports “the fiat dollar backed by our economy and managed by the Fed Board of Governors.” Connor holds the view of John Law, who believed that silver was inferior to paper money backed by a nation’s land because more and more silver could be mined and coined, thus diminishing its value. Meanwhile land is in stable supply and can be made more productive.
Ludwig von Mises anticipated Conner’s concern in Human Action.
It may happen one day that technology will discover a method of enlarging the supply of gold at such a low cost that gold will become useless for the monetary service. Then people will have to replace the gold standard by another standard. It is futile to bother today about the way in which this problem will be solved. We do not know anything about the conditions under which the decision will have to be made.
Conversely, the second letter writer, John King, claims “There will never be enough precious metal to correspond to the increasing value of all goods and services being produced and used in our growing world economy to meet some arbitrary ratio.”
Again Mises answers:
The main objection raised against the gold standard is that it makes operative in the determination of prices a factor that no government can control — the vicissitudes of gold production. Thus an “external” or “automatic” force restrains a national government’s power to make its subjects as prosperous as it would like to make them. The international capitalists dictate and the nation’s sovereignty becomes a sham.
