myth: We Have Gold Backing Our Money, by Agent d’Amore

Hick Planet magazine

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Thursday, 2019 November 28th

issue 1

If you think money should be a store of value rather than just a way to facilitate transactions, it seems like a good idea to make a dollar directly convertible to something valuable. This is the idea behind the gold standard.

The United States was on a gold standard until 1933; you could walk into a bank and exchange a $20 note for a $20 gold coin. The equivalence was set at $1 = 1/20 of an ounce of gold. Given today’s price of gold, that would make a 1932 dollar worth 1/20 of $1500 = $75. History shows that if you do not have an expanding base of the valuable commodity, you limit the growth of money and the amount of transactions in the economy—a clearly negative outcome. So another way to look at the difference in value between 1932 and 2019 would be to say there are 75 times more US dollars in existence than there used to be when we were on the gold standard.

There have been schemes presented at times to use a basket of commodities as backing for a currency, with growth of the money supply related to the production and use of the commodities. The problem with that type of mechanism is that what is considered valuable changes (when do we remove coal and add computer chips?). Currently the US dollar has no convertibility: if you go to a bank to exchange your $100 bill for “real money”, the teller will likely ask you what denomination of notes you want. They will not offer you gold coins, silver coins, bars of any metal, or any type of commodity in exchange for your dollars.

Interestingly, the gold standard required certain distinctions to be made with regard to cash and Treasury securities that paid interest. In the old days, a Treasury security might pay interest but did not need to have gold backing until it matured, when it could be exchanged for cash (and cash for gold). This meant that when the USA “borrowed” money, they would need to have sufficient gold when the debt came due. This is very similar to a household that needs to obtain money from some outside source when its debts are due. Since the USA went off the gold standard (domestically in 1933 and internationally in 1971), all that a Treasury security holder gets at maturity is cash or credits in its bank account. This makes the “national debt” less of an issue than it once was, in that the USA doesn’t need to obtain anything except dollars, the creation of which it fully controls.

To put this into layman’s terms, the national debt used to be a problem of having to obtain gold to redeem the debt, like a worker having to go out and earn money. Now it is just a matter of moving money from a savings account (interest bearing) to a checking account (the equivalent of cash). As you can imagine, being the one who creates the money has many advantages and of course some risks, so it is a great responsibility.