A fig leaf

There has been lots of talk lately about the need to embrace the gold standard for currency again because of America abusing the dollar. There are two issues that need to be separated, and the answers are not as simple as it might seem.

The reason why gold functioned as currency for the majority of history is that mankind had a solar powered economy. This means it was restricted by the amount of agricultural land that was used to convert solar energy into carbohydrates. Also, solar power was used for energy, in form of wood and coal. This made the total supply of energy available to mankind more-less constant. Also, technology was primitive and constant. This made the economy constrained, and its volume could be represented by another constrained resource, gold. Essentially, you could dig out just enough new gold to match the eventual growth of the economy. However, the problems started with the industrial revolution, where new inventions could multiply the size of the economy, and the monetary supply remained constricted. When petroleum use freed mankind from solar restrictions on energy by tapping into a huge energy buffer of oil reserves, invention of electricity broke all restrictions wide open, and Haber-Bosch method of synthesizing artificial fertilizers allowed for a huge increase in food supply, the economy and population started growing exponentially, and the monetary supply needed to be expanded far beyond the constraints of any single constrained resource. So, having in mind that the supply of gold couldn’t successfully cover the expanding economy even in the times of Tesla, Westinghouse and Rockefeller, and needed to be supplanted and eventually replaced by mechanisms based on mortgage loans and GDP calculations, suggesting an introduction of a currency backed by gold at this point reveals lack of understanding of the constrictive effect that would have on mankind. With gold, the totality of everybody’s wealth always equals the totality of gold in supply. With a gold standard, if you invent something that grows the economy by 30%, the supply of gold doesn’t grow by 30% to match, which causes a shortage of money in circulation and artificial appreciation of gold, favouring those who already hold the most gold, instead of giving power to the inventors and “new money”. Of course, if gold-backed paper money is used, the state will print more money in order to keep up with the economy, but then this money will lose convertibility into gold. This is the reason why gold standard was removed: it was a problem rather than a solution. When economy grew, for instance by the size of petroleum reserves, it was much better to use petroleum reserves as basis for currency than to try and dig out enough gold to represent the value of all the oil in the world, or to artificially inflate the value of gold to the comic proportions. Also, when someone came to the bank to request a loan, the bank could either say “sorry, but there’s not enough money in circulation to give you a loan, because we didn’t dig out enough gold this month”, or they could say “we can take the mortgage papers as backing for a low-interest loan we can get from the central bank, which will use this guarantee as backing and create new money which we will then sell you at increased interest”. Guess which turned out to be more acceptable for a growing economy.

However, when you allow someone to print papers saying “this paper represents a gold coin”, you will inevitably get more papers than gold coins, because the position where you can create money out of thin air is incredibly tempting. The first experiment with paper money in ancient China ended for exactly those reasons. But that is a separate matter: you can’t say that abuses of the fiat currency system justify returning to the gold standard, if the gold standard was not viable even in the 1930s, due to its restricting hold on economy. You can only make a currency that is required to be backed by actual physical resources, such as metals, petroleum, electric currency production, foreign currency reserves, and mortgages on physical assets. You can require solid backing for all newly printed money, but gold, there’s just not enough of it in existence to cover the value of our economy. It can’t even cover a minute fraction. And even if there were enough gold, it would work only if our economy remained constant. For a 5% growth in economy, you would need to have 5% of increase in total supply of gold, which is utterly unrealistic.

There is that other matter of dollar being an instrument of pressure and abuse, which warrants its removal from the position it presently holds. This would require the United States to relinquish a position where they can print new money out of thin air, and have the rest of the world pay for it; essentially, that’s what you get when everybody is forced to pay for petroleum in dollars. Instead of the normal inflatory effects you would get from increasing the supply of money in circulation, you get the situation where the rest of the world is artificially impoverished and American economy is artificially boosted. If you think America would relinquish this position without a very ugly world war, I have some real estate on the Moon to sell you.

However, there is a reason why America might actually find it preferable to have dollar crash and burn, despite all its obvious benefits. You see, all American debt is denominated in dollars. Also, American debt is so huge, it approaches the point of being unserviceable. There is a very easy and tempting solution for this: America can just print trillions of new dollars without any backing, and use them to cover their debts and thus reset their situation. Of course, that wouldn’t sit well with all the nations that hold American state bonds denominated in dollars, and would basically crash the world economy and monetary system in an instant, producing an avalanche of consequences, and that’s the reason why other great powers have been diversifying their assets, from US bonds to gold, rare earth minerals, etc.; because they see this coming. Either America will cause a world war to cover its naked butt, or remove any semblance of a fig leaf by simply resetting its debt to zero using the aforementioned method. Of course, having in mind that this would wipe out all retirement funds and personal savings of their citizens, this method would be hugely unpopular and would need to be covered up by some fabricated external factor. This is why I find a war to be much more likely. They will stir the pot so much, nobody will pay any attention to the little man behind a curtain pulling the levers and pressing the buttons. The plan seems to be to provoke Russia and China into a war, suffer a limited nuclear strike, introduce martial law, and then reset their debt and thus hide their plan behind some external villainous force, playing the poor victim of evil in the world. There is too much propaganda to that effect already in place for me to have any confidence in the possibility that I might be wrong.