Replies

While the founding fathers prevented the States from issuing paper money they did not place the federal government under the same restriction. They could easily see that specie was systemicly drained out of this country and as a consequence there was almost none to be had. Given the persistent balance of payments deficits of the early period that would not have changed since significant gold mining did not occur until the late 1840s.

Gold is totally impractical as a money supply and in fact has never been truely used as such. Even when claimed as the true money governments proclaim inconvertibility anytime a crisis developed. Thus, England did not require convertibility for almost 40 yrs during the Napoleonic era.

Handling large transactions is virtually impossible with a metallic standard and small ones are exceedingly difficult as well.

Anyone who has actually examined the needs of a modern economy can understand that the growth rate of a money supply of gold is far too low to allow economic health. Growth rates of 3% a yr. are impossible to attain without an increasing MS unless tremendous productivity gains regularly occur. Gold as money wears away at a rate of 1% per yr. thus as MS it would have to increase by at least a 4% rate for a growing economy. This is almost twice the long run growth rate of the gold supply.

When gold/silver was the standard not only was there chronic deflation because of the slow growth rates but it was distributed very unevenly within the nation. It was over a 100x as plentiful in the urban areas than in some rural states in the 19th century U.S. Not only was there a built in deflation with gold but when large discoveries were made it wildly inflated money supplies and produced inflation. Gold from the New World inflated Spain's prices so much that its economy was wrecked and the country went from being the most powerful in Europe to a backwater in about a 100 yrs. That inflation spread throughout Europe during that century.

Gold is valued monetarily because of superstition more than rational analysis. And most of the history of the Gold Standard is not properly understood.

This is why the populists, greenbacker and progressive parties were formed by the farmers of the west and south- to demand a more elastic money supply not limited to the Eastern cities.

One slight correction, the mentioned section of the Constitution (1-10-1) doesn't prevent the states from issuing paper money, it prevents them from issuing any kind of money including precious metal coins. They're allowed to use gold or silver coin to pay debts and nothing else, but they're not allowed to issue anything.

One of my big arguements with the gold bugs is that cash itself is becoming a thing of the past. With the vast majority of transactions being forms not created by the US Mint (credit cards, checks, electronic transfers) the concept of what a printed dollar "represents" is frankly immaterial. And any "constraints" put on the physical money supply by tieing it to a commodity are meaningless.

While the founding fathers prevented the States from issuing paper money they did not place the federal government under the same restriction.

No but it did grant the responsibility to Congress and the Coinage Act of 1792 established a silver standard.

Gold as money...would have to increase by at least a 4% rate for a growing economy.

Nope. A growing economy does not need more money. A constant money supply with increasing purchasing power will do the trick.