Gold (number 79 on the Periodic Table of the Elements), has been money ever since it was discovered. Today it competes against fiat currencies, especially the US dollar, in a competition it so far seems to be losing.

We are all aware of the value of the printing press to the state, but gold is aloof to economic principles and, unlike the state and its bankers, it always tells the truth.

At present the Keynesians and fellow travellers want to be rid of gold (“A barbarous relic” according to John Maynard Keynes) while the Austrians and Libertarians seek a return to a gold standard.

The rationale for a gold standard primarily revolves around it being a constant store of value. For example:

“Regardless of the dollar price involved, one ounce of gold would purchase a good-quality man’s suit at the conclusion of the Revolutionary War, the Civil War, the presidency of Franklin Roosevelt, and today.”
– Peter A. Burshre

Nonetheless, inflation has taken place under a gold standard, or its equivalent. In the latter part of the Roman Empire, gold coinage was constantly being debased, by using less gold in coins  and alloying it with less valuable metals. Another notable period of gold inflation was in Spain in the 16th Century, at a time when vast quantities of gold (and silver) were entering Europe from the New World.

However, by way of comparison, the use of fiat currencies as money (really credit), without gold backing, has just about always ended badly.

Here are a couple of quotes from recent Chairmen of the US Federal Reserve.

“It is a sobering fact that the prominence of central banks in this century has coincided with a general tendency towards more inflation, not less. [I]f the overriding objective is price stability, we did better with the nineteenth-century gold standard and passive central banks, with currency boards, or even with ‘free banking.’ The truly unique power of a central bank, after all, is the power to create money, and ultimately the power to create is the power to destroy.”
– Paul Volcker, ex US Federal Reserve Chairman

“Gold, unlike all other commodities, is a currency…and the major thrust in the demand for gold is not for jewellery. It’s not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating.”
–  Alan Greenspan, ex-US Federal Reserve Chairman

An  here is something less conclusive from the current (soon to be Ex) Chairman:

“The degree to which the gold standard actually constrained U.S. monetary policy during the early 1930s is debated,” he said, “but the gold standard philosophy clearly did not encourage the sort of highly expansionary policies that were needed.”

– Ben Bernanke

This a remarkable degree of support for gold from people who are at the heart of the fiat money system.

Last Word

It is difficult to see a return to the gold standard, and even if it did occur, the system would be gamed by all involved. Nonetheless, it will remain a store of value that has held its buying power over a long period of time.

Finally, a quote from the master:

“Everything has its limit – iron ore cannot be educated into gold”

– Mark Twain

13 August 2013 Macro