Sunday, 8 March 2009

Return to the gold standard?

I have been hearing two things about gold a lot recently...
  1. Gold keeps its value in the long term.
  2. Therefor gold should be used as a peg for currencies - "the gold standard".
Now I do absolutely agree with point 1. In the long term gold has kept its value very well. This is in large part because it the quantity of it in existence is very restricted. However I would not agree with statement 2 at all. The problem is that whilst golds long term value has been very constant, its short or medium term value has varied all over the place. The reason for this is that it is a popular target for speculation, in fact it's value is largely dominated by speculation. Its price can become temporarily very high purely because of the belief that it will go even higher - this is a self feeding phenomena leading to great booms followed by busts... mark my words - just watch what happens to the price of gold when (or shortly before) this recession finally comes to an end (which may be some time) - it's price will come crashing down.

So one may ask, how can we keep the value of a currency stable? I think the answer is obvious - ditch the ridiculous, unstable, out of control, fractional reserve currency system and instead arrange to have a fixed quantity of money in an economy. This way a currency will only vary with the productivity of the nation. There is no need to peg it to anything in order for it to be stable. Instigating this plan could be achieved in a variety of ways, the only real obstacle being the political will to do it.

Some people, when faced with the thought of a fixed quantity of money in an economy seem to think that it would somehow "stunt growth" because "you need more money if you're ever going to pay for the ever increasing output of an economy" - but this argument is entirely fallacious. Money continuously adjusts its own value.

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