If the very idea seems at odds with what is currently happening in our country with Congress preparing to pass a massive economic stimulus bill that will push the fiscal deficit to triple the size of last year’s record budget gap it’s because a gold standard stands in the way of runaway government spending.
Under a gold standard, if people think the paper money printed by government is losing value, they have the right to switch to gold. Fiat money i.e., currency with no intrinsic worth that government has decreed legal tender loses its value when government creates more than can be absorbed by the productive real economy. Too much fiat money results in inflation which pools in certain sectors at first, such as housing or financial assets, but ultimately raises prices in general.
Inflation is the enemy of capitalism, chiseling away at the foundation of free markets and the laws of supply and demand. It distorts price signals, making retailers look like profiteers and deceiving workers into thinking their wages have gone up. It pushes families into higher income tax brackets without increasing their real consumption opportunities.
February 13, 2009