I have been wondering what would happen if OPEC priced oil in gold.
While gold is the current speculative bubble, I don’t see it actually being used as a medium of exchange. The use of gold as currency would have a serious problem — the supply of gold does not readily respond to the economy’s need for currency to conduct transactions because gold supply for monetary use depends on gold discoveries, gold mining technology, and the changing industrial needs for gold. If we were to decree that gold is the official currency, we can expect continual deflation as the economy’s need for currency expands faster than the supply. (This happened in American history, leading to demands for silver coinage.) Sorry, Wall Street Journal editorial page gold advocates — there is no currency rule or formula that is going to keep the economy sound; an informed, freedom-loving populace is our only hope.
I’ve said it before, and I’ll say it again: when gold reaches $2,067 per ounce, the dollar will be worth exactly one penny from a century ago. Economists may call this an overly simplistic measure of inflation, but simple is not simplistic. We’re not talking about a dollar’s worth of an artificial ‘basket of goods’ which has different arbitrary contents from the end of one century to another; we are comparing two commodities, period. An ounce of gold a century ago was $20.67, by law. No ‘baskets’ were involved. The whole concept of comparing groups of commodities to get a ‘better view’ of inflation, or to use ‘average daily wages’ (another guess) serves only to make it seem impossible to measure wealth and inflation.
We have not been well treated by nearly a hundred years of the Federal Reserve system, nor have we done particularly well in the forty years of fiat money since Nixon closed the gold exchange window. A politically staffed central bank with the power to print money leads to politically motivated bubbles. At least the First and Second Banks of the United States were only chartered for twenty years, and couldn’t create money out of thin air.