A Gold-Based Currency

A gold-backed currency. Hard currency, where the value of ‘a dollar’ (or ‘a euro’) is tied to a specific quantity of a specific commodity. Like gold, one of the most (if not the most) chemically inert solid elements. I think this is a great idea, with minimal downsides.

The purpose here is to limit how much the value of ones currency can fluctuate, which really means how much the value of goods fluctuate in relation to other goods in your economic system. As a point of fact, we don’t really care too much if the value of a Mercedes fluctuates with respect to the value of oranges. Why? For a variety of reasons, but I believe that the main one is that the rest of the system could be entirely stable, and the fluctuation in price of these two commodities could simply reflect an abundance (or lack) of those two commodities. However, if every commodity were to devalue simultaneously, this would indicate that the market (as a whole) has entered a period of deflation.

But wait: if everything (in a system without a currency) devalues at the same time, then nothing devalues. This is where currency comes in. In order to avoid bartering goods at arbitrary values, currency allows us to set the value of a commodity independent of other commodities. Without the use of currency, there is no objective standard by which to judge the value of a potato to a cup of coffee. A kg of potatoes, for example, is roughly $1.10 here in Canada, whereas a large cup of coffee at Starbucks is about $2.50. As I’m loathe to drag 2.25kg of spuds to Starbucks just to procure a cup of coffee, the existence of currency is a boon. I’m sure that the barista likewise appreciates that they don’t have to figure out the exchange rate of a variety of commodities that each customer might bring.

So far, so boring. By bringing in the gold standard here, I have (as a point in fact) brought the relationship between commodities back into play: now everything is directly tied to a particular quantity of gold. And since the quantity of gold is fixed, and can never, ever be changed (excluding supernovae, or other controllable processes), prices will now forever remain the same. Fantastic! No more inflation!

Let’s imagine a world, where there is a mere 100kg of gold. In order to avoid having a pile of 100kg of gold just lying around to be stolen (and the whole economy destroyed), the government mints all of that gold into coins of some arbitrary denominations. How many coins can they produce from that quantity? Whatever the number is, it will be a finite amount.

Let’s say that in this world there is also a company that produces electronic devices. And that company is the world leader in innovation, such that it creates the JPhone, instantly becoming the most in-demand device of all time. And the cost to produce vs the cost to purchase is pennies on the dollar. What happens as that company absorbs more and more of the gold-standard coins in existence?

As the government can’t simply produce more coins (which is the whole point of the commodity-based currency), the number of coins in circulation necessarily reduces. People have less money to spend. Companies will have less access to coins by which to pay their employees. Wages will necessarily stagnate, and the price of good must necessarily decrease. In short, the entire economy ceases to function.

But hey, that one company? It wins as it has all the coins. As long as it holds those coins, the value of those coins necessarily increases as the prices of all other products drops. The company will have cornered the market on money itself. Of course, if that money is spent (en masse), it would then flood the market with the coins, causing the price of everything (including the items just purchases) to rapidly raise, which is inflation. The thing that commodity-based currencies are supposed to escape.

This is, of course, merely a hypothetical situation. It would be ludicrous for me to posit a world where, say, 1% of the population controlled 35% of the wealth. If such a situation existed, with a commodity-based currency, that 1% could directly manipulate the value of all goods by retaining (or releasing) wealth as they chose. Clearly, having a commodity-based currency in a world with that kind of wealth disparity would be a recipe for unmitigated disaster.

(And no, this is neither the best nor the only argument against using a commodity as a standard for a currency, but it’s one that I don’t often see)

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