Part 36 – The Gold Standard

The Gold Standard is the name given to the backing of a currency with Gold.
Sir Issac Newton, of gravity and falling apple fame, is credited with having come up with the notion of a Gold Standard circa 1717. It serves humans civilisations well for 200 years.

Why has Gold been used to back currencies? Well, because gold has an intrinsic value and it maintains this value over time. With a Gold Standard, a currency can become money – or rather I should say a currency can assume the status of real money. A currency will only ever be a currency. It will never be real money.

Backing a currency with gold gives the currency a value than it would otherwise not have. After all, currencies don’t have any real intrinsic value. In and of themselves, they aren’t worth much. They are just paper - pretty, printed pieces of paper. Or with regard to coins, shining bits of metal. (Have you noticed that coins are coloured silver and gold? This is done deliberately - to fool people into thinking that they are real money.)

There is another very important facet of the Gold Standard which is often overlooked. Having a Gold Standard demands that governments are fiscally prudent. This basically means that the governments have to “balance the books” and budget properly.

It’s a restraining mechanism, serving as a curb against governments building up debt. With a Gold Standard they can not so easily increase the money supply. They can’t just print money as they desire.

Why not? Because Gold is a scarce resource and it’s hard to come by. With the Gold Standard the money supply usually increases in line with productivity. Inflation is therefore necessarily limited.
The converse is also true obviously. Without a Gold Standard, governments have no real restraint on their spending.

Wise up and rise up.