Via Wiki­media Commons

Many econ­o­mists see an inter­na­tional return to a gold-backed cur­rency as a solution to many coun­tries’ financial woes. With a true gold standard, the decline of money’s pur­chasing power would slow, the gov­ernment would have less control of our cur­rency, and, ideally, central banks would be abol­ished, putting to bed the Key­nesian pipe dream of steering an economy. But, in a world of glob­al­ization and inter­twined national economies, many argue that the current state of the world renders the switch impos­sible. eco­nomic fal­lacies abound in the gold standard dis­cussion, the most common being that there isn’t enough gold to serve the needs of the world. This argument remains untrue, regardless of how often it is made.

In a gold standard system, the quantity available is unim­portant when deter­mining if it will satisfy con­sumers’ needs. Any amount of money, when agreed upon as a means of exchange, will serve all of society. Though many people obsess with their account bal­ances, they care more about the pur­chasing power of that money than the actual quantity. The supply of a form of money directly influ­ences its pur­chasing power, increasing it when the supply decreases and vice-versa. Therefore, even in a hypo­thetical shortage of gold, the pur­chasing power of even a small amount of gold would be quite high. We may nom­i­nally have “less” money, but each indi­vidual unit would have the ability to pur­chase a greater amount of goods and ser­vices. When its value is allowed to be deter­mined by the market, the actual quantity of gold cannot be too small to serve society.

However, a com­modity can be too scarce for prac­tical exchange. If only one bar of gold existed in the world, the pur­chasing power of one speck of gold dust may be astro­nomical, but no sane person would capture that speck and expect to use it to pur­chase goods. Therefore, monies are deter­mined by humans inter­acting in the mar­ket­place. Gold and silver became widely cir­cu­lated due to their perfect balance between avail­ability and rarity, in addition to their inherent use value in jewelry. This fact renders hypo­thetical gold shortages pointless. Thou­sands of years of market inter­action deter­mined gold to be the superior means of exchange, not the flawed whim of a ruler or the inten­tions of some “inventor of money.” The actors in the economy, the ones who utilize money, mutually deter­mined gold func­tioned best.

This is not to say that a better, more effi­cient means of exchange cannot emerge. Bitcoin tech­nology is a fas­ci­nating attempt to create an untraceable elec­tronic cur­rency, and, if gov­ernment were to stay out of its way, it may even­tually replace a hypo­thetical gold standard as the best form of money. However, until then, most Aus­trian econ­o­mists will con­tinue to praise the gold standard and call for its return. Its biggest obstacle? The igno­rance of basic macro­eco­nomics.