We have been reflecting and writing on money lately. Now we turn to the question of can we return to gold or gold-backed currencies?
For a large part of human history, warfare has been motivated by and certainly directed at the acquisition of a neighboring country’s gold which represented a country’s wealth. Gold was the basis of a sovereign’s wealth and power and no sovereign, of today included, has ever had enough wealth. Until recent times, gold has been the predominate metal of currency, supported by silver and copper.
Gold Coinage As Currency
Consider an Archimedean experiment. Suppose all world currencies were in gold coins. Suppose we created a large balance such that all the gold coins in the world were on the left side and all the tangible assets in the world, ex gold, were on the right side. Suppose the balance were constructed so it was initially in equilibrium (balanced) and what the balance is measuring is value.
If we multiplied the face values or denominations of the gold coins by their numbers and added them up, we would have the value of all the money in the world.
Since it takes years (typically 5 at a minimum) and huge amounts of money (typically half to multiple billions of dollars) to explore for, develop and put into production new gold deposits, the increase in the gold supply is at a slow, fairly fixed rate. The total value of money on the left side of the balance grows slowly and cannot be accelerated to any extent.
The quantity of tangible assets or durable goods (we will ignore services for our simple example) on the other hand has expanded much faster through industrialization and the utilization of modern technologies. The output per unit of labour in virtually all industries and agriculture has been increasing steadily for centuries. The total value of assets at a fixed price on the right side grows faster than the value of gold on the left.
The experiment we have created would move away from the initial equilibrium or balance quite quickly. A free market would restore balance naturally, but let’s see what we would have to do if we wanted to maintain the balance ourselves. We would have to increase value on the left side or decrease value on the right side. Let’s look at the left side first.
