Sunday, May 16, 2010

The Good Side Of Official Gold Demonetization

The claimed obsolescence of the gold standard is merely a trope, as aficionados of digital gold well know. Digital gold makes it convenient to pay for a chocolate bar with (say) 0.025 g of the metal, which was impossible before the advent of the Internet. It's only a matter of time before a dedicated spreadsheet comes along, perhaps in cloud-computing format, that would automate the task of calculating profits and losses in fiat currency for tax purposes. Far from being at odds with hi-tech, gold fits well with the increasing digitalization of the Internet age.

The purpose of that trope is to guard against any serious effort to officially remonetize gold. I'd like to point out why official demonetization is a blessing in disguise.

First of all, remonetization would plaster gold onto the current fractional-reserve system. Although the supposed virtue of the fractional-reserve system is expanding the money supply, it's obviously deflationary when under stress. That's why reflation is undertaken recurrently. Since gold is out of the picture, it can't be blamed for that instability; not can the metal be blamed for the economic instability engendered by the fiat-money fractional reserve system. Any turmoil tends to discredit fiat money, not gold. As long as gold is not officially remonetized, it can't be plausibly blamed for the latest monetary crisis.

Secondly, the supposed virtue of the fractional-reserve fiat-money system - that it's flexible enough to meet political demands - is also a benefit for gold in the longer run. The current monetary system, in the current political framework, is like the One-Hoss Shay. Once it goes, it'll drag down the entire monetary system with it. As long as gold is not a part of it, the metal won't be dragged down with it.

Thirdly, official demonetization makes for a cleaner use of gold as money. As long as gold payments are officially recognized as barter, allocated gold depositories are legally required to abjure the usual fractional-reserve practices that banks use nowadays. If a digital gold depository only keeps (say) 10% of all the gold on hand, while promising that it's all there, said depository would be guilty of fraud. Being made to exist outside the official monetary system means that there won't be any threat of bank runs bringing down the digital-gold system. That makes gold as an alternate currency stronger because it lacks the fragility of the fractional-reserve system.

Fourthly, gold loans will be subject ot the same legal restrictions. A gold depository that makes loans in gold, to be paid back in gold, is legally the same as a rental centre. Any rental centre that rents the same good to two or more people has committed fraud. That's the same legal requirement hat a gold rental centre would have to observe. What this means is, a system of unofficial gold remonetization will be on the basis of 100% reserves. Thanks largely to the work of Murray N. Rothbard, the intellectual infrastructure for 100% reserve banking already exists. By legal necessity, any system of full gold loans would have to be on a 100% reserve basis. That makes for a sounder and less unstable system than the one that official remonetization would permit.

Fifthly, official gold demonetization means that using gold as money won't be a threat to the authorities (as long as the tax laws are obeyed without any tricks.) Since using gold as money is officially barter, the monetary authorities will likely be curious instead of threatened. They're typically monetary economists, and seeing a gold-barter system turn into a para-money would likely excite their intellectual curiosity. Some of them might even join in as a lark.

Sixthly we're habituated to a fractional-reserve fiat-money system. One of the main reasons why "deregulation" of finance ran aground is we're still habituated to the regulatory system. Instead of proactively taking steps to protect ourselves when nothing seems legally wrong, we still half-expect the regulators to crack down when someting goes crooked. More importantly, financial-service professionals depend on the regulators to tell them their right and wrong. The same habituaiton applies to the fractional-reserve fiat-money system, for both groups. A 100% reserve bank may have to turn down loan applications because it's already lent out all its loanable funds. As of now, we're very unused to that business practice. We're also quite unused to poring through financial statements and auditors' reports to make sure a depository is sound. Financial-service professionals would have to become habituated to standards that make normal business practice look shockingly imprudent. That habituation is going to take a long time, so it's best that gold-as-money grows slowly and gradually to give people time to become acclimatized to it. That's only possible if gold is not officialy remonetized, if a gold standard is grown informally from the ground up.

For these reasons, I say that it's better for gold to remain demonetized. Fiat money, the fractional-reserve system and the habits that go with it are too pervasive right now to make the remonetization of gold anything more than a graft that'll be rejected. Moreover, it'll be a lot harder to blame gold for the troubles caused by the current system if it stays officially demonetized. Demonetization makes gold non-threatening to the current regime, which means that a ground-up para-currency system isn't likely to be legally impeded. Gold as an informal money is a better niche in today's economy, particularly since the world needs lots of time to rediscover the kind of prudence needed to make a gold standard work.

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