I have always been puzzled by the exact mechanisms through which the government keeps us from using gold as money, and my recent inquiries on a private email list of economists only confirmed my view that it is not legal tender laws per se. If I understand the laws correctly, then it seems the only thing preventing a bunch of gold bugs from moving to some place like Montana and starting up their own community that uses gold as money, is the sheer inconvenience of it. I.e. there must not be enough gold bugs to make the transition worth it; fiat money isn’t so bad that it justifies moving to Montana.Specifically, a merchant can effectively refuse payment in US dollars and insist on gold. He can post a price such as “1 oz. of gold or 1 billion US dollars,” or if that seems too explicit, he can post a ridiculously high nominal price in US dollars, and then offer a discount to anyone who pays with gold certificates (issued by Joe Smith down the street, another gold bug).
Now it’s true, legal tender laws would force such people to accept US dollars as payment for any debts, but so what? The gold bugs would just sell the dollars on the market for gold. They wouldn’t lose out, since (I think) the legal tender laws would still apply the prevailing market price of gold when deciding how many US dollar bills pay off a debt that is transacted as “100 grams of gold” or whatever.
If this seems fanciful, consider this: Suppose that tomorrow the US gov’t said it would only accept taxes that were paid in Mexican pesos. Does anyone think this alone would cause the US to stop using dollar bills and switch to pesos? Or would dollars still be our money, and people would just buy pesos (with dollars) when it came time to pay their taxes?
Now how could the government make the switch to pesos? Well, if it made it literally illegal to hold dollars, and forced everyone to turn in their dollars (in exchange for pesos) to Fort Knox, then that might do the trick. And that’s of course exactly how the government got the US off gold. But my point is that right now, I think it’s more inertia rather than outright legal prohibition that makes a return impractical.
By all means, someone please correct me if I’m wrong. And if I’m not wrong…why aren’t we all moving to Montana? Why doesn’t the Mises Institute start insisting on payment in gold? Etc. (One reason is that, just because it’s not technically illegal, if such a movement ever did catch on, the government would crush it somehow.)
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Steven Kane, my remarks about taxes being used to back fiat currency were not hypothetical. We know that precisely that sort of thing was done in introducing cash economies to formerly subsistence economy areas under the European maritime empires.
That applies mostly to the British, French, Portuguese and to a lesser extent Belgian African colonies, where they used methods varying between forced labour with exemptions for people with colonial language skills and cash employment, to hut and/or poll taxes (varying according to local lifestyles).
An even more interesting case was what the Dutch did in the East Indies. They introduced, not a true fiat currency, but a pre-depreciated new coinage: copper coins at a nominal value twice that of the copper content. Then rather than just spending this, they used it to provide working and fixed capital as they organised their “culture system”. This exploited local resources directly as a commercial enterprise rather than via taxes – but the previously existing levies backed the depreciated or fiat part of the new currency. The copper itself was provided by Dutch bond issues.
Anyhow, that and the cases where European countries occupied each other go to show that fiat currencies could be and were sustained by tax demands. The scenario that the government would switch to demanding gold if people didn’t offer fiat payments is unrealistic; to a Keynesian, tax is just a way of heading off inflation that would result from a deficit, not a way of financing spending. It’s the same thinking. If someone doesn’t like fiat money and only has gold when the tax collector comes, he will lose everything in distress sales etc. This encourages the rest to get fiat currency, and so improves its market price against gold.
For myself, having regard to these and other issues like value in use and the current use of Maria Theresa thalers etc. (so no kick start would be needed), I think a silver standard might well be realistic.
1. There is no more gold standard, and there cannot be–is there enough gold in the U.S. Treasury to back the number of dollars (real and imaginary) in the money supply?
2. Gold has intrinsic value–but whence the impulse to spend your gold? Use it as a store of value. I do not understand these e-gold cards, digital gold accounts–you are still making a fiat-like substitute for gold–is there a point here?
3. The Bretton-Woods agreement whereby gold was convertible into dollars at $35 per ounce–ONLY for NON-U.S. citizens; this is how the Bretton-Woods casino shifted much of this country’s precious metals stockpile to Europe after the close of WWII. Nixon finished it off for good around 71′ or so, and we now see gold at its free-float levels. In truth, gold once did circulate in the U.S. as evidenced by: gold dollars, 2 1/2, $3, $4, $5, $10 and $20 all the way up to $50 gold pieces. All minted prior to 1933…
4. It really makes a lousy currency, unless you have a desire for the barter system, which the average idiot does not. The dollar, Euro, and Yen, that is what people accept and want for exchange.
mr_gs_12:
No one here will give you an argument over your third point. But it would be a waste of time and space to deal with the others at length.
Wrong as you are on these, it would be close to impossible to compress the necessary arguments to fit this forum: they are the essence of some of the unique distinctions of the Austrian school (from all others)., with which it appears you are totally unfamiliar. If you actually have a keen interest in monetary matters, my suggestion would be that you read HUMAN ACTION for an appreciation of the views that inform most at this site.
But meanwhile, to give you something to ponder (since your “store of value” comment shows some sign of thinking about such matters): if dollars, Euros, and yen are what people want, why do their respective issuers burden themselves with storing gold? They could save the expense and get a windfall contribution toward their debts by selling it off into the market, couldn’t they? And do you imagine that such an action would have no catastrophic effect on the willingness of the people in those nations to continue to use their paper and deposit currencies at anything resembling current values?
The essence of the Austrian view regarding money is that it is an outgrowth of peoples’ production-exchanging activities and that government management of its quantity interferes negatively with the general welfare of the economy that it was the government’s
intention (in its management) to benefit or assist in the first place.
Like I said, if you want to understand as much as can be understood opf the matter, read Mises. (There’s probably a reason they call this place the Mises Institute.)
Dirk Friedrich (and Bob Murphy, too):
It’s a little fast and loose with the language to call the money in present use (referring to the US) “fiat” money. Mises himself was of the opinion that the existence of a fiat money could not be proven theoretically and reserved the term “fiduciary media” for that portion (or fraction) of a currency “unbacked” by a secure claim to something of value. Of course, it may certainly be argued that the present currency is unbacked: there is no legal guarantee of convertibility except to another form of the same. But, at the same time, the mere fact that the monetary authorities do not seem to regard their present metal holdings as an excess to be sold off into the market at some rate consistent with a not-too-great depression in its price level would indicate that they, too, are loath to discover whether or not they have actually produced a fiat money or not–one that would continue to circulate at close to present purchasing power without the slightest hope of any ultimate redemption other than that of the steadily diminishing prospect of passing it to a greater fool. At the same time, they are as careful as possible to manage the quantity of the stuff in such fashion that, in concert with similar efforts by the monetary authorities of other major nations, no more abrupt rise in the market price of gold occurs except as is closely paralleled by similar change in those others’
units. You could say, that in managing monetary dimensions, all such managers watch not each other but rather the gold price!
This is to say, that, although gold has been said by some (including Gary North) to have been demonetized, this is not (or is not entirely) true.
Silver is a metal with specific applicability to certain industrial uses of great stategic importance and might, for that reason, be stockpiled against some future emergency condition. Similar applications of gold are extremely few, especially when those similar to silver are compared against their respective prices. The entire purpose of the US gold reserve is as a similar stockpile for some emergency purpose, except that, in the case of gold, the anticipated future emergency is a MONETARY emergency, in which it is presumed by the same people who insist that their paper is money and gold is not that their paper will be of no use and ONLY gold will serve. The only reason that authority is able to influence the general purchsing power of their currency is that they have the means available–the gold reserve and the money-quantity control–with which to maneuver between the two in such manner that the rate at which the loss of purchasing power of the currency proceeds remains within “acceptable” bounds. And without the reserve, the “jig would be up,” the game would be over, and no one would trade anything of actual value for any quantity of the currency. Under the present circumstances, however, the same final result may be extended over some indeterminate and lengthy (but not infinite) time. You may be absolutely certain that every currency will fail at some time in the future and that what has been money before and is money now will continue to serve in that capacity and will again be recognized a bit more widely than at present.
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