Jun 06 2007
Why Metal Standards Don’t Work (Part 2)
I would’ve finished this post last night, but two things got in the way:
1. I had somewhere I had to be in short order.
2. The post was getting too long, so splitting it wasn’t a bad idea.
That said, if you haven’t read the first post, you can do so here.
Continuing on…
I’ll start by pointing out that, even with our current currency system, it’s quite possible for hostile countries to affect the value of our money. In fact, China has been buying T-Bills for years, which has caught some people’s attention. What I was getting at, however, was that, in a commodity-based or metal-based currency model, there’s no good way to get control of your currency when someone acquires enough of what your currency is based on. In fact, it was due to China indirectly buying a large amount of silver from Britain (what the Pound was based on at the time) that led to the Opium War. Coincidentally, this helps show that China has a long history of getting large trade balances on its side and picking up the wrath of the prevailing powers of the time in the process.
With that out of the way, it’s now time to explain what our current currency is based on - us! Simply put, our currency is based on the economic production of our country. If our economic production and our money supply increase at the same rate, our currency will retain value. However, pulling that off is rather tricky - there are numerous variables at play. So, what the federal government usually does is shoot for mild inflation - they do this by loaning money to banks at very favorable rates, which encourages banks to loan more money. If the government was unable to loan money due to a shortage of gold, banks wouldn’t be able to loan as much money, which would stunt growth since businesses wouldn’t be able to borrow money to increase capital.
So, why am I touching this? Because, though I’m libertarian-minded, I don’t agree with the entirety of the Libertarian Party platform. Take the following from the LP’s Family Budget section:
During those same years, the government has increased the money supply — producing inflation. Whether the inflation rate is 12% or 3%, the result is the same: groceries cost more; clothing costs more; your car costs more. You work harder every year for less purchasing power.
The solution, from the LP’s perspective, is to eliminate inflation. However, doing so would cause the millions of Americans on credit cards extreme hardship - banks, to maintain profits, would increase interest rates, causing undue hardship on American people. One way that some in the LP would like to fix inflation is by bringing back the gold standard. Unfortunately, bringing back the gold standard would cause extreme deflation (gold is currently selling for $668.90/ounce, so basing the dollar on gold would require fewer dollars on the market), which, as the article notes, would cause severe hardship - since the price of everything would go down, profits would go down, people would lose jobs, and anyone that’s borrowing money would be in dire straights.
I have other issues with the Libertarian Party’s platform as well… stay tuned.
