Friday, December 28, 2012

Hard money?

How do you enforce a gold standard?

Anyone can create a fiat currency. All I have to do is write an IOU for a half hour of my time, or a day's worth of groceries of my time, or one arbitrary unit of my time. Since people trust me, those people can use that IOU as currency. If my descendants choose to honor the IOU, then it can circulate indefinitely, mediating an arbitrarily large amount of trade. Private banks were creating money like this long before governments got into the game.

All you have to do to not use a fiat currency is, well, not use it, or at least not use it much. Take all your money out of your savings account and buy gold with it. When you need to buy groceries, trade in a little bit of gold for cash. The amount of cash you get for the gold doesn't matter: since gold (supposedly) has a consistent, real value, then the amount of stuff you get for that cash will depend not on the arbitrary units of the potentially inflating currency, but on the real value of the gold. Whether it's one Euro per ounce or a thousand lire, it'll still represent the same amount of food.

This is kind of cumbersome, but people generally don't want to take gold directly; it's not their problem that you don't like the fiat currency. (Would you force them to take gold?) But that's a business opportunity! If gold is so useful as money, start a gold bank. Let people deposit currency, use the currency to buy gold, hold the gold, and give people currency when they want it at whatever the going rate is. There are plenty of idiot goldbugs who don't understand economics. You could make a fortune!

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