Gold backed currency: fiat dollars in a house of mirrors
October 28, 2015 § 37 Comments
In the previous post I gave a basic explanation of fiat dollars. In this post I will argue that gold backed currency (or other sovereign-issued commodity-backed currencies) are actually less transparent than fiat dollars as a medium of marketplace exchange. Gold-backed dollars, in other words, simply are fiat dollars; but a perverse and distorted form of them.
Gold became a medium for barter, particularly over extended distances and time, because it had characteristics which made it particularly suitable. A valuable quantity of it takes up very little space compared to alternatives, so it can be easily transported and defended; and it is very durable, so it doesn’t lose its intrinsic value quickly the way food and other perishables do.
Every useful application of a thing affects the market value of that thing, so the use of gold as a medium for barter (that is, as a currency) affects its market value. If 90% of the time gold is used as a currency and only 10% of the time it is used for other applications, then its use as a currency will dramatically affect its market value.
When Caesar puts his face on gold coins and pledges to accept his minted coins for payment of taxes, those gold coins become a fiat currency – tax vouchers issued by Caesar – printed on gold. So now the market value of each coin, and the corresponding value of equivalent weights of gold, are further altered from the value of gold apart from its application as a marketplace currency and tax voucher. What has happened is that what used to be an advantage in a case of pure barter – how much a small volume of gold is valued in itself for applications other than currency or tax voucher – has become a distorting and obfuscating factor.
What we have at that point is still a fiat currency: it is just a fiat currency viewed through a house of mirrors.