Rolling Gold

Gold has been used as decoration since at least 4000 B.C. Now a Republican bus tour is parading through Iowa advocating a return to the gold “standard.” So what’s up with gold? Here are some interesting facts:

  • A single ounce of the metal can be drawn into a wire five miles long.
  • It can be hammered into sheets so thin that light can pass through.
  • High purity gold reflects infrared (heat) energy almost completely, making it ideal for heat and radiation reflection.
  • Gold-coated visors protected astronauts’ eyes from searing sunlight on the Apollo 11 moon landing.
  • Gold is an excellent conductor of thermal energy. It is used in many electronic processes to draw heat away from delicate instruments. For example, the main engine nozzle of the space shuttle uses a 35% gold alloy.

Gold gradually emerged as standard of exchange, but was not made into currency in the way we understand it until the Shekel emerged as a standard of international trade around 1500 B.C. Gold emerged as a unit of exchange partly because of the extraordinary physical characteristics listed above. It is also rare and the total supply of gold grows slowly. No one had to dictate that gold was valuable; it simply emerged as a common perception among traders and has held that status for thousands of years.

“Gold standard” has many meanings. Among other things, it can refer to actual gold coinage or to paper money that is backed by gold. “Backed” means that paper money is not the “real” money used in an economy. It only represents gold and can be redeemed for the real thing at any time. The only real advantage to having paper represent gold is that paper is easier to carry around.

The strength of a gold standard is that paper money cannot be printed willy-nilly. Politicians hate this restraint because one of their favorite ways to steal is to create deficits that are paid for by paper money backed by nothing. This is what we are witnessing now as the Fed tries to defibrillate the economy with a dose of adrenaline in the form of money created from thin air. The only possible outcome after a period of time is hyper-inflation, a situation in which people no longer believe in the value of the paper.

If politicians hate it so much, why the bus tour? Well, it seems that the jig is up. Voters are starting to realize that politicians will never spend responsibly. They have also started to figure out some basic economics, namely that the fiat money system we have in place now allows people at the very top to rape the poor and the middle class. A gold standard would at least reduce the ability of politicians to steal through inflation. It would force them to print only the amount of money for which there is gold to back it up.

Will it work? Not likely, at least not in the way that the bus riders think. A gold “standard” still implies that the government determines what money is and leaves it plenty of room to screw things up. There are certain problems with international trade if only the US converts as well, which I will cover in a future blog. Last, there is so much paper money in circulation that an ounce of gold would have to be set at an extraordinarily high dollar equivalent. It is not at all clear that there is a route from here to there.

In short, a gold standard sounds like good medicine, but is likely to give us a major rash in the end. A more radical solution is required, one that kills the Fed and removes government from the business of managing currency altogether. Right now, that idea is too radical for most Americans.

So what can we do? If you are the type who believes in unicorns and magic fairies, I would put your stock in the bus riders. To their credit, they at least have enough sense to bring the subject up, unlike dyed-in-the-wool Keynesians, who stop just short of thinking gold evil. If you are more like me, an optimist who carries a raincoat, you will accept the dismal fact that the Fed and its cronies will suck blood until there is no more. As the last drop is consumed, the people at the very top will waddle off to their private islands, stuffed to the gills. The rest of us will suck, too–the hind teat, that is.

Those who see the end of the dollar coming will be able to find ways to shelter at least some of their wealth. They will also find ways to make money both before and after the crash. I encourage you to start learning how. Get on the bus now, but not the one rolling through Iowa.


About Terry Noel

I am an Associate Professor of Management and Quantitative Methods at Illinois State University. My specialty is entrepreneurship.
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