Viewpoint: Economy Sets Monetary Value

By Tom Altvater, Numismatic News July 09, 2010

This article was originally printed in Numismatic News.
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Folks, let it rest. Gold is no longer money.

It is no longer the basis for money, except in the minds of a few. There is not enough gold in the world to go back to the gold standard. Let’s also drop the reference to fiat money, money that is backed by decree. Fiat should be on the hood of a car, but not in reference to the dollar.

The strength of the economy determines the value of the monetary system. That system is tightly controlled in the United States by the Federal Reserve system using regional banks to provide the stability. The ability to quickly infuse funds into the economy when called for is a strength of the Federal Reserve to control deflation or inflation.

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A gold backed monetary system would not be able to handle the major swings of money supply that we have recently witnessed as the gold supply simply cannot be controlled since it is a commodity dependent on availability and the technology to produce it.

Let’s assume gold becomes more readily available because of some future mining technology. It would make it as common as aluminum is today, which was also extremely rare a little over a 100 years ago. This would create an oversupply and its value would drop. This would also create hyperinflation resulting in increases in costs of all goods and services as happened in the Carter years.

Another downside is that most of the gold in the world is owned by foreigners. Let’s assume we are on the gold standard and China one day wanted to cash in all the debt the U.S. owes in gold. We could empty all our bullion deposits and have very little left over (if any). I’m old enough to remember that prior to ending the gold standard France was demanding to be paid in gold. We have very few friends in the world that would maintain a stable gold supply just to keep the dollar on an even keel.

Do I own gold? Sure do; I have a gold Frank Robinson coin that I treasure and a couple of other commemoratives. It’s a great investment if I had the foresight to purchase lots of it several years ago. It’s a good investment only when its price increases, but not as good as stocks that pay regular dividends.

Here are my $2 of opinion and now I will take my fiat money and go spend it on a new coin set to help out the U.S. economy.

Tom Altvater is a numismatist. Viewpoint is a forum for the expression of opinion on a variety of numismatic subjects. The opinions expressed here are not necessarily those of Numismatic News. To have your opinion considered for Viewpoint, write to David C. Harper, Editor, Numismatic News, 700 E. State St., Iola, WI 54990. Send e-mail to david.harper@fwmedia.com.