Gold-backed Currency Is Strong
gold-backed currency
Tying currency with gold is also called gold standard. Last time the currency was backed by precious metals, or was precious metals themselves. In US, Richard Nixon took away gold backing of US dollar in 1971. In UK, 1 pound used to mean 1 pound sterling of silver, which was a very transparent system.

Without backing from precious metals, nothing can guarantee the value of money. It is only backed by perception planted in the mind of people. This is similar to company stock: the current price of the stock reflects the current faith of the people. One of the factors that Roman Empire fell was the emperor created fiat currency by cheating on the gold content of their coins. It caused distrust to their coins and finally lead to unstable economy. The paper money will be worthless after 100 years but the gold will still be valuable. Fiat currency is destined to become worthless. Fiat currency exists because money printing men can take the wealth from people by continuously decreasing the value of the fiat currency.

Gold is preferred than silver to back the currency today because it has less industrial uses. Consumable items should not be used as currency. Its value is also higher than silver.

Some say economic growth will be limited if there is not much currency in circulation. Actually it is good that it is limited to avoid false growth. Decline will always happen after unusual growth. We rather want the market to remain stable. Besides, currency can be further divided into smaller unit for circulation. In some countries, there used be a quarter cent.

Some say it will lead to deflation. Deflation can actually heal the economy by reducing the production of over-supplied goods. In deflation, supply of goods is higher than supply of money so the price of goods can get lower and lower. Thus, people will only spend on basic necessities of life due to expectation to see even lower price of goods. Deflation is good for most people and only a few people with vested interests will demonize it.

With gold backing, there will be no debt that reaches astronomical figure because there is limited amount of gold available worldwide. Price of goods will only be affected by the supply of the goods, instead of the depreciation of fiat money.

Theoretical implementation

Gold is not portable and is hard to be divided so it is better not to be used as currency, but to back the currency instead. Also some amount of gold will be lost due to friction of the metal in circulation. Also some people may not know how to differentiate fake gold. The disadvantage of gold-backed currency is transactions can be tracked like fiat currency compared to cryptocurrency.

Use 1 mg (or cg as desired) of 0.999 gold as the basic unit of the currency, which is straightforward and transparent. For 1 tonne of gold, there are 1,000,000,000 (one billion) of units available for circulation. It is not much compared to unlimited fiat currency, but it is valuable. For existing currency, cut down the quantity in circulation to match the amount of gold reserved.

Gold should be used as reserve and for industrial purpose only. Even for industrial purpose, try getting other material as replacement if possible. It should not be used in jewelry or other ornamental purpose. It is anyway shallow to display the gold like that.

However, free market should be allowed without outlawing usage of gold to make purchase. If gold cannot be used to purchase items, what is the good of it? Gold Reserve Act should not exist.

The country that does not have gold can trade its goods and service for gold. Although countries that have a lot of gold have more advantage at the beginning, but if their productivity is low and they have to buy things from other countries then their gold reserve will diminish over time. The only organic way to increase gold reserve is to increase productivity.

One great challenge in starting gold-backing is money printing men will start a war to stop it.

Posted: 2016-09-20; updated: 2016-10-30 by Ong Seng Aun.
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