Making the case for Gold… (and against central banks) #1

The Telegraph (31/08/12) carried an article by Andrew Trotman that reported Euro Pacific Capital’s chief, Peter Schiff, has predicted that the US will return to the Gold Standard within two years.

Whilst a timetable of two years might be overly optimistic, the very fact that serious people in finance are contemplating a US return to the Gold Standard is extremely interesting, not least because it is also gaining traction with American politicians.  With yet more Quantitative Easing – and the further erosion of the value of fiat paper currencies that this entails – being considered by the world’s central bankers, enthusiasm for a return to gold is definitely on the rise.

Mr. Trotman’s article ends in a paragraph that rather succinctly, if ironically, makes a good case for returning to the Gold Standard; ironically as Mr. Trotman summarizes the position of the Gold Standard’s opponents.  He writes:

However, opponents [of the Gold Standard] believe it would limit the flexibility of governments and central banks in managing economies, restricting the ability to adjust money supply, government budgets and exchange rates.

And that’s also precisely why many advocate the Gold Standard!

One of the most basic arguments for the Gold Standard (or metallic standard) is that it will help to keep governments honest because they have proven incapable of controlling their impulse to spend, and to fund that spending through the taxation of inflation by de-basing the money supply. Central banking has proven a failure when it comes to sound money because that was never really the rationale; central banking (from the creation of the Bank of England in 1694 to help fund William of Orange’s wars) was principally established across the world to finance state action, be it war or welfare, not to provide a sound money supply.

Sure, as Lawrence White points out, the Gold Standard is not without its faults but the faults of our current system of fiat paper currencies “managed” by central banks has far more faults and more serious ones at that.  Can we really afford the economic and socio-political consequences of two more years of Quantitative Easing and the government debasement of our fiat paper money supply?

For further reading:

Ludwig von Mises, Theory of Money & Credit (1912)

Murray Rothbard, What has Government done to our Money? (1963)

F.A. Hayek, Denationalisation of Money (1976)

Lawrence H. White, Is the Gold Standard Still the Gold Standard among Monetary Systems? (2008)