What is the Gold Standard?
In a liberal society, money will have a stable value. The reason is simple: If entrepreneurs are going to plan projects and produce goods and service of value to others, thereby continuing to increase wealth in society, they need to be able to work within a predictable framework.
This is not possible in a society, where the government can interfere in varying degrees in the economy by issuing regulations, printing paper money at will, and forcing banks to act as it wishes.
Business needs full economic freedom. When the banking system is free, it will seek solutions to ensure a stable financial framework. One alternative that has been favored throughout history is the gold standard.
The purpose of the gold standard is to prevent inflation and monetary tinkering on the part of the government and other institutions that benefit from friendship with government.
Inflation is a useful ploy to make loans cheaper. If a government takes out a loan of 1 billion dollars, and then runs an active money printing policy, the result is that more money is in circulation – and that they decrease in value.
Thus, it becomes cheaper to pay back the one billion dollars, but prices of goods and services have gone up. Furthermore, inflation hurts people who save money, because their savings have become less valuable. This hurts the motivation to invest and run a savings-based and sustainable economy.
A Stable Currency
A gold standard means that banks declare that money can be exchanged into physical gold. For instance, one ounce of gold could be exchanged for 900 dollars, and money would be anchored to a fixed amount of gold. If a bank prints up large amounts of money, people will experience this as a general increase in price. The money will be worth less, and the customers will trade it in against the gold amount – which makes the bank go bankrupt. Therefore, banks will avoid this.
With a gold standard, customers experience that everyone who wishes to do so can redeem their money for gold. The bank’s money will inspire increased confidence, and in time, it will be used for trade throughout society. The value of money is stable compared to gold, but otherwise the prices of goods and service go up and down in step with supply and demand.
Flexibility is Acceptable
Gold is not the only value a bank possesses, however. A large part of the funds in a bank can be found in real estate and capital goods, which it has obtained through security agreements when issuing loans. Therefore, the relationship between gold and money does not need to be one-to-one.
This means the bank can issue more money than it can cover in gold reserves, but it is up to the market to decide which model survives. This can be compared to insurance companies, which usually have more clients than they can fully cover with their funds. After all, it is not likely that, for example, all the clients’ homes will burn down at the same time.
Why Gold, Exactly?
The reason why gold was the exact choice as a means of exchange is the fact that it is a precious metal that cannot be endlessly forged and reprinted – as you can with paper money. In addition, there is a certain scarceness (exclusivity) to the material, and it will be a relatively stable amount to deal with.
Legalize, Not Implement
The task of a liberal government is to protect individual rights. Everything else is up to people to decide for themselves through peaceful relationships and cooperation.
Therefore, a gold standard will be legalized in such a society, but not implemented by the authorities. Whether the players opt for the gold standard or for another solution is a decision left totally up to themselves.
- Business needs a stable and predictable framework to engage in wealth creation
- In a free society it is up to the players themselves to find solutions for a solid economy
- The gold standard is a possible alternative
- With this system, money is tied to precious metal, which cannot be manipulated like paper money can
- Therefore, creating inflation and tinkering with the money is not possible
- Liberalists do not want to implement the gold standard, but legalize it