gold eagleLinking gold to a currency is always doomed to fail. The expansion of the money supply through bank lending and government deficit spending puts pressure on a fixed gold price, a pressure which can only be released by either revaluing gold at a higher price (from $20,67 to $35 per troy ounce in 1934) or by selling gold (London Gold Pool during the sixties). There is no discipline in a gold standard which links gold to the currency, it is just a matter of time before we can all agree it has failed. How long such a gold standard can live depends on the price at which the gold is fixed, how much gold there is in the vault to back up the currency and how fast the supply of currency expands. The only certainty is that it will fail sooner of later.

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Submitted by Market Update:

Quite often we hear ‘gold bugs’ saying “gold is money”. Or that it should be money again, for example by linking the value of money to a certain amount of gold. These sentiments are characteristic for a time in which central banks provide almost unlimited amounts of liquidity to the banking system and in which banks are saved by taxpayers for billions of dollars. Yet gold bugs should understand that the monetary problems are not solved with a return to gold money.

Gold Standard

The idea of linking money to a fixed amount of gold has some prominent supporters. People like Ron Paul, Mike Maloney, Peter Schiff and many others are very popular among the goldbugs for their view on gold. Inspired by the Austrian school of economics they oppose the Keynesian view and plead for a return to ‘sound money’, that is money with intrinsic value. According to many gold bugs we could limit the power of the banks and governments with a return to money backed by the precious metal.

By imposing a gold-exchange standard we could end the fractional reserve banking, forcing governments to live within their means. Expensive wars would be limited in scope and duration, because governments would not be able to finance it. A gold exchange standard would discipline both banks and governments, according to the proponents of a return to a gold-backed currency.

Bretton Woods

The failure of the Bretton Woods system proves that linking money to a specific amount of gold will end sooner or later. The Americans promised a dollar ‘as good as gold’ after the second World War, promising foreign countries to exchange dollars for gold at a fixed rate of $35/oz. The world started accepting  Treasuries from the United States government as a central bank reserve equal to gold. As long as those dollar reserves could be exchanged for physical yellow metal at a fixed rate, those dollar reserves would indeed be as valuable as the gold itself.

However, the gold exchange standard of Bretton Woods did not impose a limit on credit expansion in the United States. The US could keep on living beyond their means, because other countries saw no other purpose for their dollars other than lending them back to the US. Exporting countries put dollar denominated debt on their balance sheet as backing for their own currency, like if it was a gold reserve. The US debt piled up in the rest of the world, while the dollar was still valued as if it were physical gold. It was a remarkable exorbitant privilege, which was threatened for the first time during the sixties.

France, the Netherlands and other European countries started exchanging their dollar reserves (euro dollars) for gold at the US Treasury. Within a few years it was abundantly clear to everyone that the US couldn’t keep it’s promise to deliver gold at $35 per troy ounce. The dollar for gold exchange window had to be closed in 1971, to prevent the US running out of it’s remaining ~8100 tonnes of metal.

Depleting US gold reserves during Bretton Woods

Depleting US gold reserves during Bretton Woods (Source: Sunshineprofits)


Linking gold to a currency is always doomed to fail. The expansion of the money supply through bank lending and government deficit spending puts pressure on a fixed gold price, a pressure which can only be released by either revaluing gold at a higher price (from $20,67 to $35 per troy ounce in 1934) or by selling gold (London Gold Pool during the sixties). There is no discipline in a gold standard which links gold to the currency, it is just a matter of time before we can all agree it has failed. How long such a gold standard can live depends on the price at which the gold is fixed, how much gold there is in the vault to back up the currency and how fast the supply of currency expands. The only certainty is that it will fail sooner of later.

Sooner or later people will see the scam in such a gold standard and start demanding the undervalued physical gold in exchange for the vastly overvalued paper currency. This can happen on a national level, but also on a global scale as we saw in the late sixties.

Gold is valuable

Don’t be mistaken when I say gold is not money. It is a precious and valuable asset! The metal does not degrade, has a high liquidity and is recognized worldwide. The high stock to flow ratio means total supply of gold cannot be diluted in a short time frame. The idea that gold should be money is based on the past, when both gold and silver were used as a tradable good. Back then, goods were exchanged for goods and gold and silver were the most liquid ones available to the market. Because the value was only in the metal itself, private gold smiths could make coins with standardized weight and purity to improve the trade.

This was the first step to money based on mutual trust. Coins with standard weight and purity could be exchanged much easier than raw pieces of precious metal, because people trusted the goldsmith and didn’t need to assess every single piece of gold as thoroughly as they would with random pieces of gold and silver.

However, the use of gold and silver coins in trade was still a form of barter. There was a direct exchange of goods (livestock, food, tools) and services for other goods (gold, silver).

Money is credit

As the time passed by, people started to figure out it was much easier to exchange promises instead of gold and silver coins. Banks emerged when goldsmiths handed out unbacked gold certificates to clients, pieces of paper which were not backed by gold in the goldsmith’s vault.

This was the turning point in the history of money, because the money evolved from asset to liability. No longer was the value of money based on the value of the precious metal, but by the knowledge that the money would be accepted as a means of payment for other goods or services. Central banks and governments guarantee the acceptance of the currency. Money evolved from a barter tool to a bookkeeping system, in which the currency is used to facilitate the exchange of goods and services. Think of it as a large scoreboard.

Money became a claim on the productivity in the real world economy, a claim which would be guaranteed by a central bank. That’s why there is a signature of the head of the central bank on every banknote. Money nowadays is nothing more or less than the representation of a social contract, as Wim Duisenberg put it in his acceptance speech in 2002. He said the following about money:

“We engage in an exchange of goods and services everyday by using money as the means of exchange; and we offer our labour in exchange for money, which, in itself, has no value. We only do this because we believe that we will, in turn, be able to exchange that money for more goods or services. This fact tells us much about the confidence that we place in money itself. And it tells us much more about the confidence that we place in each other. Hence, money is, in essence, a social contract.

FOFOA also describes money as an accounting system, symbolized by physical representations in the form of coins and notes that have almost no intrinsic value. This is what he said in one of his articles.

Transactional currency is simply a notional, purely symbolic token medium of exchange, much more replaceable, resource-efficient and environmentally friendly than mining stupid metals for stupid coins.”

Gold is not money

Money is debt, created by the banks to fulfill the demand for debt in a society. The primary goal of this debt is to improve the flow of goods and services in the economy. Money in it’s current form is an excellent unit of account and medium of exchange. Euro’s, dollars and other fiat currencies are much easier for daily transactions than gold and silver coins.

The yellow metal is much more useful as an antipode of debt, being the currency in circulation. Gold as a physical asset that compensates for the loss of value in fiat currencies. When you take this perspective, it might be no surprise for you that gold is the number one asset on the Eurosystem balancesheet. On the opposite side of the balance sheet, we find currency in circulation.

ECB balance sheet

ECB balance sheet

The gold reserve is revalued quarterly to reflect the market value of gold. An increase in the price of gold increased the value of the gold reserve, as well as the revaluation account in the liabilities side of the balance sheet. When the price of the precious metal goes down, the same amount is deducted from the revaluation account. So the price of gold can move freely in this system. The undervaluation of gold in in fixed gold standard is solved, once we stop striving for a fixed price of the precious metal in currency terms.

Gold as wealth reserve

While fiat currency is the most convenient instrument for daily transactions as a unit of account and a medium of exchange, physical gold is the most useful store of value. The metal has all the desirable properties for those wanting to store purchasing power for future consumption. When buying gold, you exchange your fiat currency for a piece of gold metal. This is beneficial for all of us, because this transaction doesn’t involve interest. The alternative is to lend money, which requires a certain amount of interest. By exchanging excess currency for gold, one makes his currency available without interest attached to the transaction.

The possession of gold is not only being promoted in China, but also in the Eurozone with the special tax exemption on gold. It is a recognition of gold as a wealth asset, available for those producing more than they consume. Savers can protect their wealth in gold (among other tangible assets), a metal which can appreciate in value without damaging the real economy.

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  1. “Money is debt, created by the banks to fulfill the demand for debt in a society. The primary goal of this debt is to improve the flow of goods and services in the economy. ”
    There, you can have your money. I have my gold. Couldn’t care less if it is money or not.

    The primary goal of this debt is stealing. You DBAG. Lying whore.

    • Agreed, debt is a promise to pay, not the payment itself.
      “Woe to those who call evil good    and good evil,who call the darkness as light    and the light as darkness,who claim the bitter is sweet    and sweet is bitter.”
      …and woe to those who claim that a promise is the actual payment, and that the actual payment is not money.

    • @mlui Money is whatever the people use as medium of exchange. It was gold and silver once, but now this function is replaced by more convenient fiat electronic currency.
      Gold is a valuable asset and all of my savings are in physical gold in my hand! Very little silver for emergency, but i think foreign currencies will also do well in a currency crisis.
      Gold is my savings, which cannot be tampered with in any way possible. Fiat currency has it’s limitations, but is perfectly useful for daily transactions. Even more than gold or silver.

  2. Linking gold to money is as good as it gets. Gold IS Money. Silver IS Money. Get with the program. Both metals serve a purpose as currency. There is nothing wrong with paper back gold as long as the gold is there to back it up. Bretton Wood failed because America welched on its exchangeable Dollar product of $35 to a troy Oz of gold. Why did they welch, because their resource became over extended because of war.
    How do you stop Paper gold turning bad? Easy, don’t go to war. I shall mention some key dates as far as gold/silver as money are concerned, each period after the war, the precious metal currency became debased:

    Decline of the Roman Empire, paying for wars and soldiers (debasement, coins contained less and less silver as the payroll became over extended)
    Napoleonic wars (debasement) (Re-coinage act of 1816, the death of the gold Guinea, all coinage, smaller, payments to Guerrilla’s in the Iberian Peninsular war, debts accumulated to parties in the Holy Roman Empire via Rothschild )
    World War 1 (debasement) (Silver Coinage in UK came from 92.5% to 50% silver, war debts)
    World War 2 (debasement) (UK Coinage no longer contains any silver, have to pay for the stuff bought from America)
    1971 (Nixon Shock, Vietnam War) (US removes the convertibility between Gold and the Dollar. War debts)
    So, whats the problem, War.

    • @WaitingForSilver
      I agree.  War is just another form of an excess of government.  Government is toxic.  While a little might be a stimulant, once we get past that stage, it very rapidly becomes a poison that destroys productivity and eventually production as well.  When government out-grows industry, the end is near for that nation.

    • Money is whatever people use as a medium of exchange to lubricate the transaction of real value (goods and services) in the economy. There is no reason why this SHOULD BE gold or silver. Have you ever felt disadvantaged for being paid in dollars of euro’s in exchange for your product or labor? Probably not, because you know you can exchange that fiat currency for goods and services you need.
      This does not mean you should save fiat currencies, because their intrinsic value always returns to zero. This means you should save in something else than fiat money. The Indians and the Chinese understand this perfectly well, by putting their savings into gold and silver. So do I and so do most of the people here.
      fiat currency = medium of exchange and unit of account
      gold = store of value
      I love both gold AND fiat currency in their proper role.

    • Money = Debt
      Gold = Asset
      Let’s imagine a gold backed currency for a moment. Would you prefer you payments PM or currency? I would want gold and I’m sure everyone here would too. That’s a bit of a problem and exactly why we don’t use a gold standard.
      History has shown us that people find it much easier to work with credit (debt) rather than gold back currency. Why? Gold back currencies are DEFLATIONARY. Human nature chooses the path of least resistance.Will we need a gold back reset? I think so and that’s why I’m in the PM game. But then the whole stupid cycle starts again.
      All your key dates are examples where the gold standard failed because its anchor to the economy and deflationary. It’s not a perfect system. When was the last time you used PM for exchange of goods and services? I bet your stacking it (therefore it’s an asset and barter if you trade, not currency or even considered money). To put gold as currency is perhaps insulting to the yellow metal…
      Perhaps an ideal system would have gold back currency with room for credit expansion (when necessary) and forced contraction for economic discipline (again when necessary). Unfortunately economic policy for the 100 years has been the worst examples of greed in human history with no concept of economic discipline at all.  

  3. mliu
    I dont know about this guy and what he says—it seems a bit intellectual and as such, is way beyond what most people think, believe or experience on a daily basis. The thought that occurred to me is the notes about wars would be limited due to the availability or access to precious metals and the dilution and counterfeiting aspect of PMs.   Back in era of the biggest empires, particularly expansion of the giant empires, like the UK, America and the Roman empire, the rulers of the day did two things. 
    1. They expanded the empire to acquire more precious metals and natural resources, using the new acquisition of PMs to further the empire building.
    2. Once the empire reached its unnatural limits the rulers began counterfeiting by dilution of gold and silver or issuing continuously devalued FIAT
    All empires failed in large part due to these two fundamental failures in execution
    Most people live their lives on their streets and in their homes.   They cannot be concerned with the petty tyrants that are ruining their lives.  The tyrants are usually beyond their reach.  The average person has to hunker down andtake care of their own families and neighborhoods against the worst the tyrants can dish out
    Which bring me to the thoughts of why we stack. 
    I stacked heavily in gold and silver, including junk bullion, once I figured out that the problems we face are mathematically intractible in regards to debt, FIAT debasement plus the downward course of our country and the countries in other parts of the world
    The problem then arises of how do we determine the value of our REAL MONEY, the gold and silver. How do we transact commerce faced with that paradigm shift?.  
    How will the 2, 3 or 5% of the people who accumulated precious metals when the getting PMs was good idea, deal with  the 95% of the people who failed to plan ahead.  When I see people  flash mobbing, stripping store shelves of food and water, lining up 500 cars deep at a gas station when they SHOULD HAVE KNOWN BETTER, given  days of warning, they sit like bumps on a log, parked passively while a juggernaut of disaster rolls over them. 
    The preppers will be in  better shape if the apocalypse comes. But the Big A can come in many forms.  The one that catches my eye is wealth confiscation
    The EU has made it abundantly clear that they need to take citizens FIAT by bail-ins or wealth confiscation to rescue the governments and TBTF banks.  Their plans are laid out, book chapter and verse. They are easy to follow.
    When a football team gives you their play day game plan you can beat them every time. When central banks and governments tell you their plans to steal and loot your livelihoods and net worth, and maybe it’s just me, but I look at this with jaw dropping amazement They are telling us the plans for us. The threat is imminent. It is at our door step.
    Those plans have been incorporated in the US, Japan and the Eurozone: The entire economically and fiscally dysfunctional schebang.
    We see China buying gold at 20 tons a day right now.  Thats 7,000 tons a year.  That’s 200% of entire world production ex China and Russia.  Are they going to deal 100% in precious metals for all transactions? Or a fractional gold based currency? The author above says that is doomed to fail. What about the rest of the world—what will they use for commerce?
    Beats me. I do not know what will come of this.
      But there is going to a tall amount of explaining to do when FIAT becomes toilet paper.

    Side note.  A comment was made as to how bourses rocket up in value when hyperinflation hits.  Weimar was one. Zimbabwe another.
    Right now the Argentinian and Venezuelan stock markets are exploding upwards. But to what effect?  Just another faux-FIAT system!  The stocks double and FIAT is worth 50-75% less.
    When inflation is 75% a year, as it is in these two countries; with devaluations occuring regularly and all the bad effects of tyrannical rulers ruining what is left of what should be wealthy countries, I wonder when we’ll be hit. Or have we been hit and we have simply haven’t woken up to the reality of the blast?
      Our equity markets have been going upwards at a rate equal to or exceeding the rate of real inflation and unemployment combined.  I am not sure if the DOW with its 30% increase in 2013 can be equated to the sum of real inflation at 8% plus real umemployment of 22%, but who knows.  In an era of hyperFIATflation, there has to be some measure or litmus test of what is happening in this country
    As for me, I am in the Charlie school of PMs.  Keep stackin’
    One more thing
    What if some insane SOB in the government, just one or two of all the insane SOBs in our government, decided to hit China with an EMP or nukes, thus disabling their economic infrastructure, banking systems, industry and the connting houses that hold records of the $3.4 trillion in reserve currencies of other nations held by the Chinese.
    Just sayin’, but 9-11′s building 7 housed some of the largest repositories of records regarding our debts and other information about the nature of the Fed and Treasury
    It would be very convenient if the electronic records of our debt to China were erased with an EMP blast while completely destabilizing their shadow and central banking systems. That would effectively decapitate the dragon.

    • @AGXIIK
      “It would be very convenient if the electronic records of our debt to China were erased with an EMP blast while completely destabilizing their shadow and central banking systems. That would effectively decapitate the dragon.”
      Hmmm… cruise missile launched from a sub east of Taiwan, making it appear as if they launched the missile?  

  4. Again, the author of Marketupdate shows he does not understand anything about gold. For one, it was not the gold standard that failed, but it was the politicians and central bankers that screwed it up. Second, a gold exchange standard is not a real gold standard, but a watered down “version” of it, indeed doomed to fail. But that is exactly because it encourages fractional-reserve banking, which a real gold standard prevents – as long as it is adhered to by the “authorities”. In any case, it’s the people demolishing gold, it’s not a gold standard itself that fails.

    • You might want to learn something about Freegold. I do understand that a gold standard is wonderful in theory, but that it fails in practice because the human race can’t live up to the discipline gold requires. Every time again in history kings and governments have tampered with our money. For me there is no reason to believe there will ever be a government or banker which respects the gold standard. Every time it has failed, so why try this gold standard thing all over again? What do you expect?
      REMOVING the link to gold all together will free the people from governments dilution their savings. Yes, the fiat currencies will lose value. Now and in the future. But your savings will be safe when held in physical gold. Like we do!

  5. Problem is that the price of gold was fixed to a set value. If things were priced in grams of gold set each day on the exchanges then yes gold would work fine as a currency. Demand would drive the price up of course but that doesn’t make it unusable. So what if that loaf of bread went from .001 grams of gold to .002 grams. As long as wages paid in gold kept up the system would work.

    • In my lifetime, I have seen bread go from 20 cents a loaf to $3.50 a loaf.  This pretty much defines the effect of inflation on buying power and why saving wealth in fiat is doomed to fail.  $3.50 worth of silver will likely always buy a loaf of bread but $3.50 in fiat will not.  Not coincidentally, $3.50 worth of silver is not all that far off from the fiat value of two 90% silver dimes.

    • Prices have increased, but I am safe to assume your income went up as well. Therefore it is more appropriate to measure daily expenses in relation to you income. Both rise over time due to the losing purchasing power of all fiat currencies.
      If you don’t save for the future and spend all the currency within three months, this whole inflation thing impacted your purchasing power much less than you think.
      The story changes when you put the money away for 10 or 20 years. Then you will notice your money has lost value and that is when you want to hold gold or silver. As savings, not as money in circulation.

    • A gold standard (or gold as money in general) does not fix any price. Nowadays, dollars and all other fiat currencies are separate “things”. All goods, including gold and silver, have a price in these fiat currencies. With gold as money (a gold standard for example), there is no separate “money price” of gold, as gold and money are one and the same. Then there would be only gold and all other goods. And their price against each other (for example: the price of bread in gold) is not fixed. Under a gold standard, the name of a currency is only a trade name for its weight in gold. The same goes for silver.

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