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Prophets of Gold – Part 1 – The problem with the prophets of the Gold Standard

Posted by Don McLenaghen on January 23, 2012

This blog post turned essay started from a conversation I had with a co-worker. He had mentioned that he thought the USA should return to the gold standard. I made some disparaging comments and debate ensued. Sadly for me, although I was sure of my conclusions I could not bring the reasons and arguments to mind to prove my point. This of course spurred me to write this.

At the heart of my trouble in attempting to explain why a return to the gold standard is at best a non sequitur and at worst a ticket to decade long global depression is the fact that those who propose the gold standard are using it as code for a set of radical changes. Each in their own sounds plausible to the armchair economist but fail under greater scrutiny. I have termed those proposing the return to the gold standard the Prophets because they preach of a holy land that we could have if only we were (economically) pure.

I think one of the reasons I spent such effort on this project is not so much to ‘prove a point’ but because thanks to prominent political figures, most notably GOP presidential hopeful Ron Paul, there is a growing chance the ideological powers will be given the chance to create this economic dystopia. Because of the length of this discourse, I have divided it into 6 segments and have also included in this first segment the bullet talking points. I go into greater detail on these in other following segments.

The Skinny on the discussion; what they say and my response

1)      Gold is thought to be stablehistory has shown it is not, nor is a fixed currency economy.

2)      Gold prevents hyper-inflationmost countries that suffer hyper-inflation started with fixed currency. Easy on the gold standard, easy off.

3)      Gold limits government debtgovernments get debt not by printing money but by issuing bonds.

4)      Fiat money leads to hyper-inflationhyper-inflation is caused by other issues, confusing symptom for cause.

5)      Fiat money allows governments create infinite debtno, it can only create as much debt as the market will buy.

6)      Fiat money is debtits credit and its one of the foundations of capitalism. It’s not currency but capitalism.

7)      Full reserve banking is besthowever it dries up investment capital

8)      Full reserve banking promotes savingno, people would use investment companies

9)      Markets self-regulate, money supply regulation makes economics less stableno, historically inaccurate

10)   Without the gold standard, boom/bust cycles have gotten worseno, again historically inaccurate

11)   The US is suffering a debt crisisno, it’s a political crisis

12)   Europe is suffering a debt crisisyes, and the made worse by the fixed currency of the Euro

13)   Credit ratings are being lowered because of government debtno, it’s austerity and political instability not deficit.

Okay, that’s the simplified view. In the next few posts I will expand, explain and pontificate on these points in greater detail.


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