To understand why gold works, as a standard of monetary value, you have to understand what makes good money. Monetary thinkers have always known: that the best money is stable money, or, as I like to term it, Stable Money -- money that is stable in value. Ideally, a currency would be perfectly stable in value.
In practice, such idealized perfection is not quite possible, so we have to go with the next best thing. The next best thing is gold: the thing that most closely approximates this ideal of stability of value. President James Madison summed up succinctly:
The only adequate guarantee for the uniform and stable value of a paper currency is its convertibility into specie [gold]--the least fluctuating and the only universal currency.
James Madison understood this. And the United States became one of the most successful countries in the history of the world because people like James Madison understood it, and adhered to this principle from 1789 to 1971.
Related to this is the fact that gold is the "only universal currency." It is the only thing (along with its adjunct silver) that all people have agreed to use as the basis of money, which then allows fixed exchange rates between countries, vastly simplifying trade and investment. In the pre-1914 era, most major governments participated in the world gold standard, which was simply the extension of many centuries of gold and silver coinage used throughout the world. This system was reassembled during the 1920s, and again in 1944, at Bretton Woods.
We have had no difficulty establishing world monetary systems based on gold.
Despite this enthusiasm for fixed exchange rates (a form of Stable Money), there is little interest today in establishing a unified world currency bloc. The simple reason is that nobody would trust the European Central Bank. I wouldn't -- because the ECB is subject to political pressures, or other agendas, to which gold is immune. The ECB can also serve as a means of imposing political pressures.
Actually, the world did have a system like this. It was called the Bretton Woods arrangement. The British pound, German mark, Japanese yen, French franc and all other world currencies were nominally linked to the U.S. dollar. The reason why they agreed to this is that the U.S. dollar was also linked to gold, at $35/oz. When the dollar left gold in 1971, nobody was interested in remaining linked to the dollar, and currencies floated. They still float today.
Gold's performance as a standard of Stable Value has been exemplary. It is, actually, a lot better than one might rationally expect. The things that the gold standard made possible -- such as the extraordinary stability of bond yields during the nineteenth century -- have never been replicated under fiat currencies.
Economies work best when currencies are stable in value. Once we know what the goal is, we then look for a way to achieve it; and the best way has always been to base a currency on gold. Nobody has found a better way, even in the form of a proposal; and nobody has ever needed to find a better way, because gold has always worked very well.
The Big Two – Barron’s and Forbes have both had growth in posting positive articles on gold.
Victor Del Giorno
President / CEO, Coin Trader Inc. Member ANA / ICTA / PCGS / NGC / CAC Rare U.S. Coin Portfolio Planning Precious Metals Advisory Private Wealth Management
Direct: (504) 267-6004
I-Phone: (281) 387-0569