Why The Future Money Is Gold And Silver


This article has made the simple assumption that the demise of fiat currencies will be succeeded by sound money. It has glossed over the likely political and economic turbulence such a change would cause, which is assumed herein to be a temporary phase. Nonetheless, there are other institutional changes that need to be made for the introduction of a sound money regime to stick. These include governments reducing both their financial commitments and economic involvement to a bare minimum, maintaining balanced budgets, not discouraging savings by taxing them, and ensuring they never take actions that discourage free markets. It must be admitted that the prospect of a smooth transition to sound money is close to zero, but transition there will eventually be.

This article has also played down the role of banks, whose credit creation is by far the greatest factor in the expansion of money. The misunderstanding of the importance of the factors behind the cycle of bank credit expansion and its sudden episodes of contraction led to interventionist policies with fatal long-run consequences. It is not generally understood that banks create money, with the financial establishment believing they simply have an intermediary role: it is not for the first time we see the high priests of central banking being utterly deluded about the business of commercial banking.

In a monetary revolution there can be no place for this type of loose thinking, so with it will have to be a process of rapid re-education for politicians and planners alike — probably in the real world of experience. Bank reform will have to be aimed at dampening the bank credit cycle. Purists of the Austrian School have suggested that banking must be realigned into deposit takers, who operate as off-balance sheet custodians, and financial arrangers for savers investing in productive enterprises. Then there should be no doubt in anyone’s mind about the status of their money, and unbacked bank credit would be eliminated.

While this approach is an ideal, it might be more practical to simply remove limited liability from banks. This would allow them to continue with existing banking practices and accounting. But the risks arising from balance sheet leverage would be significantly reduced because the homes and other assets of shareholders and directors would be on the line. This simple measure would likely be enough to drive banks towards the Austrian solution.

Aside from the institutional changes, the eventual replacements for fiat currencies that will initially be required will be driven by the establishment attempting to save itself from only having a worthless currency as its means of finance. Inevitably, it will require governments to use the only means at their disposal, and that is to monetize gold reserves because they are the only money they possess in non-fiat form. On this basis alone, cryptocurrencies, including planned central bank cryptocurrencies which are merely another unbacked form of fiat, don’t even get to the starting gate.

If that were not enough, we have established that a future sound money must be flexible enough to not only finance production but to act as the mainspring for markets. Bitcoin enthusiasts have failed to grasp the importance of a degree of flexibility in the quantity of money, driven by free markets and not imposed by the state, for it to act as a medium of exchange. For now, bitcoin as money is merely poorly informed speculation. And when the world has returned to metallic money for all the reasons outlined in this article, bitcoin’s legacy will be the invention of a blockchain and all that follows it, and not its price in fiat currencies, which will be of no consequence.

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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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