I was talking with my father about the benefits of the US on a commodity backed currency and finally sold him on it principle, but not in reality. He has an interesting point that if the US were on a commodity backed currency, other countries with a fiat currency could buy and sell massive amounts of US currency in a very short period of time. This could definitely rock our system quite a bit. Is there an answer to this sort of thing in the Austrian school of thought?
Thanks
How is that any different from how it is now?
If anything a commodity currency would destroy all other countries’ currencies as they would look like shit schemes in comparison. The market would adjust very quickly to get the forex crosses in line.
The reason people don’t use gold and silver as money is because it’s illegal. People who try to set up alternate monetary systems based on gold or silver wind up in jail.
Two specific examples are E-Gold and the Liberty Dollar.
Except it is legal and you can contract in silver or bubblegum if you want.
As far as I understand, trading in precious metals is not illegal per se. It’s simply impractical due to legal tender laws and capital gains taxes. At least on a wide scale. It’s quite possible on a local level off the government radar. I already hear stories of gold and silver hoarders buying for various services with silver or gold coins or bars. I don’t know how widespread this practice is, but it has a chance of becoming very common in times of hyperinflation.
Here’s a specific example.
Suppose you buy raw materials for $5 and sell something for $10.
If you use FRN as money, you owe taxes on the gain of $5.
If you use barter as money, you owe more in taxes. (Using gold/silver as money counts as barter, according to the IRS.) You owe a tax of 28% on theENTIRE transaction. The buyer also owes a tax of 28%. The net effect is much greater taxes.
Therefore, gold and silver as money are not outright illegal, but they are heavily taxed. That’s the reason you can’t go into Wal-Mart and buy something with gold or silver.
Operating a gold/silver warehouse receipt bank IS illegal. It’s not outright illegal. The cost of compliance with the banking regulations makes such a business effectively illegal. Most people who try to operate such a business wind up raided by the State.
The problems with using gold/silver as money are:
If you’re willing to operate off-the-books, only then is it practical to use gold and silver as money.
Good explanation, FSK.
As long as federal reserve notes are widely accepted and inflation is somewhat under control, using gold/silver as money would be very limited and primarily off the book. However, just wait for the coming crush. I lived through hyperinflation after the Soviet collapse. Barter (and foreign currencies) was far more preferrable than local currency since it was inflated every day and everyone wanted to get rid of it. Listing prices in dollars or euros is still very common in stores. Since the start of the crisis, Russians have been buying gold and silver products en masse and they don’t trust foreign currencies as much as they used to. They’ve been taught a lesson and are not going to forget it. Americans are going to learn it the hard way. It’s going to get really ugly, I’m afraid.
Until TSHTF, it’s probably best to keep your long-term savings in gold and silver, but keep enough FRNs for short-term needs. Over the past 10 years, gold has outperformed the S&P 500 by a wide margin!
Is it not what safety deposit boxes do?
What do you mean? You can easily buy and sell gold and silver, no?
He probably means you can’t use them as your checking account and draw against them.
Again, you have to pay taxes on your gains or maybe even a sales tax.
Besides the day-to-day price is volatile due to the central banks interventions.
But this is true to oil or any number of goods. Why single out gold?
because traditionally, gold has been free market money.
Huh?
No. If you had gold in a safe deposit box in 1933, the bank management was required to steal your gold and give you a piece of paper.
You’re an idiot if you keep your gold in a safe deposit box in a bank.
I went to a local coin store and asked about American Eagle gold coins. The quoted bid/ask spread was 10%. The transaction costs are artificially high due to State licensing costs and State restriction of the market. I’ll probably use an online dealer where the costs are lower. Still, my transaction is automatically reported to the State/IRS.
It’s hard to buy/sell gold for FRNs with cash. There are State reporting requirements.
Thanks for all the replies.
My question still stands, however. If China can print money and we are on a gold standard, then couldnt China print massive amounts of money, buy up a lot of our dollars, and drive the value of our currency up? Couldnt they then sell it all and cause our dollar to lose value?
Basically, if we are on a gold standard, cant other countries easily manipulate the value of our dollar to put us at a disadvantage?
True. You’d be safer just by burying it in your backyard in an old-fashioned way. I swear, when it comes to financial matters, our ancestors were much savvier than we give them credit for.
I thought they only report it over $10k?
I do buy from online dealers like Bulliondirect.
what are ‘our dollars’ ?
That only is possible on a fractional gold standard. If the USA has 1M ounces of gold in its reserves but prints 10M of gold-backed paper, then this is subject to manipulation if China acquires 1M pieces of gold-redeemable paper and says “Give us our gold!”
If you don’t have more paper promises for gold than actual gold, then there’s no abuse possible. If China prints its own fiat money and buys gold, then why would people in the USA give up their gold for worthless paper? China could only get gold from the USA if it was providing tangible goods in exchange.
For example, if the Federal Reserve printed up money and started trying to corner the world gold supply, there would be humongous inflation.
The problem is, that while gold standard is infinitely better than fiat money, it’s still a half measure as long as its fate depends on the government’s good will. And we’ve seen how “trustworthy” they’ve been to their promises in the past 
The true solution would be getting rid of the Fed and legal tender laws and having private currencies backed by whichever commodity market has determined to be appropriate. Gold and silver topped the favorite money list in the known history but it could very well be something else no one has thought about it.