Why The Gold Standard Cannot Be Manipulated By The “Mega Rich”

It is a common line by liberals that a Gold standard would be manipulated by the mega rich. The thinking being that gold is in finite supply and therefore the mega rich could buy it all up and therefore control it.

The alternative to the gold standard put forward by liberals and I want to emphasise the difference between liberals and libertarians, the answer put forward by liberals is that government should control the supply of money.

The answer they do not have is why the current banking elite will not simply move to become politicians and therefore continuing the existing system.

So assuming you agree with me that a gold standard is the way forward let me explain why it cannot be manipulated.

So lets establish the baseline.

People get paid for their work. The money they are paid with is tied to gold. Therefore, unless the “mega rich” are not prepared to pay anyone to do work then they must distribute the gold amongst the population.

And this leads to the fundamental reason why the gold standard cannot be manipulated by the “mega rich”.

Lets assume the price of the Pound is set at 2000 Pounds to 1 ounce of gold.

A person is paid 2000 Pounds (GBP) for their work. This gives the worker many options. Let me give 3.

1. The worker can spend the money like now, to buy “stuff”.

2.The worker can put the money in the bank safe in the knowledge that it will not be devalued.

3.  The worker can go to the bank and exchange his or her 2000 GBP for an ounze of Gold.

So given all this, the only way money under the Gold standard can be manipulated is for the bank refusing to give the worker 1 ounce in exchange for the workers 2000 GBP.

As soon as the bank does this the worker knows his or her money is not safe at that bank and will either pull out as much gold as they can there and then and/or they will spread the word to other people causing a run on that bank.

The threat of the run being the key reason why the gold standard cannot be manipulated. As soon as a bank refuses to give people the amount of gold they say the currency is tied to, the game is up.

The public immediately knows the bank is unsound and does not have the gold to back up the money it has issued, this leading to a run and the bank going under.

And this is why the gold standard cannot be manipulated. It would be commercial suicide for banks to try to manipulate money under the gold standard.

There is one fundamental flaw with the point I am making and that flaw is government involvement and/or central bank control.

The government, to quote Obama, “has the monopoly on the use of force”. So it is quite possible that the government or the central bank could come out one day and state that the value of gold has changed.

Instead of an ounce of gold being equivalent to 2000 GBP they could, overnight, state that one ounce of gold is now worth 4000 GBP. This has happened before.

So logically the only way to eliminate this possibility and to make the gold standard absolutely concrete is for individual banks to be able to issue their own currency and tie their currency to what ever gold value they see fit.

Customers will then be attracted to banks that give the best gold:currency exchange rate for their circumstances. This will also mean transparent competition between banks.

Of course some banks will make mistakes, but a mistake by one bank will not lead to the crashing of the entire economy, which is the situation we have now with a fiat currency.

This competition between the currency of individual banks is not an alien concept. This situation currently exists and it is in the form of currencies competing against each other.

The difference with bank currencies competing with each other is that the market becomes much more competitive and much more accessible to the public as it is happening within national borders whereas currency speculation happens internationally and if you want to spend money in one country you usually have to use the currency that has the monopoly in that country.

Domestic competition between currencies will be much more straightforward as all currencies will be legal tender within the country, so no cross border problems and the fees that go with it, something which makes currency speculation out of the reach of most people.

Now there are a lot of people who are against the idea of competing currencies within a country saying that bank runs will be common and the economy will be unstable.

The fact that there may be more bank runs is a possibility but the benefits to savers and workers will far outweigh any negatives.

You only have to look at the US economy pre federal reserve to see how much more stable prices were and how prices reduced over time giving savers a bigger bang for buck as time went on.

And bank runs are not as catastrophic as one some people would make you think.

Lets look at the car industry as an example. People can invest tens of thousands of pounds on a new car and yet the government is not back stopping your purchase should the car turn out to be unreliable.

The car industry regulates itself by offering warranties and good products in order to preserve their repuation etc etc.

And it could be argued that buying a car from a company is a much bigger act of trust than investing in a bank because of the cost of the car is arguably much more than a person would trust to a single bank.

Ultimately there may be uncertainty at the beginning, but like every free industry, the best and most reliable companies suceed and gain the trust of the people.

When we start to see runs on car companies, for example people trying to offload their 2 year old Corollas before the engine expires then an economy with competing currencies is nothing to be afraid of.

Let me flesh out the car run analogy.

Toyota may decide that it can make much more money by using inferior materials which lead to their cars will only lasting 2 years instead of 40 years. Their plan being that they will make vastly improved profits by buying cheaper materials  while proftiing on their repustation for reliability ie Toyota suddenly takes an extremely short term view and decides to maximise profits before they declare bankrupcy and/or close their doors.

By the time their cars start to expire they will declare bankruptcy and run away with peoples money by not honoring warranties and therefore pocketing a huge sum of money due to the extra profits.

And the same analogy can be used for any consumer item which costs a lot of money, TVs and PCs for example and when was the last time you saw a well respected company like Sony or Dell taking the short term view by selling their products with inferior materials and then closing their doors before the warranty claims came in.

I do not recall this situation ever happening so for this reason I think the fears of bank runs are unfounded. Sure there may be some, that is a natural process, many more business start ups fail than suceed but the ecnomy benefits from this churn.

Can you imagine Apple was not allowed to move into the mobile phone market because of the fear that its products would be sub-standard?

Can you imagine if Toyota was banned from starting a company making cars in case it products were sub-standard?

Sure some people have got burned buying cars from companies whose products were substandard or unpolular, Rover for example, but I think everyone can agree that allowing car companies to start and fail benefits the poopulation massively becuase it also gives the chance for amazing companies to start and grow, giving people products that are far better than what came before. The pain of the few benefits the many and the people in pain or they people who are wary can buy insurance.

In short competition gives the public better value, better products and better service. And I think, given the massive importance of money, that competing currencies should be permitted given the massive benefits that are felt by the public in industries where there is real competition.

All evidence I believe shows that competing currencies is not only a good idea but it is also a system which can massively benefit everyone that uses money and that means you an me.

For more information on the concept of competing currencies I recommend reading Ron Paul’s book, “End The Fed” which can bought through Amazon, see the recommended reading list to the right of this article to buy your copy and to support this website.

 

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