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Would Returning to the Gold Standard Resolve Our Most Pressing Monetary Problems? May 24, 2024
We all know the problem with fiat currency: the temptation to print more currency is irresistible, but ultimately destructive.
Money in all its forms attracts quasi-religious beliefs and convictions. This makes it difficult to discuss with anything resembling objectivity. But given the centrality of money (and its sibling, greed) in human affairs, let's press on and ask: would returning to the Gold Standard (i.e. gold as money / gold-backed currency) resolve our most pressing monetary problems? The conviction that the answer is "yes" is widespread. In this view, President Nixon "closing the gold window," in 1971, i.e. ending the convertibility of the US dollar to gold in international foreign exchange (FX) markets, is the Original Sin that doomed us to the inflationary Hell of fiat currency, i.e. currency unbacked by anything tangible such as gold or silver. In this view, the only way to avoid the consequences of this Original Sin--the eventual reduction of fiat currency to zero value via hyper-inflation as the currency is "printed" without restraint--is to return to the gold standard. So far, so good, but from here on in it gets tricky. We have a long history of precious metals being the only form of money in various economies, and an almost as long history of paper money augmenting precious-metal "real money" (in China, for example) and the issuance of copper coinage to grease small transactions. Gold-backed currency rolls off the tongue rather easily, but what exactly does this mean? In theory, it means every unit of paper / digital currency in circulation can be converted on demand to a physical quantity of gold or silver at an exchange rate either set by the nation-state's government or by the market. This conversion acts as a governor on the issuance of new currency: if the nation has $100 billion in gold/silver, it cannot issue $1 trillion in currency, as the whole idea of conversion is that each unit of currency can be fully converted to gold/silver. So in a truly gold-backed currency, the money supply in circulation must be limited to $100 billion. There are various tricks that can be played here, of course. The government can assign a conversion rate that doesn't align with the actual market value of gold/silver, for example. Or it can limit conversion to the settlement of foreign trade with other nations. Let's return to Nixon's Original Sin and stipulate that there is no such thing as "free trade", as all trade has geopolitical and domestic-economic elements. Those nations whose domestic growth depends on increasing exports, i.e. mercantilist economies, will naturally trumpet "free trade" as a cover for their exploitation of trade for domestic growth while they restrict imports. Many observers seem to forget the US was engaged in an existential geopolitical struggle with the USSR in the 1950s, 1960s and beyond. Gaining and maintaining allies and "spheres of influence" were core dynamics in this global contest, and the US had over-riding reasons to support the war-devastated economies of its allies in Europe and Asia by enabling them to export goods to the US. The US also had over-riding reasons to maintain the US dollar (USD) as a reserve currency, a currency that is available in sufficient quantity globally to grease commerce and credit and also act as a stable foreign exchange reserve for both private enterprises and nations. Issuing a reserve currency offers an exorbitant privilege--what we might call monetary hegemony--but it comes with a price, a price explained by economist Robert Triffin as Triffin's Paradox, which has two key paradoxical dynamics: 1. The issuing nation must run a sustained trade deficit in order to "export" sufficient quantities of its currency into the global marketplace to meet the expansive needs of global trade and other nations. (This helps explain why the USD is roughly half of all reserves (48%) while China's RMB is only 2% of reserves: exporting nations running surpluses don't "export" their currencies for use by others.) 2. This need to serve international trade / geopolitical goals is fundamentally in conflict with the goals of the domestic economy: the currency cannot serve two masters equally well. Why did Nixon end USD conversion to gold? He had no choice, as the geopolitically necessary trade deficits were rising to the point that America's gold holdings would have diminished to zero were the rising trade deficits settled in gold. Existential challenges take precedence. To say that the US should have given up its reserve currency and insisted our struggling allies maintain balanced trade with the US is to ignore the geopolitical realities. We must also recognize that markets discover the price/value of competing currencies, and so nations whose currency is priced higher than others will have difficulty exporting their goods, as these goods are priced in their own strong currency and are therefore more expensive in nations with weaker currencies. Nations with weaker currencies will have an easier time selling their goods to nations with stronger currencies, as their goods are cheaper as a result of their weaker / lower value currencies. Those nations blessed with surplus essential commodities (energy, food, minerals, etc.) will naturally tend to run surpluses with nations less endowed with tradable goods, and as a result, the nations running trade surpluses will end up with the lion's share of the gold and silver. This generates global "haves and have-nots," with all the attending sources of conflict: "our lead will take your gold." We might also note that fiat currencies issued by the sale of sovereign bonds are not actually "backed by nothing": they're backed by the interest payments made on the bonds and the entirety of the nation's economic-political-social stability and productivity which guarantee repayment of the bond at maturity. We all know the problem with fiat currency: the temptation to print more currency is irresistible, but ultimately destructive: once currency is issued in excess of the actual expansion of goods and services, the result is devaluation / loss of purchasing power, a.k.a. inflation. Here's a snapshot of global money supply: 
In response, central banks are adding gold reserves: gold reserves are now larger than the reserves of the second-largest reserve currency, the euro: 
Where does this leave us? Not with an easy answer, but with more complexities, starting with credit. As David Graeber explained in his book Debt: The First 5,000 Years, credit has been an essential element of commerce from the earliest days of commerce, for very compelling reasons. How do we graft credit onto "money" when credit is itself a form of "money"? We'll also have to consider the other crisis we face, soaring wealth-income inequality, which arose without restraint in ancient economies that used precious metals for money. Looking at the history of Rome, we note that the wealth of Rome's elite in the Republic era has been estimated as 30 times the wealth of the average free male citizen, where by the Imperial era the elites had amassed fortunes 10,000 times the wealth of the average free male citizen. There was no fiat currency, so we must accept that politics is part and parcel of "money," social stability and economic vitality or stagnation. We'll grind through these additional complexities in my next post. I discuss these issues with Richard Bonugli in a new podcast: CHS on Gold and What Currency Systems Make Sense (31:37 min). My recent books: Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site. Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF) The Asian Heroine Who Seduced Me (Novel) print $10.95, Kindle $6.95 Read an excerpt for free (PDF) When You Can't Go On: Burnout, Reckoning and Renewal $18 print, $8.95 Kindle ebook; audiobook Read the first section for free (PDF) Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $9.95, print $24, audiobook) Read Chapter One for free (PDF). A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $8.95, print $20, audiobook $17.46) Read the first section for free (PDF). Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World (Kindle $5, print $10, audiobook) Read the first section for free (PDF). The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $4.95 Kindle, $10.95 print); read the first chapters for free (PDF) Money and Work Unchained $6.95 Kindle, $15 print) Read the first section for free Become a $3/month patron of my work via patreon.com. Subscribe to my Substack for free Self-Reliance in the 21st Century print $18, (Kindle $8.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF) 
When Ralph Waldo Emerson wrote his famous essay Self-Reliance in 1841, the economy was localized and households supplied many of their own essentials. In our hyper-globalized economy, we re dependent on distant sources for our essentials.
Emerson defined self-reliance as being our best selves thinking for ourselves rather than following the conventional path. Self-reliance in the 21st century means reducing our dependency on fragile supply chains and becoming producers as well as consumers. Self-reliance is often confused with self-sufficiency--the equivalent of Thoreau s a cabin on Walden Pond. But self-reliance in the 21st century isn t about piling up money or a cabin in the woods; it s about humanity's most successful innovation: cooperating with trustworthy others in productive networks. The book details the essential mindset of self-reliance and 18 nuts and bolts principles of self-reliance in the 21st century.
Podcast with Richard Bonugli: Self Reliance in the 21st Century (43 min)
When You Can't Go On: Burnout, Reckoning and Renewal ( $18 print, $8.95 Kindle ebook; audiobook) 
When I burned out, what I wanted but could not find was a practical guide by someone who had experienced burnout
themselves. None of the material I found spoke to what I was experiencing or to my sense that our
economy is now optimized to burn people out.
I decided to write the guide I wanted but could not find. This is my experience of burnout, reckoning and renewal. This book is my account of what helped me. The intended audience is other burnouts and those who want to better understand the experience of burnout. Burnout is a life-changing experience in a good way, as absurd as that may sound to those in the depths of burnout. To paraphrase Samuel Beckett: I can't go on but I must go on. There is a way forward. Read the first section for free (PDF). The Introduction
The Epidemic Nobody Talks About: Burnout
Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States ( $22.50 print, $9.95 Kindle ebook, audiobook) 
Nations that embrace Degrowth and social cohesion will survive. Those that cling to "waste is growth" economies
and destabilizing extremes of inequality will perish.
The threats to the republic are unprecedented, and conventional responses are an accelerant of collapse: the status quo is now the problem rather than the solution. We have an opportunity to redraw America s Grand Strategy from the ground up. Should we fail to do so, the United States will fail, along with all the other nation-states that are incapable of grasping degrowth and social unity as solutions. This revolutionary Grand Strategy will be the deciding factor between nation-states that fail and the few (if any) that will not just survive but actually thrive. Read Chapter One for free (PDF). Read the Introduction Podcast discussing the book: A Grand Strategy to Address the Global Crisis (54 min., with Richard Bonugli)
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Extra-Special Bonus Aphorisms:
"There is no security on this earth; there is only opportunity." (Douglas MacArthur) "We are what we repeatedly do." (Aristotle) "Do the thing and you shall have the power." (Ralph Waldo Emerson) "Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius and a lot of courage to move in the opposite direction." (E.F. Schumacher, via Tom R.) "He who will not risk cannot win." (John Paul Jones) "When we drink coffee, ideas march in like the army." (Honore de Balzac) "Progress is not possible without deviation." (Frank Zappa, via Richard Metzger) "Victory favors those who take pains." (amat victoria curam) "The man who has a garden and a library has everything." (Cicero, via Lee Bentley) "A healthy homecooked family meal and a home garden are revolutionary acts." (CHS) "Do you know what amazes me more than anything else? The impotence of force to organize anything." (Napoleon Bonaparte) "The way of the Tao is reversal" Or "Reversal is the movement of Tao." (Lao Tzu) "Chance favours the prepared mind." (Louis Pasteur) "Success consists of going from failure to failure without loss of enthusiasm." (Winston Churchill) "Where there is ruin, there is hope for treasures." (Rumi) "The realm of gratitude is boundless." (CHS, 11/25/15) "History doesn't have a reverse gear." (CHS, 12/22/15) Smith's Law of Conservation of Risk: Every sustained action has more than one consequence. Some consequences will appear positive for a time before revealing their destructive nature. Some consequences will be intended, some will not. Some will be foreseeable, some will not. Some will be controllable, some will not. Those that are unforeseen and uncontrollable will trigger waves of other unforeseen and uncontrollable consequences. (July 8, 2014)(thanks to Lew G. for retitling the idea.) Smith's Neofeudalism Principle #1: If the citizenry cannot replace a kleptocratic authoritarian government and/or limit the power of the financial Aristocracy at the ballot box, the nation is a democracy in name only. The Smith Corollary to Metcalfe's Law (The Network Effect): the value of the network is created not just by the number of connected devices/users but by the value of the information and knowledge shared by users in sub-networks and in the entire network. (CHS, 4/6/16) My Credo of Liberation: I no longer care if the power centers of our society--the distant, fortified castles of our financial feudal system--are changed by my actions, for I am liberated by the act of resistance. I am no longer complicit in perpetuating fraudulent feudalism and the pathology of concentrated power. I no longer covet signifiers of membership in the Upper Caste that serves the plutocracy. I am liberated from self-destructive consumerist-State financialization and the delusion that debt servitude and obedience to sociopathological Elites serve my self-interests. (Thank you, Klaus-Peter L., for reminding me) "We've become a culture of excuses rather than solutions: solutions always require sustained effort and discipline." (CHS 4/9/16) "Fraud as a way of life caters an extravagant banquet of consequences." (CHS 4/14/16) "Creativity = problem solving = value creation." (CHS 6/4/16) "Truth is powerful because it is the core dynamic of solving problems." (CHS 7/21/17) "We live in a system of human emotions that masquerades as a science (economics)." (CHS 1/1/18) "Always remember, your focus determines your reality." (George Lucas) "Diversity is for poor people. Sameness is for the successful." (GFB) "When power dissipates suddenly, it dissipates completely." (CHS 7/14/19) "Disobedience is the true foundation of liberty. The obedient must be slaves." (Henry David Thoreau) "Markets cannot price in the value of non-monetized natural assets such as diverse ecosystems." (CHS 7/14/19) "Magical thinking isn't optimism, it is folly." CHS 1/3/22) "Tune in (to self-reliance), drop out (of hyper-consumerism and debt-serfdom) and turn on (to relocalizing capital and agency)." (CHS 1/5/22) "The path to everything you desire starts here: like yourself as you are right now." (CHS 11/20/22) "There are only two signals: how many essentials you produce and share and if you're consuming less with better results. Everything else is noise." (CHS 12/17/22) "Liberation is no longer needing any confirmation or feedback from others or the world for one's sense of self. Wealth, fame, recognition, admiration, praise, prestige, approval, sainthood, martyrdom, success: none are needed, none are desired." (CHS 12/26/22) "When fame, wealth, prestige, status and glory are out of reach, you're free to pursue other more valuable things." (CHS 2/6/22) "It is the sacred duty of every activist who seeks to better their community to grow and share as much life-giving food as is humanly possible." (CHS 6/15/23) "Being anonymous, gray and unknown is the ideal state of freedom." (CHS 3/15/24) click here for more Extra-Special Bonus Aphorisms. |
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