Misconceptions about the Gold Standard

With the faltering dollar and the ascent of Ron Paul’s intellectual influence, the idea of the gold standard has received an increasing amount of attention over the past few years. Naturally, the policy proposal often associated with libertarians has been harshly criticized by those who would prefer the government to have the power to print money without restraint. Unfortunately, many of the criticisms that tend to be the most persuasive rely on false presentations of what gold standard supporters are actually proposing.

Perhaps the most common misconception about advocates of the gold standard, frequently referred to as gold bugs, is that they believe gold to have intrinsic value. It is said that gold bugs favor having gold as money because it is inherently valuable regardless of its use. However, most of the economists who favor a gold standard adhere to the subjective theory of value. This means that gold bugs understand that all goods get their value only from the subjective way in which individuals rank them. Gold is subjected to this valuation just as any other good is and if individuals began believing gold to be worthless, it would lose the value it has. In other words, gold does not have intrinsic value, and gold bugs don’t believe this.<--break->

The reason gold is chosen by these economists to be used as money is not that it has intrinsic value, but because throughout history it has been the most common and dominant commodity to arise as money. In times that money has been left to develop naturally, gold has almost always overcome the competition of other commodities and become the money used by individuals. It is also relatively scarce, which prevents the many problems of constant inflation and limits the ability for the government to grow rapidly as it does under a fiat money system. Gold bugs simply observe history and economics and realize that gold has a trusted record of being the most effective and desired money.’

Another mischaracterization about the gold standard is that by having the government dictate that gold be accepted as money, it is still being given a monopoly. However, this view ignores perhaps the most important aspect of conversion to a gold standard: legalizing competition for private currencies. Allowing this competition forces the government to maintain a strong value in whatever money they issue so as to prevent other moneys from becoming more desired. It also gives individuals the freedom to choose which money they most prefer.

Imagine a scenario in which the government issued dollar and the privately issued dollar are both moneys competing in a certain region. If the government decides to massively inflate the dollar, then eventually people may switch to using dollars because it maintains its value better. When forced to face competition from private currencies, the government is incentivized to maintain the value of its money out of necessity and not the whim of fickle politicians.

The idea of private currencies may seem unfeasible in a world that is dominated by state controlled money. But money, like any good, only increases in quality when competition is allowed. In fact, the dollar, perhaps one of the strongest currencies in history despite its recent struggles, can have its origins traced back to show that it began as privately coined money and gained great value from the trust individuals had in it. Unfortunately, modern attempts at repeating such success of private money have been shut down or greatly limited by the United States government, most notably the government’s assault on the gold and silver backed Liberty Dollar.  

Before the dollar, or any currency, can be converted to a gold standard, competition must first be allowed. It is useful for the government to issue a currency of its own in order to collect taxes, pay debts, and so on, however, people shouldn’t be commanded to use and accept this currency in all of their transactions. Whether the government money is backed by gold or by nothing, freedom is severely limited when individuals are allowed no options outside of what the government provides.

Another attack on the gold standard is based on its price fluctuations as an investment. Despite its proven performance as a long term investment, gold has been fairly volatile in different short term periods, reaching a high of $1910 an ounce in late 2011 and dropping back to under $1300 an ounce by middle 2013. The critic of the gold standard claims that while governmental control of the dollar may cause for its value to increase and decrease at any given moment, having it backed by gold makes this just as likely to occur.

However, this entire argument stems from lazy critical thinking. Under a gold standard, the dollar would have a solid definition in terms of gold, such as 1 dollar being redeemable for 1 ounce of gold. When considering the price fluctuations of gold as an investment, it must be remembered that these prices are in terms of dollars that aren’t backed by any commodity. In fact, many of the times that gold has risen in its dollar price have been during times of questionable monetary policy in which mass inflation is feared. Therefore, it can be concluded that the price fluctuations of gold in terms of dollars stem mostly from people’s confidence in the stability of the dollar, something that would be trustworthy under a gold standard.

Defeating the misinformation spewed about the gold standard is vital if one plans to successfully defend it. The above sophisms tend to be the most frequently repeated misrepresentations that critics of the gold standard resort to using when their other arguments have failed. Such arguments can only stem from two different reasons. Either the critic is intentionally attempting to mislead an audience in order to persuade them against the gold standard, or the critic is genuinely ignorant of what the policy proposal entails. Whatever the case may be, rebutting such claims is a nagging but necessary exercise.  

Content published on the Young Americans for Liberty blog is only representative of the opinions and research of the individual authors. It does not necessarily reflect the views, goals, or membership of YAL.

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