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Welcome to my blog, Solomon's Conservative Wisdom. The name of this blog comes from my middle name and the historical & biblical figure King Solomon. This group is dedicated to conservatism, and I invite all conservatives to join, I really don’t mind non-conservatives joining. All I expect is a respectful debate. So tell everyone you know.

Tuesday, February 23, 2010

The Problem with the Gold Standard.

Originally I started on a post on my opinion on Ron Paul and the CPAC straw poll, and found my self discussing the issue of the Gold Standard. So I decided to turn that into a separate post.

First some background information, the first gold or commodity standards go back to the ancient era before the dark ages, where the commodity standards were a barter system or coins actually minted of gold, silver, or copper. Now while most might assume the first ones to try to control the value of the currency and stop inflation would be in modern times, not true the first ones to try to control inflation and encourage it was the Roman Emperors, the most common roman coin was the denarius which was minted in silver, over a period of five hundred years it went from 4.5 grams of pure silver with it's introduction in 211 BC dropping in silver content over the years until the coin ceased to be minted in sizable numbers in the middle of the third century. It was around that time when in 301AD Diocletian issued an Edict on Maximum Prices, in an attempted to control inflation due to the debasing of the Roman Coinage thanks to proceeding emperors and usurpers who minted their own coins in decreasing gold and silver values, this Edict was not well received by merchants and others and did not solve the problem, by 305AD the end of Diocletian's reign it was basically ignored.

While there are many theories on the other reasons on the decreasing gold and silver content of the Roman Coinage over the years, it can not be ignored that Rome's power and wealth originally came from conquests and after their expansion ended and they continued to import large quantities of luxuries from India and the Far East leading to a drain on their precious commodities like gold and silver. After Rome other nations had their own issues with coinage and inflation, after the discovery (or rediscovery) of the new world Spain became the new super power of the world while it controlled the new world, if fact this is what started what is known as the Golden Age of Piracy. During this period Spain was at its height of power rich in plunder from the new world, until a combination of factors reduced this power sufficiently.

Now to the modern age and the USA. Now originally US currency was minted in gold and silver coins and until the Civil War that was how things where, now when the Civil War broke out the government started to produce the first Greenbacks, there are two types of greenbacks, the Demand Note which was only produced for nine months and the United States Note which was produced from 1862 to 1971, our paper dollars today are "Federal Reserve Notes." Now I should note to you that all greenbacks are a fiat currency, in other words the government has never categorically guaranteed to redeem them for precious metal or other commodities, and the Federal Reserve Notes are a "bill of credit" and backed by debt purchased by the Federal Reserve.

And before I go into the problem of going back on the Gold Standard, a quick explanation of a commodity backed currency such as the old Gold Certificates (these were dollars with yellow backs, check out the link for examples,) with a gold certificate you could take it to the bank and exchange it for gold, FDR ended this in 1933, (FDR also made owning gold and Gold Certificates Illegal, either not just both). There was also the similar Silver Certificates. Now the reason we went off the gold standard the last time was under President Richard Nixon due to more gold going out due to other countries converting their dollars to gold.

Now as to going back on the gold standard or a commodity standard for our currency. First with our country's current debt, the minute we went back on the gold standard you can be sure that China and Russia will be first in line wanting to exchange dollars to gold, I don't even know if we have enough gold in Fort Knox to pay off the debt. Now I am not totally against the idea of putting the dollar on a precious commodity standard, if we where to do that what I propose is we reserve the right to decide what precious commodity we would exchange dollars for, for example we could redeem dollars in gold, silver, platinum, or in precious stones such as diamonds, this way if a nation such as China wanted to exchange dollars for a precious commodity we could pay them in silver or diamonds, and pay more friendly nations like Japan in gold. This would make our currency more stable and would more thine likely put most of our debt in friendly hands.


Solomon.
P.S. In a similar note many of the massively multi-player online role-playing games (MMORPGs) remove the excise fictional money from the system at the in game merchants to prevent in game inflation. Just thought that might be an interesting point.

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