Very Interesting Gold Standard Analysis
Posted: Sat Feb 27, 2016 8:29 pm
I am reading a book by James Rickards, "The Death of Money: The Coming Collapse of the International Monetary System". In his book, Rickards presents an interesting analysis of how we are still on the gold standard in an indirect way. It's a fascinating way to look at the relationship between fiat currency (a promissory note of sorts) and Gold (the collateral for the promissory note). Rickards states as follows:
"All gold standards involve a relationship between physical gold and paper representations of gold, whether these representations are called notes, shares, or receipts. Once this relationship is accepted, one is quickly back to the world of contract.
On this view, gold is the collateral or bond posted to ensure satisfactory performance of the money contract. If the state prints too much money, the citizen is then free to declare the money contract in default and redeem her paper money for gold at the market exchange rate. In effect, the citizen takes her collateral.
Gold advocates suggest that the exchange rate between paper money and gold should be fixed and maintained. There is merit to this idea, but a fixed exchange rate is not essential to gold's role in a contract money system. It is necessary only that the citizen be free to buy or sell gold at any time. Any citizen can go on a personal gold standard by buying gold with paper dollars, while anyone who does not buy gold is expressing comfort with the paper-money contract for the time being.
The money price of gold is therefore a measure of contractual performance by the Fed and Treasury. If performance is satisfactory, gold's price should be stable, as citizens rest easy with the paper-money deal. If performance is poor, the gold price will spike, as citizens terminate the money-debt contract and claim their collateral through gold purchases on the open market. Like any debtor, the Fed prefers that the citizen-creditors be unaware of their right to claim collateral. The Fed is betting the citizens will not claim the gold collateral en masse. This bet depends on a high degree of complacency among citizens about the nature of the money contract, the nature of gold, and their right to take collateral for nonperformance.
This is one reason the Fed and fiat money economists use phrases like "barbarous relic" and "tradition" to describe gold and insist that gold has no role in a modern monetary system. The Fed's view is absurd, akin to saying land and buildings have no role in a mortgage. Money is a paper debt with gold as its collateral. The collateral can be claimed by the straightforward purchase of gold."
Very interesting analysis IMO.
"All gold standards involve a relationship between physical gold and paper representations of gold, whether these representations are called notes, shares, or receipts. Once this relationship is accepted, one is quickly back to the world of contract.
On this view, gold is the collateral or bond posted to ensure satisfactory performance of the money contract. If the state prints too much money, the citizen is then free to declare the money contract in default and redeem her paper money for gold at the market exchange rate. In effect, the citizen takes her collateral.
Gold advocates suggest that the exchange rate between paper money and gold should be fixed and maintained. There is merit to this idea, but a fixed exchange rate is not essential to gold's role in a contract money system. It is necessary only that the citizen be free to buy or sell gold at any time. Any citizen can go on a personal gold standard by buying gold with paper dollars, while anyone who does not buy gold is expressing comfort with the paper-money contract for the time being.
The money price of gold is therefore a measure of contractual performance by the Fed and Treasury. If performance is satisfactory, gold's price should be stable, as citizens rest easy with the paper-money deal. If performance is poor, the gold price will spike, as citizens terminate the money-debt contract and claim their collateral through gold purchases on the open market. Like any debtor, the Fed prefers that the citizen-creditors be unaware of their right to claim collateral. The Fed is betting the citizens will not claim the gold collateral en masse. This bet depends on a high degree of complacency among citizens about the nature of the money contract, the nature of gold, and their right to take collateral for nonperformance.
This is one reason the Fed and fiat money economists use phrases like "barbarous relic" and "tradition" to describe gold and insist that gold has no role in a modern monetary system. The Fed's view is absurd, akin to saying land and buildings have no role in a mortgage. Money is a paper debt with gold as its collateral. The collateral can be claimed by the straightforward purchase of gold."
Very interesting analysis IMO.