“Electronic Contacts, Dentistry, Electronic Contracts”
If we’re using the gold in the production of goods, it would be bad to link it to the money supply. Moreover, gold really doesn’t have traditional uses beyond jewerly or as a currency. IOW, it had no production value back in the day where its roots as a currency lie. Its use as a currency was based on the perception of its value and to facilitate exchange (the same as paper money.) The idea is that if we wanted to go back to a barter system, we could exchange all of our gold or money for goods or services of equal value.

I look at my current house, and most of my money is backed by physical objects that I believe have value…a computer, a tv, some furniture, etc….and the exact same argument can be made as was made in the original post. As more money is printed, the value of these items goes up in our balance of payment world. But as I said above, I can point to the Spanish Silver tax or various gold taxes throughout the centuries if we want to talk about the inflation tax. (Moreover, we’d move to deflation if gold is so great in the production of goods.)

To sum up, I still don’t see a great distinction between “real” and “perceived” value. I certainly recognize the value of a gold standard as a fundamental theory in maintaining the value of money, but I believe there are better ways to go about the stabilization of currency because of the technicals that affect gold. Changing the Fed’s mandate and potentially moving to a rules based mechanism would be my choice.

If you could somehow implement a competing world currency that was as good as gold (except with greater stability of supply) then that could also work (but could you trust the world to do this?*)

* – and it’s funny I say this because the $ is (arguably was) this great world currency (but we couldn’t trust ourselves).

Were there no market applications fof gold then i would agree with you.

It is malleable and easily fashioned into bullion, or from bullion to any simple-use-case.

It’s applications in real markets, as well as its physical properties are what make it a good candidate for hard money. Although it is true you could use silicon or some other non-perishable good, gold and silver’s physical properties and homogenity make for an easy decision.

Rothbard lays the case out pretty well, and supports it with years of documentation.

Defined real value and define perceived value.

As for fiat dollars vs. gold:

The gold has actual and perceived value. The fiat dollars have only perceived value.

If more dollars are printed, the value of each dollar goes down. If more gold is found, the value of gold-back dollars goes down. Finding more gold is difficult and requires work, though, unlike cranking up the printing presses. There is a high incentive to find gold, so most of the easy gold has already been found. A little more gold can always be found, though, historically growing the supply fairly steadily (with a few spikes here and there.) Fiat money is unpredictable and can be printed on a whim.

One other major difference: if a government eventually collapses, what happens to the value of the currency? It disappears. How much are those Confederate dollars worth? The value of gold remains, regardless of political changes.

In order to avoid inflation – and the tax it implies – currency must be based on a value that is as constant and reliable as possible. While gold and silver can fluctuate in value via sporadic supply increases and other uses, they have held value both intrinsically and psychologically for far longer than Federal Reserve Notes. The only reason FRNs are used anywhere is because the U.S. economy has been presumed to be nearly as constant and reliable as the values of gold and silver. As America descends into a Welfare/Warfare state that is perceived as increasingly unstable, so that perception taints American FRNs. It doesn’t surprise me at all that the so-called ”Dollar Hegemony” is in trouble at the moment. Ron Paul wrote a paper about it in 2006.

Given the complete lack of understanding evidenced by a majority America’s currently elected officials – apparent by their continuing deficit spending in the face of such a colossal debt – I don’t find it that hard to imagine more nations considering reserves other than FRNs.

Perhaps offering to legalize competing currencies based on commodities which fluctuate less than FRNs might give the U.S. (and the rest of the world) options for reserves that will lose value to government-created inflation proportionately less.

My one consolation is that it seems to be more damaging to other countries’ own situations to divest their dollar holdings than they are willing to stomach.

But in a true dollar crisis, nations may believe it is rational to get out while they can, regardless of the consequences. The problem is that these panics occur unexpectedly, and the behavior that seems irrational before a panic seems rational once it starts.

Either way, the state of the dollar is what I see as America’s biggest issue right now. Unfortunately I think our elected officials have painted us into a corner where they can’t muster the political will to fix the problem.

I would add that in the USA inflation is a double tax. They devalue your property then charge you capatol gains!

For thouse who want to learn more read “What Has Government Done to Our Money” by Murray N. Rothbard. Free PDF download at http://www.mises.org/money.asp

I don’t consider myself a “gold standard” person because I recognize there’s inherent problems in making a currency a derivative of the technical factors at play with whatever commodity you wish to select. I could write a similar article about the “silver tax” in 16th & 17th Spain or the “gold taxes” from gold strikes in the 19th and 20th centuries. Likewise, why does gold or any other commodity have value? Because we all believe it does which is precisely the reason that Dollars are a store of value. I suppose we could replace “gold” or “silver” as our proposed $ linked competition with a world currency (and it actually would work better than gold), but that seems pretty un-American.

But to get back to the Fed…. I think the Fed’s mission should be tweaked a bit and we should take out this political tightrope they seem to walk between inflation and full employment. Now, the problem with a responsible Fed as part of the solution is what every Libertarian knows as the central issue of why gold is considered an option….it requires responsible govt. Maybe a technical or rules based process of governing the money supply is the solution.

I’d be interested in Clayton (or anyone else’s) thoughts on that.

Beautifully simple piece on such a crucial topic. I’m definitely going to pass this around.