Gold vs Fiat

The more I look into it, the more convinced I am that fiat currency is superior to a gold standard.

In short, the gold standard is the idea that money/currency should be backed by gold, so that people who exchange money are, in fact, exchanging ownership of an amount of gold. This supposedly gives people confidence in that their money retains its value and is linked to a real, physical "thing" that can be measured and given worth.

Fiat currency, on the other hand, is money with no backing at all. Fiat currency is created through the fractional banking system as both the central bank and commercial banks create it as it passes through deposits and loans.

There is a lot of talk around the internet at the moment about the horrors of fiat currency and the importance of putting money back onto a gold standard. The Ron Paul political movement was not the creator of this movement, but did certainly help it along the way.

Let me just simplify some of the concerns I have about returning to the gold standard.
  1. A Gold standard was in place before 1929 and continued through the great depression. If anyone thinks that returning currency to the gold standard will somehow solve the current economic crisis ignores that simple fact. It was not the gold standard that caused the great depression, but it was not the gold standard that helped the world's economies recover from the depression. Similarly, the current economic crisis is not a result of fiat currency and the fractional banking system.
  2. Gold is only valuable because people attribute value to it. Gold is not somehow valuable in and of itself, like some sort of philosophical ideal. No. Gold is only valuable because human beings want it. Money, like gold, is something that people can value. Money created within a fractional banking system - ie not backed by gold - can and does retain its value. Japan, for example, has a fractional banking system, and they have experienced deflation over many years (deflation is when money rises in value against goods and services).
  3. Like all goods and services, gold's value is determined by the marketplace. If currency were backed by gold, what would happen if there was an oversupply of gold? With more supply comes lower prices, which means that money backed by gold can easily devalue (and cause inflation) if gold supplies increase. Restricting gold mining is an option, but a gold standard would turn gold mining companies into the world's central banks. These companies are not mining gold in order to keep the world economy stable, they are mining gold because it makes them rich. If a gold mining company strikes a very rich gold seam and begins to flood the market with gold then it would, of course, result in a currency devaluation.
  4. A fiat currency is controlled by a central bank. The supply of money can be easily regulated through monetary tools like interest rates, bonds and reserve requirements. Inflation is, of course, an issue in any economy but it is not sourced in a regulated fractional banking system. Even though central banks have the potential power to create an infinite amount of money, they do not because money's value needs to be retained in order for it to be used effectively. Put simply, hyperinflation and hyperdeflation are contrary to a central bank's purpose.
  5. While it is true that a fractional banking system could create an infinite amount of money, the reality is that money is used by humans, who pick and choose when to buy or save or invest or borrow. This slows down money creation. It is therefore entirely possible (and proven in Japan's case) that a fractional banking system can maintain price stability.
The picture is of a gold coloured Fiat. Yes, that is how bad my humour can get.

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