The Gold Standard

When man first started to produce more than he could immediately consume, especially in agricultural societies, he is faced with a significant challenge. While he was very capable at producing valuable products, a part of which he would trade for the products he wanted from other producers, he needed to find a way to safely store his property: the result of his productive efforts, so that he can use the value he created, on a future day, when he may not be as effective at production.

This necessitated the use of some currency of Money: A substance, the worth of which can be established as a scalable equivalent to the worth of the products offered by the producers. A substance that doesn’t perish like vegetables or meat, a substance that is universally valued by all other producers similar to him, and a substance that must be available in a limited quantity, and hard to procure, so that even a small amount of that substance can be traded for large amounts of goods and services from others.

Gold fits the criteria better than any other substance. It doesn’t perish. Total quantity of gold on the planet is constant, hence limited. Mining and shaping of gold is a task that is tough enough to justify the worth of that effort as equivalent to the worth of the efforts that men put into producing some tons of crop or an equivalent amount of other products, as decided by the traders making a trade.

Soon after, gold became the universally recognised currency. Some men started mining and shaping gold, some men started to discover and establish the methods to check its purity and weight, and other producers around the world continued to produce what they are good at producing, without worrying too much about their limited storage capacity. Because now it is possible for them to sell their surplus production for gold. When they needed goods from other producers, they could easily buy it, with gold. Payment in gold is the most honest payment possible. That is the reason why men value gold even today. It is not a mystery that a fixed amount of gold can get you roughly the same amount of goods or services today, as it did some centuries ago. 

To solve the problem of security for the gold of producers and to facilitate long distance trade between producers, men developed banking system. Managers of important banks in an economy voluntarily associated with each other and agreed to issue gold certificates to the producers who deposit their gold in the banks. Particulars about the identity of a producer and the amount of gold he deposited in a bank will be made available to all the banks in the association, with an agreement that the gold certificate issued by a bank is exchangeable for the amount of gold it guarantees, in any bank recognised by the association. This is the beginning of paper currency backed by gold.

As long as it is explicitly agreed and strictly ensured by the managers of the association: that the certificates are of a similar shape and size, and cannot be printed at the will of any bank manager, without actual deposits of gold from a producer, the gold backed paper currency note is safe to use, and safe to exchange with other producers, since the currency note promises to “pay the bearer of this note, the goods or services that you judge are equivalent to the amount of gold stated here.” This method of issuing paper currency notes by the association of banks, with each currency note freely exchangeable for a fixed and stated amount of gold, is called the “gold standard”.

Gold standard was in practice across the world, and most widely practiced in the 19th century, until the statist governments all over the world took control of the banking associations, and decided to print the currency notes at their will, even if there were no actual gold deposits by the producers in the banks, and used those printed notes to obtain actual goods and services from the producers, many of who, still continued to trust the banking system.

In the regions where men panicked and started to take back their gold deposits from the banks, the government seized all the gold deposits into its own treasury, and forced the people to exchange the paper notes they possess, instead of gold, to obtain the goods and services from each other. The people who already took back their gold deposits were forced to submit them to the government, in exchange for the paper notes, which are now backed by nothing, and can be printed at will by the government. Refer to the Executive Order 6102 by US President Franklin D Roosevelt, issued in 1933.

This the biggest moral crime ever committed in the entire economic history of mankind. Nothing else can match it in scope or the sheer amount of wealth stolen. Since the original purpose of currency note was to guarantee the delivery of gold deposited by the producer, each currency note printed without an actual deposit of gold is equivalent to stealing that much amount of gold, which is equivalent to stealing that much amount of productive effort from the life of every producer in the economy. This reduces the producer, who once had a complete and rightful control over his produce, to a slave who produces, while some unknown parasite somewhere in the economy, consumes that unearned wealth, in a proportion that is subject to the whims of every changing government.

Avinash Kumar, 28 November 2020.