The Future Of Money Is Gold

This article explains why the successor money to failing fiat is gold, not cryptocurrencies. Cryptos can only act as stores of value so long as fiat exists. I describe how a world transacting with monetary gold and properly constituted gold substitutes works. It explains how and why unbacked bank credit expansion, which in natural Roman law was ruled to be fraudulent 1,800 years ago, can and should be eliminated in a post-fiat world, thereby ending destructive credit cycles.

Gold exchange standards, which are comprised of gold-backed money administered by the state, worked extremely well when properly implemented, and it is the siren songs of inflationism that are at the root of the current crisis. If the transition from worthless fiat back to gold standards is handled properly, an initial recovery to fully functioning economies need not take more than a year or so.

The pressure on future governments to reject inflationism in favour of free markets and sound money should not be underestimated. It is not rocket science. All we need are politicians in whose interests it is to see the light and have the determination to take their electorates with them. It will require them to hand back to individuals the responsibility for their own actions, enabling the requisite cuts in government responsibilities and expenditures to be made.

That child of fiat money, the welfare state and all the government actions to protect it will have to end, with the exception of the absolute basics.

The politicians to facilitate these changes do exist, though their voices are not heard. But the moment fiat collapses, we have good reason to believe they will re-emerge from under the misguided consensus they had been elected to deliver. It will be in their clear interest to do so, and monetary collapse giving birth to civil disruption can be avoided.

 

Gold, Ingots, Treasure, Bullion, Gold Bars, Wealth

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Introduction

While there is a growing consensus that the days of fiat currencies are finally drawing to a close, the debate about their successor is misinformed due to a lack of understanding about the qualities required of money. This growing consensus is still a minority view, triggered by cryptocurrencies and bitcoin in particular, with enthusiasts claiming bitcoin to be the money of tomorrow.

To be long-lasting, stable and practical, the choice of money should be down to its users. But governments have imposed state money on their populations for over a century now, half of which time they pretended their currencies were gold substitutes. That was until President Nixon ended the fiction by suspending the Bretton Woods agreement, and the unbacked dollar fully replaced the dollar notionally backed by gold as the international standard.

Bitcoin hodlers now like to claim that people will choose bitcoin to replace fiat, ignoring the impossibility of a completely inflexible settlement medium acting as money.

In recent months bitcoin and other distributed ledger cryptocurrencies have acted as effective stores — even enhancers — of wealth at a time of developing hyperinflation of fiat money quantities. Assuming governments do not act to squash this upstart rival to their own currencies, bitcoin’s price could continue to rise. But make no mistake, the bullish argument is no more than one of a comparison between a restricted and capped issue of bitcoin against an ever-increasing issue of fiat. As long as fiat exists, so will the differential between rates of issue.

But a store of wealth is not the same as a medium of exchange. Bitcoin’s success as a store of wealth discourages its circulation as money. In a world of fiat, who in their right mind would want to use bitcoin to acquire goods and services, when on a mathematical projection its value measured in fiat would be greater tomorrow? And following the demise of fiat, the argument against the circulation of bitcoin as the world’s medium of exchange would then apply directly to its exchange value for goods and services. Any propensity for economies to grow would then be hampered by rapidly falling prices. Furthermore, its circulation as a medium of credit, vital for entrepreneurial innovation, would prove to be impossible.

These are the practical reasons why cryptocurrencies, backed by nothing more than their strictly limited issuance, cannot act as money. To this we must add a further impediment. Central banks do not possess bitcoin, but they do possess gold. Their last resort is to replace their fiat money not with a bitcoin standard but with their gold reserves. Only then can their governments pay their essential bills in a post-fiat world.

It is difficult to justify the existence of cryptocurrencies following the demise of fiat, except, perhaps, in the form of central bank digital currencies fully exchangeable into gold coin. In monetary terms, that would be little different from converting existing fiat into gold substitutes. But distribution of money in this form becomes radically different, removing commercial banks from being intermediaries between the central bank and the public.

Necessary changes in the role of commercial banks are addressed later in this article. Meanwhile, of one thing we can be certain, and that is the state will do everything in its power to retain control over money. It knows of nothing else, and both politicians and economists take government control over money for granted, after decades of so-called progress following the abandonment of classical economic theory.

Having dismissed distributed ledger cryptocurrencies, and specifically bitcoin, from becoming the replacement for fiat currencies, we know that gold must return as the core of future money. Even if the immediate statist reaction to a fiat collapse is to clamp down on the freedoms inherent in society in a last-ditch attempt to retain control over prices, these restrictions will fail. But the collapse of fiat currencies will be so traumatic for nearly everyone, that attempts to return to unbacked fiat will obviously not be an option and can be ruled out. Bitcoin’s pretence to be a store of value ceases when a transition from fiat to gold-backed currencies emerges.

For everyone, it will be back to the classroom to learn the basics of money.

The basic function of money

Money’s basic function is to facilitate the exchange of goods and services, its role always being temporary. Both parties in a transaction must have faith that the money is readily accepted by everyone with whom they transact, and that means that all those counterparties must have faith that their extended counterparties will accept it as well. This has always been gold’s strength. It is a considerable disadvantage for fiat money, whose acceptance is confined by national boundaries.

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Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not reflect those of Goldmoney, unless expressly stated. The article is for general information ...

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