The Gold Standard is not Synonymous with Freedom

A lot of people didn’t like my recent article about fiat money.  That was to be expected.  And the usual arguments were trotted out.  The old “it takes two people to support a family”.  And then the “fiat is synonymous with corrupt governments”.  First of all, those statements aren’t totally false.  But let me elaborate.

If you really wanted to live like you’re in the 1950’s you could most likely survive very easily on one salary.  Try this.  Get rid of your McMansion and move into a cottage with no AC, no heat, no microwave, etc.  (okay, that’s extreme, but you get the point hopefully – we live in suped up houses these days where the technologies are far superior to those of the 50s).  Then massively downsize your home and add an extra occupant.  Then get rid of your flat screen TVs, cell phones, cars, computers and technological items that you love.   Okay, some of that is unnecessary, but you get the point.  The reason why we need two salaries to survive in today’s world is because we demand that much more from our lives.  We want all the best toys, the best educations, the best roof over our head.  These things aren’t free obviously.  And as a result of two working heads of household, we are able to provide much better living standards to our families than we did in 1950.  Don’t trust me?  Seriously, live the 1950’s lifestyle and let me know if you can get by.  You probably won’t last a week.

The other common retort is that gold standards are somehow synonymous with freedom because they reduce the government’s ability to manipulate the money supply.  Okay, that’s true to some degree.  But this also misses another important point about the gold standard.  The quantity and value of gold in today’s world is largely determined by foreign governments and guys with shovels.  In other words, its value and quantity is mostly determined by a small group of people incentivized to corrupt its value.  We read endless stories these days about how Chinese and Indian central bankers are buying gold or digging it out of the ground.  Is that “freedom” for the USA?  Is it wise for the USA’s money supply to be essentially pegged to dictators or foreigners digging the earth up?  Yes, we will put the US government in check, but why don’t we just let foreigners run the whole damn US economy while we’re at it since they’re going to be determining our money supply indirectly.  And this doesn’t even touch on the gold standard’s primary flaw which is the natural trade imbalances that will result from it….Freedom?  Not even close.  This is more like voluntarily gagging yourself, wearing a straight jacket and begging everyone to beat you with a baseball bat.

Fiat money is not perfect by any means.  And if the government is allowed to corrupt it then the system will surely fail.  But the power of the American system lies not in fiat, but in the fact that the people determine the government thereby determining whether the government is corrupt.  And more importantly, it is the people who ultimately determine the value of the currency via their ability to produce output that makes this tool of exchange valuable in the first place.   This is why it’s so important to actually understand the market based design of our monetary system.  The quantity of money is not determined by the central bank or by the government (or at least only very loosely).  It is primarily determined by the market place via the quantity of loans that are made based on the demand for credit (we reside in a credit based money system where almost all money exists in the form of bank deposits that result from loans issued by private banks on a demand basis).  If anything, it is the market that determines the quantity of money in the US economy via the private banking system and competitive market based system for loan issuance.

In the right type of system, fiat money is perfectly synonymous with freedom.

* Slightly edited the 1950’s example as it was admittedly over the top….Hopefully you get the point.  

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Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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