(This item originally appeared at Forbes.com on June 16, 2016.)
A gold standard system can take on a great many practical manifestations. Before 1800, in most places it meant gold and silver coins exclusively. In the 1950s, it meant paper money whose value was linked to gold, even as owning gold itself had been illegal since 1933. Some time in the future, it might mean various forms of “e-money,” where neither coins nor banknotes are used.
A bitcoin stands in front of a U.S. one dollar bill in this arranged photograph in London, U.K., on Friday, Jan. 29, 2016. Photographer: Chris Ratcliffe/Bloomberg
In all of these cases, the core concept is that the value of the medium of exchange is linked to gold. Gold is the standard of value. It has a multi-century track record of success in this role.
This is not much different than the eurozone today, where, instead of gold, the euro is the standard of value. Sometimes this means using the euro itself – which is a little similar, you might say, to using gold coins. For more than two dozen countries, it means a currency linked to the euro – a “euro standard system.”
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These countries do not have any domestic monetary policy. They trust that the management of the euro will be beneficial. They get to participate in a trade network among other euro users, free of the problems of floating exchange rates.
In a gold standard system also, countries have no domestic monetary policy. They trust that gold will serve its role as a stable measure of value, as it has for centuries. They get to participate in a trade network among other gold standard countries, free of the problems of floating exchange rates.
I think that gold will still be the Monetary Polaris long after all that remains of the euro is a page on Wikipedia.
A “cashless society” could easily be based around gold. It would simply be a matter of linking the value of bank reserves (deposits at the central bank) to gold, and, ideally, making them redeemable in gold bullion. Or, you could have independent monies in the Bitcoin model. BitGold, the successor to GoldMoney, now has over one million users.
When you see that a gold standard system is a value link, then it is obvious that it does not matter if gold travels here or there, or if it is in this vault or that vault, because it is all the same value nevertheless.
I don’t think getting rid of cash is a good idea. It can quickly become a system of surveillance and control. We would want people to be able to use gold coins and bullion as a means of payment for large transactions. You would also want a large and liquid market in gold bullion, much like the new Shanghai gold exchange – and not at all like the London gold market, or U.S. Comex futures market, which are really paper-trading exercises divorced from any transfer of bullion assets.
For roughly 2000 years – 2800 B.C. to 800 B.C. – people used gold and silver as money, without making it into coinage. This was inconvenient, because the metals often had to be weighed and assayed. Coinage was a radical new innovation. Paper money first emerged in eleventh-century China, but it was rarely used in most of Europe until after 1850. The widespread adoption of paper money was also a radical new innovation. Perhaps paper money too will fade, as people make more and more transactions without it.
But, even if that happens, we are still left with the basic choice that George Bernard Shaw expressed in 1928:
The most important thing about money is to maintain its stability … You have to choose between trusting the natural stability of gold and the honesty and intelligence of members of government. With due respect to these gentlemen, I advise you, for as long as the capitalist system lasts, to vote for gold.
Just look around you. Yellen. Draghi. Kuroda. Negative interest rates. Brexit. The collapsing middle class. This is all pretty pathetic stuff compared to the great successes of the pre-1914 era, or the fantastic global wealth creation of the 1950s and 1960s. For now, we have to live with it. But, maybe not too far in the future, we might be able to choose again what kind of system we want. I vote for gold.