Brief answers to the most frequently asked questions.
(Whenever ‘gold standard’ is used then this means the unadulterated gold standard. Silver is a necessary component of the unadulterated gold standard.)
- What is the Unadulterated Gold Standard?
- Why Does The Gold Standard Institute Support an Unadulterated Gold Standard?
- What is the Relationship Between Gold and Democracy?
- What are the Benefits of the Gold Standard for Working People?
- How Does the Gold Standard Benefit The Entrepreneur?
- Is the Gold Standard Good for Pensioners?
- What Effect Does the Gold Standard Have on the Consumer?
- How Does the Gold Standard Benefit Borrowers?
- How Does the Gold Standard Benefit Lenders?
- Will Governments Still be Able to Put Nations into Debt?
- How are Governments Constrained by the Gold Standard?
- What is the Relationship Between Gold and Charity?
- Will there be Price Volatility Under the Gold Standard?
- Would Gold Cause Unemployment?
- What are Real Bills?
- Is there Enough Gold to Return to the Gold Standard?
- What does it Mean When People State that you cannot Eat Gold?
- Does Gold Pay Interest?
- Would Governments Still be able to Inject Urgently Needed Liquidity into the System Without Paper Money?
- Is a Modern Economy too Complex for Gold to Return as Money?
- Was the Great Depression Caused by Gold?
- Is the Gold Standard only for the Rich?
- Would People With no Gold be Disadvantaged?
- Would Countries with a Lot of Gold have an Unfair Advantage?
- Is the Price of Gold Too Volatile For it to be Money?
- Is Gold Deflationary?
- Are Gold and Silver Coins too Heavy for use as Money?
- Is Gold Just Another Commodity?
- What is the Stock to Flow Ratio and Why is it so Important?
1. What is the Unadulterated Gold Standard?
The unadulterated gold standard means that gold and silver coins are in circulation, or that circulating banknotes are fully redeemable in gold or silver coins on demand.
2. Why Does The Gold Standard Institute Support an Unadulterated Gold Standard?
For over two thousand years governments have firstly monopolised the money supply and then debased it. Civilisations fall for one reason only – the monopolization and then debasement of money by governments.
Money is the essential component of a free market and must be freed from government manipulation, distortion and degradation. For there to be a lasting prosperity, the State must be separated from Money, just as in the civilised parts of the world it was separated from the Church.
3. What is the Relationship Between Gold and Democracy?
The gold standard requires that all government spending has to be financed from taxation. This means that the connection between government spending and levels of personal taxation are very clear to voters.
Paper money not backed by gold allows politicians to degrade the money by inflation. This allows them to pay for their schemes covertly. Under the gold standard this is not possible because gold cannot be printed.
What this means is that with the gold standard, people vote for the politicians who promise to spend the least. With paper money, people vote for the politicians who promise to spend the most.
As we are now seeing in Europe, paper money will eventually lead to bankruptcy and the death of democracy.
Democracy can only survive over the long-term with the gold standard.
4. What are the Benefits of the Gold Standard for Working People?
The most important benefit for working people is that wages are paid in money that stably stores its value over time. Gold makes it possible for working people to save, secure in the knowledge that what is put aside will not lose its purchasing power.
This means that not only can people put aside money to secure their retirement, but also that they can put it aside for such things as the education of their children and the purchase of a house. Only gold can ensure this stability of stored value.
5. How Does the Gold Standard Benefit The Entrepreneur?
The entrepreneur is a visionary. He or she succeeds according to his/her ability to correctly predict and act upon future commercial opportunities. There are many risks involved in this. Without a stable money (a store of stable value over time), successful prediction becomes more a matter of luck than judgement.
Trying to gauge the viability of a future deal without the stability of gold is like trying to measure distance using a rubber band. Only gold can unleash the full potential of the entrepreneur.
6. Is the Gold Standard Good for Pensioners?
If any one group of people can be isolated as being the main recipients of the virtues of the gold standard then it is pensioners.
During their working lives, their productive years, they save with real money – money that holds its value over time. This means that they are assured of security when they retire. Under paper money, which has a constantly deteriorating value, they have no such certainty – quite the opposite.
The deceitful nature of paper money does the most damage to pensioners. Many are forced back into the workforce, despite their age, because the value of their paper money savings will no longer buy the necessities of life. Only gold can truly provide for the golden years.
7. What Effect Does the Gold Standard Have on the Consumer?
The use of gold as money ensures that the widest variety of goods is available at the best possible price. In the 19th century under the classical gold standard prices gradually fell for almost the entire century at the same time as wages were rising. The unadulterated gold standard will ensure that this ideal consumer environment is permanent.
8. How Does the Gold Standard Benefit Borrowers?
Under the gold standard there is always money available for sound commercial ideas.
If banks have a legitimate demand from borrowers and they do not have enough gold in the vaults then they will immediately raise their interest rates in order to attract more gold. Gold will then flow into the bank in exchange for gold bonds.
When the interest rates are too low then much gold is kept outside of banks. This gold can only be attracted back into the banking system by a sufficient rate of interest.
If there is a large demand by borrowers under the Gold Standard then interest rates will go up, but gold will always be available. Under the Gold Standard whether or not money is available is the decision of gold owners, not central banks.
9. How Does the Gold Standard Benefit Lenders?
A lender of gold will be repaid in gold – plus interest. They are repaid in the same stable value that they lent, not in paper with a deteriorating value.
10. Will Governments Still be Able to Put Nations into Debt?
It would be very difficult for governments to borrow money under an unadulterated Gold Standard. People who own gold are not inclined to lend it to those who are unproductive.
Under the gold standard, people are aware that any debt created by governments has to be paid back by taxpayers. Taxpayers do not vote for governments who cannot live within their means.
11. How are Governments Constrained by the Gold Standard?
Under a gold standard it is the people who have the money, not governments.
As gold cannot be inflated, government expenditure is restricted to whatever level of taxation they can justify to the people. People are far more inclined to vote for a party who finds some way of lowering taxes, not raising them.
This excellent incentive ensures that governments run a tight ship. Waste is minimised. The less money governments have, the less mischief they can get up to and the more money the people have.
12. What is the Relationship Between Gold and Charity?
Every productive member of society directly benefits from the reliability and predictability of the gold standard. Their income and savings are in money that stably stores its value over time.
The concept of organized charities first came into being with the use of gold as money in the 19th century. Charities arose from the free market. Examples of such organizations are The Red Cross, The Salvation Army and Dr. Barnado’s Home for orphans.
Compassion was both genuine and voluntary. The productive people who had gained so much from gold gave generously to those less fortunate than themselves.
13. Will there be Price Volatility Under the Gold Standard?
Prices were fairly stable under the classical gold standard of the 19th century. This was due to the stable interest rates that always accompany the gold standard. There was a gentle fall in most prices in accordance with technological advancements and increasing production efficiencies. A gradual fall in prices is a sign of a healthy economy. It is a mistake to make too much of a virtue of stable prices though; prices are, and should be, largely determined by the push and pull of the markets.
By contrast, the extraordinary price volatility under paper money is rarely a function of supple and demand. It is dues to erratic interest rates and the erratic value of the paper money itself.
14. Would Gold Cause Unemployment?
Under the 19th century classical gold standard in the UK, the word ‘unemployment’ had yet to be created because the concept did not exist.
Systemic unemployment will only exist in a regulated labour market. In the UK, in the thirty years from 1851 to 1881, employment expanded from 26,000,000 to 30,000,000 – a rise of 16%. That is an average of over 133,000 new jobs per year.
That rise in the number of jobs was also accompanied by average wage rises of almost 100%. Consider this against the fact that the cost of goods was simultaneously falling.
The introduction of a gold standard will cause unemployment to be recognised for what it is: a by-product of paper money and regulated labour markets.
15. What are Real Bills?
Real Bills are an odd name for bills of exchange. These act as the liquidity in the system. Bills of exchange are a free market mechanism for financing goods that are in urgent and immediate demand. The huge advantage of these bills over paper money liquidity issued by central banks, is that the moment the goods reach the market (within a maximum of 91 days) the bills are entirely extinguished – they cease to exist. The liquidity when needed is supplied, the moment it is no longer needed it is gone.
This means that unlike paper money liquidity, there is zero inflationary residual under Real Bills.
Real Bills, bills of exchange, are best thought of as a sophisticated but simple clearing mechanism; a means of ‘netting out’ transactions without the cumbersome need to exchange gold coin at every step of the way.
16. Is there Enough Gold to Return to the Gold Standard?
The British Empire at its peak was a huge, worldwide commercial operation. It operated on 150 – 200 tonnes of gold. The world now has at least 170 thousand tonnes of gold. Should one be under the misapprehension that trade is vastly greater these days, then bear in mind that the highly globalized period of the mid 19th century to the start of the First World War in 1914 produced annual volumes of world trade that were not exceeded until the early 1970s.
It should also be remembered that by the mid-19th century the worry was that there was too much gold. Both fears are unfounded.
When governments are untrustworthy gold retreats from circulation into hoards. When governments are honest and transparent and markets are free then gold circulates and is of benefit to everyone. Gold that is on the move is entirely more beneficial to both the individual and society than gold that is hidden away. The degree that gold is hoarded is proportional to the degree that governments are not trusted. When gold is hoarded it can seem that there is not much of it. When a government official or a central banker speaks of there ‘not being enough gold to return it to its monetary status’, then you know that the person doing the talking is a part of the reason gold seems in short supply. Gold is never in short supply, except when, for good reason, it is being deliberately hidden.
17. What does it Mean When People State that you cannot Eat Gold?
Nothing sensible. The nutritional qualities of paper, plastic, zinc and seashells are also highly suspect. The role of money is not to be eaten.
18. Does Gold Pay Interest?
Yes; trying to locate someone who would lend gold for no interest would be an exercise in futility. Money in the marketplace has always demanded interest. For religious reasons, interest sometimes carries a different name, but it is always paid.
19. Would Governments Still be able to Inject Urgently Needed Liquidity into the System Without Paper Money?
See ‘Real Bills’ above.
The world is currently awash with such a volume of government created liquidity (debt) that is can literally never be repaid. The first priority to fixing the terrible mess that the world is in is to immediately and permanently abort the ability of governments and central banks to create liquidity.
20. Is a Modern Economy too Complex for Gold to Return as Money?
A modern economy only appears to be complex because we have been attempting to use pseudo money, instead of real money. The economy looked just as complex to the Chinese one thousand years ago when they were experimenting with the original paper money.
The electronic era coupled with gold will greatly simplify a modern economy. Everyone will benefit from that except the vast numbers of financiers, investment advisers, lawyers and accountants that the complexity of the current system requires. Under the Gold Standard, when bankers and economists opened their mouths, people would understand what they were talking about.
The world of gold is an uncomplicated world of rising production, and rising wealth and savings for working people. It is not a world of unlimited political power and unspeakably huge, unearned bonuses for financiers and bankers. That is why politicians, financiers and bankers, along with their in-house economists, are the shrillest voices denouncing gold.
21. Was the Great Depression Caused by Gold?
The 1920s stock market and real estate boom was called ‘The Roaring Twenties’ and had the same cause as ‘The New Era’ boom of the 1990s… Federal Reserve Bank induced easy credit. In 1929, when it was no longer possible to expand credit, the boom collapsed and deflation took over. As it would be described these days… the bubble burst. The best way to stop a bubble from bursting is to not blow one up.
Despite having the same cause and the same culprit, there are some significant differences between the Great Depression of the 1930s and the current situation:
- This time, because there is no gold constraint at all, the credit expansion has been much larger than in the 1920s. Consequently the deflation will be much worse.
- This time the Fed did not stop printing, so after the deflation we could end up with a hyperinflation.
- This time, due to the interlinked nature of the world’s currencies, the problem will be worldwide.
- This time the central bankers will not be able to blame gold.
22. Is the Gold Standard only for the Rich?
The last time people actively used gold as money was in the 19th century. It was not the true gold standard because much of the paper money was not backed by gold, but it was nevertheless, while it lasted, an era of unprecedented prosperity for all people, not just the rich.
Only ‘in the know’ financiers, bankers, sharp operators and politicians gain from government-issued paper representations of money. Working people can only lose over the longer term. The inflation of paper money, which is constant under all governments, hurts the working people far, far more than it hurts the rich. Paper money is only used when there is an intention to inflate. Any government that was not intent upon inflating away the value of its money would naturally allow the use of gold.
Inflation is a regressive tax, which is the opposite of most income taxes that are progressive. With inflation, the poorer you are the more you pay proportionately. Inflation is a tax that hits working people hardest. The value of family wages go down and their standard of living falls. For the wealthy, inflation causes the real cost of servicing their large investment loans to go down. Their standard of living goes up. Inflation is a redistributive tax; it takes buying power from the working people and hands it over to politicians and rich investors.
After almost 100 years of paper money, the divergence in the western world between the ‘haves’ and the ‘have-nots’ is visible and obvious. It will continue to get worse until the system collapses. The people with the most to gain from the gold standard are honest working people and pensioners.
23. Would People With no Gold be Disadvantaged?
At the end of the first decade of the 21st century many people have no paper money and are already severely disadvantaged. Under the Gold Standard they would earn real money that kept its value.
24. Would Countries with a Lot of Gold have an Unfair Advantage?
No. It has always cost approximately one ounce of gold to mine one ounce of gold. That is why having a lot of gold in the ground has rarely made a country, a company or an individual rich. Gold mining has always run on a very fine profit margin.
Gold follows producers and savers. Today, China is the largest producer of goods and the largest saver; for that reason it is also the largest importer of gold. It is gold on the move that makes a country rich, not gold in the ground.
Those countries and people who work and produce valuable and exchangeable goods acquire gold. Where it comes from is irrelevant. A country with an existing gold stock but no gold income is in a dangerous position. A country with no gold stock but a gold income will do just fine.
25. Is the Price of Gold Too Volatile For it to be Money?
When people talk about the ‘price’ of gold, they have it the wrong way round. What they mean is the price of the paper money that is valued in gold. Gold is the measure, not the measured. All sciences consist of that which measures and that which is measured; the monetary science is no different. In the monetary science the measure is gold. Paper monies are very volatile in value; gold is very stable.
Imagine sitting on the beach as the tide drops and exposes a rock. As the tide recedes ever further the rock becomes more and more exposed. We do not say: “look how high that rock is rising”. We more sensibly say: “look how low the water is dropping”. So it is with the rock of gold. It is not the value of gold that is going up, it is the value of the paper money that is dropping.
When you see a graph showing the rise in the ‘price of gold’, then turn it upside down and back-to-front. Then you will see through the back of the paper what is really being measured… the collapsing value of paper money, or, looked at another way, the collapsing state of civilization. Gold is not an investment as it will never make anybody money; how could it, it is already money? What gold will do is transition wealth from the here and now, to wherever it is that we end up when this current system of paper money totally breaks down.
26. Is Gold Deflationary?
To deflate the money supply, gold would literally have to be poked back down into the geological strata of a gold mine. That is a nonsensical concept.
When this statement is referring to prices then it is a fact that in the 19th century, in both the UK and the US, prices gently fell for almost the entire period. Imagine a scenario where the economy and wages are growing and where each unit of money is able to buy more and more goods as time goes on. That is how it should be in a healthy economy. Under a system of honest money, rising productivity and technical innovation will always lead to a gradual fall in the overall price of goods. Who could sensibly object to that?
27. Are Gold and Silver Coins too Heavy for use as Money?
During the Weimar Republic hyperinflation people found it considerably easier and lighter to carry a tiny silver coin than the wheelbarrow loads of its paper money equivalent.
At the time of writing one ounce of gold buys $1,645.49 in Australian dollars. The notes and coin (in the largest denominations possible) are almost 19% heavier than the ounce of gold. In the more normally carried denominations it is almost 70% heavier.
Legal tender is both heavier and bulkier than gold. It is true that paper money is used for convenience, but it is not for the convenience of people, it is for the convenience of governments and central banks.
28. Is Gold Just Another Commodity?
Gold is money as proven by 6,000 years of history and the stock to flow ratio. Commodities tend to be very volatile in value; gold is stable in value – that is why it is the measure. To say that gold is just another commodity is the same as saying that a diamond is just another piece of coal.
29. What is the Stock to Flow Ratio and Why is it so Important?
The stock to flow ratio is simply the amount of already existing, above ground gold divided by how much gold is being produced each year.
Because gold has been used as money for so long, and because it is used for almost nothing else, most of the gold that has ever been mined in the history of the world is still available to the market. This means that the value of gold is now unrelated to the amount that is, or is not, being produced each year. The stock to flow ratio of gold is measured in decades; in all other metals it is measured in months, sometimes only weeks.
The importance of the stock to flow ratio is that it is this one factor that gives gold its unique stability of value. Gold’s value is unrelated to how much, or how little, is being produced each year.