What About Gold?
This is a complex system of institutions that has grown up over centuries in a mixture of blind evolution, design and deliberate reform. Its complexity and non-obvious nature cause anxiety to some of us who have to rely on it. Can such a make-shift really work? Wouldn't it be smarter to go back to simple, obvious gold coins? The answer is, probably not:
- It is true, experience has taught us, that any monetary system with a large component of government fiat money is vulnerable to inflation. All of the great hyperinflations have been associated with huge increases in the amount of money in circulation, specifically because of government creation of fiat money. On the other hand, we have plenty of examples of well-managed and very stable modern monetary systems. The dollar ranks pretty high in this regard, but if the dollar isn't "hard" enough for you, the German Mark and the Swiss Franc in the second half of the twentieth century must have been about as stable as it is possible for a monetary system to be.
- On the other hand, gold is not perfect as a monetary system either. Historically, new discoveries have propelled vast inflations. Governments have clipped and adulterated the coins, and (in more modern history) have adopted the gold standard only to drop it when it is no longer politically convenient. If we have a government with enough self-discipline to stick to a rigorous gold standard, it will probably do equally well with a managed bank-money system. Finally, a real cost of a gold coin system is the resource cost of "digging it up in Nevada to bury it again in Fort Knox." While a managed bank money system has costs too, at least the costs of digging are avoided.
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