Dmytri Kleiner against the ideology of gold

Republished from Dmytri Kleiner:

“The Ideology of Gold.

You all know them, the “Gold Bug,” often using words like “fraud” and “debasement of our money,” they decry government issued fiat money as a big scam to rip off the masses! We need “sound money” or “real money,” meaning gold. Gold has real value, it’s not “worthless” like paper!

Using gold as money, instead of government issued non-convertible currency, will bring prosperity and stability and prevent us from being defrauded by bakers and bureaucrats!

The concept rests on the basic premise that since gold is relatively fixed in supply, the government can’t increase the money supply, thus money is sound. What’s more, investors and savers, financial planners and contract holders have certainty, knowing the money in their plans and bargains will keep a stable value.

Of course, there is one small problem with this: It’s hopelessly wrong. More than just being false,
it’s an ideological pretense favouring the interests of the powerful, who’s real object of disdain is redistribution of wealth from the rich to the poor, like the majority of neoclassical theory, the real point is that inequality is just and any attempt to help the poor will lead to economic catastrophe.

For one, metallic currency will not prevent the money supply from growing. Most money in the economy is created by lending, and is only tentatively connected with the monetary base by policy and regulation, whenever a bank lends money, it creates money, and beyond any policy or regulation, the limit of how much money it can create is a function of the productive output of the economy and the structure of transactions within it. Thus, even with a metallic monetary base which the government can not increase, the money supply can still increase through the actions of lenders and borrowers.

The real point here is not simply controlling the money supply, but controlling the government. Gold Bugs often characterise government spending as wanton extravagance, telling torrid tails of Roman Emperors Nero and Caligula, or King Charles II to illustrate their point. The government must be kept under control! The obvious conclusion being that rather than try to restrict the spending of potential tyrants by employing dubious currency schemes, we instead focus on created better forms of governance. However, better forms of governance may govern on behalf of all the people, not just the rich, so the Gold Bugs, would rather have depraved wanton rules, only they want to make sure these rulers are dependant on their gold.

This is an ideological position. Constraining government spending may prevent rulers from wanton extravagances, but also from beneficial spending as well. In most cases, its the beneficial spending that will attract the greater protest, as for the Gold Bug, there can no crime worse than improving the conditions of the poor.

When pressed, the Gold Bug will admit that lending and borrowing can also increase the money supply, every bit as much as money printing by the government can, and what’s more the government can be one of these lenders and borrowers as well, since the government usually has an excellent credit rating, this means it can continue still spend more gold than is collected by borrowing it, however it must increase the income of lenders in the process.

The Gold Bug will now launch into the second part of the diatribe, this time not against fiat currency, but rather against “Fractional Reserve Banking.” Just as evil in their mind as the practice of printing money. They will propose “Full Reserve Banking,” where the banks are constrained to only lend out money in proportion to what they have in long term deposits. Since longterm deposits can not be withdrawn, the money available to be spent is thus fixed.

With the money supply fixed, the value of money is certain to be stable!

Yet, even this is false. The value of money is not based on the volume of money alone, but on the volume of money available in comparison to the amount of goods that are available for purchase. Monetary Inflation is a outcome of the ratio between monetary growth and productive growth, thus having a stable money supply will only produce stable money value when the economy never grows or shrinks.

Thus, even with a gold standard, the value of money is not stable. In fact, as the economy is more likely to grow than to shrink, if the volume of money is fixed, it’s value is likely to continuously increase.

Now, who would really want money to increase in value? Those that have lots of money.

The value of money is essentially the exchange rate of money relative to goods and services. On one hand, providers of goods and services want more money for what they produce, on the other hand, holders of big piles of money want greater returns on their money. All prices fluctuate on the market, the value of eggs is not stable to the value of corn flakes, the value of semiconductors is not stable relative to the value of LEDs. Fluctuations of values are best constrained, so that savings aren’t wiped out or debt rendered impossible to pay, but fluctuations are quit manageable and deflation is certainly not preferable to inflation.

When you borrow money and you pay it back later, if the value of money goes down you have in real terms paid back less than you borrowed, on the other hand if the value of money goes up, you will need to effectively pay back more than you borrow. Inflation is a transfer of wealth from lenders to borrowers, while deflation is a transfer of wealth from borrowers to lenders.

In many cases, borrowers include the entrepreneurs who borrow money to invest in new business and who create economic growth. Thus deflation is also a transfer of wealth from entrepreneurs to money lenders. So far form being an great economic boon, so-called “sound” money, is actually a constraint to building the capacity for creating more wealth. The ones that benefit are those that are already rich.

Make no mistake, promoters of Gold Standards and Full Reserve Banking are promoters of the interests of the rich, and are not so much interested in economic stability, but in class stability: making sure the rich stay rich and the poor stay poor.

There can be no such thing as “sound” money, money is a relationship, a way of keeping track of what we do for each other in a large impersonal economy. The amount of money there can be is limited only by the amount we can do for each other. The aggregate of all the things that we do and make for each other is called the economy. The right amount of money to have is that which is enough for anybody who wants to buy something from anybody that wants to sell something, in other words, the amount of money needs to only to stay stable relative to how much their is for sale. A free economy can not be constrained by people who want to get richer just by hoarding the currency everybody else needs to conduct their exchanges. Paper money, and other forms of credit are not “worthless,” any more than a contract is “worthless.” Its worth comes from the promises that it represents, and we should not be limited in what we can promise each other.

If government is untrustworthy, then we need new democratic forms to take its place, not try to constrain it by tying its spending to some arbitrary volume of metal, and if the banking system is not managing our money supply, we can not help ourselves by adding even more limits on how credit can capital can be formed, but rather we need to create ways to create credit and capital amongst ourselves. Gold Standards and Full Reserves don’t help us do any of these things, what they do is chain us even more to the established distributions of wealth and power and help conserve the structure of wealth, at the expense of our common wealth.”

3 Comments Dmytri Kleiner against the ideology of gold

  1. AvatarJulia

    I think Graeber put it best when he pointed out that money – all money – is essentially an IOU, a debt. Advocates for a gold standard who rant on about the “immorality” of fiat currency don’t seem to understand that all money functions the same. You could have pomegranates as money if people accept them as such.

  2. AvatarTodd S.

    Not to mention the typical goldbug is also a staunch capitalist. Meaning that they seem to think that the trappings of capitalism like equity markets could still exist with a specie currency. But if you look at how equity markets operate, they are creating and destroying “wealth” all the time; every second they are in operation. If you have a company with 1 million shares trading at 10/share, then I buy but a single share at 11, the company’s “market capitalization” has just increased by 1 million, not 1. How can you reconcile this with a finite money supply?

  3. Avatarhappyseaurchin

    wait a mo
    if money is a debt
    that means if someone has £1m
    then they are £1m in debt
    now that’s a *weird* thought…

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