Many people tell me that "I don't want gold. I have no desire for gold. Why should gold be used as the standard for our money?"
First of all, it's not set in stone that you use gold. During WWII, soldiers used cigarettes as the barometer of wealth. However, gold has been proven to be the best standard to base our money on.
There are several criteria that make for an ideal standard of value. For instance, the thing should have value in and of itself with little human effort applied, unlike paper money. It should be durable, unlike cigarettes. It should be divisible, unlike for instance a diamond. And it should have an easy standard of value, for instance 1 gram is $1.
Gold, and other precious metals such as silver, fit all those criteria. Because of this, we use gold.
You might say "But *I* don't want gold. When I go to the bank, and they give me gold, I am going to have no use for it. Why should we use gold?" That is true, you may not want gold. But, other people do.
Let's go back to our original scenario. You are a doctor and you want to trade with the farmer. Let's say that because you decided you don't like gold hence gold shouldn't be the standard and no one can agree on any one substance that everyone likes, you decide to just use a worthless pieces of paper. This worthless piece of paper is given value based on nothing more than your arbitrary whim that it should be the currency of choice. So, you give the farmer a medical examination in exchange for the worthless piece of paper.
However, just like in the first scenario, the farmer doesn't produce any wheat due to a bad season. What are you left with? You are left with a worthless piece of paper. What can you do with this worthless piece of paper? Nothing. You try to go to the market and give someone this worthless piece of paper in exchange for their services and they just laugh at you. They weren't in on your scam and arbitrary choice to have this be the currency of choice. They don't want your paper; your paper has no value.
Now let's assume you used gold. You give the farmer a medical examination and in turn he gives you gold. Come farming season, he doesn't produce anything to exchange for his former trade. But, this time you aren't going to go hungry. What do you have now? You have gold. But you can't eat a piece of gold, you might say. No, but you can use that gold to entice someone else to sell you food. Before, you were left with a worthless piece of paper, which you couldn't use to your advantage at all. Now you have gold, and even though you may not want that gold, you now have something to offer someone else in exchange for their goods or services.
So, there in lies why just because you don't want gold, gold is still a good standard. Gold has market value, that's why it is desirable for you to have. It isn't necessary that everyone have a desire for gold. It is only necessary that whatever you use has some inherent value so it can be sold on the free market, thus giving you something to use to bargain with for something else. You specifically may not want gold, but other people do, and that's why gold is still desirable and used as the standard.
When on a gold standard, the amount of gold that any given unit of money is worth is fixed. For instance, 1 troy ounce of gold may get a person $35. More on this in a later article.
The main reason for the gold standard is it resists inflation and keeps the dollar strong. With the gold standard, the government and banks must always be accountable for how much money is in the system. You can only give out as much money as there is gold. When a person comes in with $35, they can expect to get an ounce of gold. In theory, all money in the system should be able to be converted into gold.
Without the gold standard, the government is able to just freely print off money and spread it around in various ways. With more money chasing more goods, it causes inflation. And moderate inflation should not be seen as a minor inconvenience. Inflation of only 3% a year will cause over 300% inflation in 40 years, i.e. by the time one retires. If you make $40,000 now, expect to make $120,000 per year in order to retire.
Are you willing to develop savings knowing that on down the road it will lose 2/3 its value?
So what about the natural growing of population and the limited supply of gold—won’t we need more gold to keep up with more people, more good, more business, etc.? Ah, that’s the beauty of it. As there are more people and more goods, with limited gold, that gold actually becomes stronger. The monetary value on something is just a number. We could just as easily say a gallon of milk should cost one cent or one hundred dollars. What matters is the worth of that penny not the number. Under the gold standard, instead of inflation you have deflation (though that’s not the best word to use since it often has negative connotations). As time goes on and there are more and more goods compared to gold, your gram of gold will buy 3 gallons of milk instead of 2. And, yes, there are other reasons for “deflation” other than slowing business, as those who operate the FED would have you believe. Better technology is one such reason; for instance, consider the price of VCR throughout the 1980s.
This is a question for all to think about: which would you rather plan for retirement under: the gold standard of fiat money?