Gold Standard

The gold standard is a method of backing the bills issued by a government with bars of gold.

Currency issued by a government (i.e. the green linen rectangles of paper called U.S. Dollars) by itself doesn't have any actual value. You can't do much with the paper, except maybe use it as kindling for a fire. So why don't we go around burning dollar bills? Because the government tells us and the world that those rectangles have value.

It used to be the case that they could say the bills have value because they matched some fraction of the gold stored in U.S. vaults, and this was the Gold Standard. Until the 1930s, currency and debt assets could be converted into physical gold in the U.S., and up until the 1970s, US currency was still backed by gold. Now the US and many other countries use "Fiat Currency" where a country's central bank (the Federal Reserve in the US) regulates the value of currency based on the trust given to a country's government.

Why is this helpful?

Well, the market value of gold fluctuates greatly based on current events. Turns out that the value of fiat currency can be regulated to be much stabler than gold-backed currency. This helps lessen the blows of major economic swings, like the great recession.

Think about gold through a different lens:

It’s a kind of value number line that everyone trusts. Gold gold gold gold gold gold gold. An ounce of gold in India is generally worth the same as an ounce of gold in China, the U.S., Argentina...even Somalia, assuming it’s real gold and not fake gold or pyrite. Because gold is so universally or planetarily trusted, it kind of comprises a monetary system unto itself. Its economic unit is the heart of most modern economies.

And, like a tub of Neapolitan ice cream, it comes in 3 flavors: Specie. Bullion. And Exchange.

Okay, so let’s start with gold specie. Rhymes with fece. It is the standard monetary unit associated with gold coins. Obviously, in a world where gold is being exchanged for things of value, like mining picks, Levi’s jeans, and food, gold itself, or the store of value, has to be modularized into standardized units…and that’s what gold specie is all about.

Next up, the gold bullion standard. That’s a system where gold coins are stored in the coffers of governments as a kind of collateral, or guarantee, against a usually paper-circulating currency.

And finally, we have the gold exchange standard, which is usually simply a government backing, or guarantee, of a fixed exchange rate...for what the government will do in return for them being given an ounce of gold. The real gold standard, however, kind of faded away through the 20th century, as so many countries drew irresponsible financial practices as the norm.

The “honesty” of a fixed rate gold exchange simply put too much pressure on the desire for countries to have internationally weak currencies, hoping to stimulate exports from their own hard-working citizens. The big advantage here? In essence, the gold standard limits the power of government to make too many stupid moves.

And the foundation of that control is that, if a government’s currency, or ability to buy stuff, is limited by the amount of gold they have in their coffers, then they have to live within a set budget, unlike a paper-backed currency, like what we have in the U.S…. governments can’t just run a printing-press out of thin air, making more gold to pay for Congressman Pigpocket’s private shuttle from Virginia to D.C., or a new, $500k after-school program for kids who are addicted to biting pencils.

The biggest disadvantage here is that governments are actually culpable for the money they spend. But when you look around, uh...that’s maybe not such a bad thing after all.