Before the Gold Standard

December 7th, 2011 at 4:19 pm David Frum | 21 Comments |

| Print

I’m very much enjoying Charles Mann’s 1493. So much of the book has deep relevance to current affairs, including this piece of monetary history on p. 135:

[In contrast to commodity money,] fiat money has no intrinsic value, and is worth something only because a government declares it is. … From a government’s point of view, commodity money is problematic, because the government does not fully control the money supply – the nation’s currency is at the mercy of random shocks. For example, at the time of [Christopher Columbus'] voyages cowry shells were used as currency from Burma to Benin. Then Europeans shipped in vast quantities of shells from the cowry-rich Maldive Islands, in the Indian Ocean. Governments throughout the region were overwhelmed. A financial system that had been in place for centuries disintegrated in a flash.

On the other hand, don’t you think there must have been some Equatorial Ron Paul fulminating against the new-fangled European innovation of shiny disc money, and insisting that if cowry shells were good enough for Benin’s Founding Fathers, they ought to be good enough for the Benin of today?

Recent Posts by David Frum

21 Comments so far ↓

  • D Furlano

    Another good book that has the gold bugs fuming about.

    • NRA Liberal

      The author of that book was also one of the main masterminds behind Occupy Wall Street!

      • ConnerMcMaub

        If any conservatives want ammunition against the occupy movement they should read the recent New Yorker article about it. Lots of stuff that would sound bad if cherry picked.

  • Graychin

    What money does have “intrinsic value”? You can’t eat gold. The price of diamonds is propped up by a cartel, just like Chinese money is. In the end, markets decide what money is worth.

    “Fiat” money actually works better than any of its predecessors. Even if cranks like Ron Paul don’t agree.

    Right now, the US Dollar (“fiat” money) is riding high. The rating agencies may have downgraded it, but the markets disagree. Those same rating agencies said that “liar loans” were AAA after they had been kissed by Goldman and insured by AIG.

    • JimBob

      5000 thousand years of history. Frum is truly an embarrassment. People chose Gold. The free market. Something Frum knows very little about.

    • JimBob

      I suggest when you and Frum talk about cranks I’d look in the mirror.

      Contrasting fiat money to gold one can say that gold has intrinsic value compared to paper money. In that context it means that, stripped of its use as money, paper fiat money would have almost no subjective value, certainly not even close to the number printed on it. Gold on the other hand has subjective value even if it is not legal money.

    • Frumplestiltskin

      Exactly, hell at least silver has industrial uses. For most of human history currency consisted of pigs, cows, and chickens far, far longer than 5,000 years (and yeesh, Jim Bob doesn’t even know how long recorded history is, I guess he never heard of the Agricultural revolution in the neo-lithic age, I guess the neo scares him, to him we went from Noah to Jeebus in 2 easy steps) Jimbob proves that Darwin was wrong, devolution exists.

      And no people did not just choose gold. Good lord, where did you learn your history? From Ayn Rand?

      • JimBob

        Kid, Five Thousand Years of History. There’s nothing that can touch Gold as money. Deal with it.

        • D Furlano

          Gold was never used as a real currency. There was never enough to use as a currency. Even when the US was on the gold standard it was pegged at a much higher rate than the market rates because there wasn’t enough gold to support the economy.

        • think4yourself

          Like Frumple, if we ever do have a currency meltdown where the dollar is a worthless means of exchange, I don’t want to be lugging gold around. In that post apocalyptic world, I want non-perishable foods, potable water and oh yeah lots of rounds of ammo. Red Dawn, here we come!

        • Lonewolf

          ‘Dja ever stop to think that gold was the standard for that long because all gold production was, um, CONTROLLED BY THE STATE? “People’s choice” had nothing to do with it. The only viable uses for gold today are jewelry (luxury goods), electronics (luxury goods) and hoarding as bullion (luxury goods). Unless you’re a jeweller, or interested in plating electrical contacts, gold is useless; you can’t eat it and it makes lousy bullets.

        • kuri3460

          The only problem is that in order to use your gold to get food, shelter, medicine, transportation, and all of other life’s necessetities, you have to…..wait for it…..convert your gold into wortherless paper fiat money.

  • Frumplestiltskin

    And it might be of interest to the historically illiterate Jimbob, but the first paper banknotes appeared in China about 806 AD. The first real use of a paper money system was in Sichuan province, an area subject to frequent copper shortages. It had reverted to an iron currency of coins, and paper was a welcome option. Iron banks sprang up to facilitate the trade, and the government was quick to take over the profitable enterprise.
    The Song dynasty was the first to issue true paper money in 1023.

    And gold has no intrinsic value, stating it does has got to be one of the dumbest statements anyone can make. I will tell you what Jimboob, I will put you on a desert island and give you a 100 tons of gold, I will then go to a nearby island with pigs, chickens, cows, a fishing net, a boat, etc. all weighing far less than that 100 tons of gold. In a week you would be dead. Do you even know what intrinsic means? It mean relating to its inner nature. Gold has no inner nature other than being gold, its value is what we ascribe to it as it has no industrial uses nor can it be eaten.

    Gold has no intrinsic value. This does not mean gold is bad, it is pretty and it doesn’t tarnish (like silver) but that is it. You can’t make the word intrinsic to mean that what it doesn’t mean (ok, maybe to an illiterate you can try but good luck promoting ignorance)

    • ConnerMcMaub

      I agree the gold standard is an inefficient anachronism but calling Jimbob illiterate isn’t required to make your point. We already have enough anger in the equation, you’re just harshing my metaphorical buzz further.

  • Frumplestiltskin

    And in a hundred or two hundred years, when we can mine asteroids and effectively mine the oceans (our oceans contain magnitudes more gold than has even been mined, a genetically modified micro-organism can one day eat the gold in the ocean and we can then harvest it) and gold will be worth far, far less than it is today. Jimbob, I am sure, will whine that those micro-organisms should be illegal, as should asteroid mining.

    I also wonder at the patriotism (or lack thereof) of the gold bugs, being that Russia and South Africa have large stores of gold reserves, why would they allow America to be held hostage to foreign powers? I suspect Jimbob is actually Ivan from Petrograd (how else to explain his English illiteracy?)

  • NRA Liberal

    The problem of money–a government creation, be it gold or not—will always be a political problem.

    Governments on the gold standard simply GO OFF THE STANDARD when they need to. This happened in the USA more than once.

    Gold may have value independent of its status as money, but a government decision to abide by the discipline of a gold standard is just that–a government decision made by men and liable to be unmade by them at convenience.

    • CAPryde


      This is a point that deserves to be highlighted. Historically speaking, a “gold standard” is a very recent invention, and not fundamentally that different from fiat money, insofar as gold had to be moved through official channels (usually starting, for prospectors, with the local assayer) to become “money.” As often as not, older societies–all that history that JB loves–used gold as an art object, which is not strictly the same as using it to “store value.” And when societies used gold to produce coinage, that coinage was essentially “fiat money”; it had to pass through official channels (specifically a royal mint) before it had value as “money.”

      For those of us in academic history, that fiat-money requirement is a God-send, since much of what we know about, for instance, ancient Bactria/Afghanistan under Greek rule is based on coins minted by individual rulers with portraits and inscriptions. Some of the “best”/most useful coins are actually overstrikes, where a ruler declares some previous money no longer valuable, forcing people to come in and remint their coinage. Lazy minters would just pound the new face onto the old one without bothering to re-blank the money, so you can tell the order of rulers by whose image is on top.

      That’s a long digression, but the bottom line is simple: sure gold is old, but gold standards are new, and no more “natural” or “historic” than other officially-sanctioned tools for simplifying the barter process (which, despite what gold bugs will tell you about “storing value,” is what money really does).

  • Sinan

    There is very little difference between fiat money and money backed by gold. They are both backed by something of value to holders of the currency in a grand bargain that assumes value will be defended by those that create currency and manage the available amount of currency. All the gold in the world could be counted and stored somewhere. There would be a value associated with gold that would allow for you to price it at some rate that would have a relationship to the amount of money in circulation. That rate could be a fixed rate or a floating rate depending upon the scheme used to control the money supply. If it was fixed, then we would end up in the exact same problem we had in the 20s and 30s and again in the early 70s. The creation of money is an artifact of fractional reserve banking which is the essence of banking and the key driver of a modern economy. Without the ability to create money based upon a rational reserve requirement, we would end up with a static amount of money worldwide meaning that if the total pool of money was 1 trillion, 7 billion people would be fighting over a static pool of dough in a fight to the death. Every economy in the world would grind to a halt and guess what the war machines would end up having to do to protect national interests? We would invade your country to get your gold because that would be the only way we could ever grow. Didn’t this motivate the Spaniards in the New World?

    There is no substitute for managing money and controlling the rise of the money supply. It is all an illusion based upon our mutual confidence in each other and our futures together. If this is shaken, every type of currency ever imagined would not prevent the resulting chaos.

  • Paolis

    I think what Ron Paul is really pushing for is the elimination of fractional-reserve banking. I believe this whole “Ron Paul wants us to lug around gold!” argument is just a straw-man that takes away from the real issue that needs to be tackled.