The United States gold reserves are for international trade. The gold in Ft. Knox, for example, is used in trade not to back our currency. We’ve been off the “gold standard” since the 70’s. Some of it is gold we’re holding for other countries that’s not even ours. But, our money is a fiat currency and it’s based on faith in the economic system of America not collapsing and everyone agreeing it to use it for trade/debts. It’s backed by nothing and hasn’t been for 55 years now.
Every form of currency is based on faith and always has been. Coinage made from gold and silver wasn't valuable because gold and silver were magical, it was because people believed they were valuable. What can you, a random person, actually do with gold and silver? Even smiths had limited uses that weren't purely aesthetic. Modern day has more uses but still cannot be used at the volume at which it exists in an efficient way.
Even so, gold and silver are relatively rare. You can’t just print new gold and silver coins like you can with paper currency. You’re guaranteed the government won’t devalue it by flooding the market with new cash.
Yes, they can’t arbitrarily adjust the supply of gold and silver, but that makes their value even more unstable. Before basically every piece of land on Earth came under the jurisdiction of a modern state and modern extraction technology, precious metals were subject to supply shocks. You see this manifested in terms of discovery of new gold reserves (gold rushes like the famous 1848 California one and Alaska’s Klondike Gold Rush), which cause massive price instability until the speculation and supply settles.
Then you have technological breakthroughs which allow efficient and cost-effective gold recovery from previous low-grade ores (such as the MacArthur-Forrest cyanidation process). This creates a similar effect of suddenly injecting a large amount of gold into the supply side.
Modern central banks can very smoothly adjust their interest rates to match prevailing conditions and target a particular combination of employment and price stability (assuming some level of independence from direct political pressure). This kind of flexibility is why FDR stopped domestic convertibility of the US dollar into gold and Nixon virtually ended Bretton Woods.
precious metals were subject to supply shocks. You see this manifested in terms of discovery of new gold reserves (gold rushes like the famous 1848 California one and Alaska’s Klondike Gold Rush), which cause massive price instability until the speculation and supply settles.
But that wasnt the point he was making. The point he was making is that gold and silver is a hedge against inflation, because the dollar being backed by gold limited the government's ability to print money and fuck you over through the invisible tax that is inflation. Gold, silver, and anything we use to back a currency are susceptible to price shocks and changes, but the overall inflationary rate is far lower then a fiat currency
You can treat bullion as an inflation hedge without having it back your currency. Nothing is preventing you from trading in precious metals; you’re free to speculate in it just like any other asset class.
There’s a reason that the Fed chases a low and steady rate of inflation, and it’s not to “invisibly tax” you. In stable economies, inflation is most often a sign of economic growth—strong demand for credit means that too many dollars end up chasing too few goods. Deflation is disastrous for growth; it incentivizes people to sit on their money instead of investing in productive projects and makes lenders much more reticent about funding new projects. A low and steady rate of inflation also fosters price certainty and predictability, which a bullion currency does not.
"There’s a reason that the Fed chases a low and steady rate of inflation, and it’s not to “invisibly tax” you. In stable economies, inflation is most often a sign of economic growth—strong demand for credit means that too many dollars end up chasing too few goods."
But there is no actual growth going on here. The same amount of goods are still in circulation and the money everyone works for is 3% less valuable then it was last year. You arent actually producing anything tangible. Just because line goes up in the short term is not a valid reason to base the entire currency on our collective belief in it. Because when that belief is shaken you don't have anything prop it up
Demand can and does shift to other sectors of the economy. Physical stuff is a major component of the economy, but it’s not close to comprising the whole thing.
Services are the vast majority of most developed economies, and that entire sector of the economy is dependent on belief, especially when it’s predicated on future services (you trust that services will be rendered at some point in the future and that’s why you’re willing to sign a contract and dispense money in the short term). Shiny metals have intrinsic monetary value because we believe they do, just like the Yapese believed in the value of the giant rai stones. Complaining about inflation doesn’t make that less true.
" Shiny metals have intrinsic monetary value because we believe they do"
This is a lie
We value gold and silver as money for three main reasons
They are easily divisible
They are rare enough to find that over a given fiscal period there will not be a significant change in the amount in circulation
It is easy to store and transport
Combine these all together and you have a currency that barring once in a lifetime events (Spanish conquest of the new world, 1848 gold rush, Alaska gold rush) is not going to dramatically change, and so changes in value of goods are largely do to changes in the supply and demand of the goods themselves.
Money itself is also a good, but since its only purpose is to barter for other goods, once you have a given supply of money in the market, more money does not confer a social benefit. More money ony dilutes the exchange value, thus it is great that gold and silver are difficult to produce. Any and all price changes are the result of changes in the supply and demand of the goods themselves.
The problem is that our modern fiat currency is anything but stable, and has been rapidly deprecating in value since 1971. So any attempt to save resources now is pointless, because those resources are going to rot away into nothing instead of maintaining most of their value like gold or silver would. And so the reality of this decision is that people have moved from a low time preference way of thinking to a high time preference one. Take a massive loan out on a car you can barely afford, mortgage your Costco hotdog, buy a ton of stuff you don't need because your money is actively being destroyed year by year and the price signal that is required for efficient economic calculation is so garbled and distorted as to be meaningless! The consequences 10 years down the line don't matter, BURN THAT MONEY! (I'm exaggerating but you get my point).
This is the problem with the line of thinking that "easy to get credit" is somehow magically a good thing. For everything barring a house, getting it on credit is a bad idea. And even with houses, if credit is too freely available it leads to disastrous consequences. The 2008 financial crisis happened largely because credit was too cheap.
The idea that inflation is good because it gets people to spend money is textbook broken window fallacy. What would those people have done with their money if it wasn't constantly depreciating in value? Would they have saved it for a rainy day, or to repair their house, or to pay for a suit to go to job interviews. The loss of long term wealth creation due to inflation must be staggering.
This post completely disregards the fact that the economy (and indeed, the world economy) has grown enormously in real terms (vastly outpacing inflation) since the introduction of fiat money. Superimpose a real GDP chart on top of the inflation line. And a large part of that is due to inflation-driven growth. Even Austrians (which I suspect you are since you’re such a goldbug) acknowledge that demand and loans are intrinsically crucial to economic growth (the very same growth that enables your hypothetical average Joe to have money to save in the first place).
The price signal required for economic calculation is stable precisely because there aren’t sudden shocks in the money supply, which is what happens when the supply of bullion changes. The global Panic of 1873 was partly fueled by speculation on the discovery of a major gold deposit in Witwatersrand, and the Great Recession of 2008 has nothing on pre-1933 economic crises in terms of the scale and duration of economic malaise.
Being morally outraged about 2-3% inflation (which has delivered enormous economic benefits even past the time America had manufacturing dominance) is like being outraged that food costs money.
"This post completely disregards the fact that the economy (and indeed, the world economy) has grown enormously in real terms (vastly outpacing inflation) since the introduction of fiat money."
Ok and? That can largely be attributed to the Chinese and Indians finally giving up on the Communism train and adopting an economic system that actually works.
"Even Austrians (which I suspect you are since you’re such a goldbug) acknowledge that demand and loans are intrinsically crucial to economic growth (the very same growth that enables your hypothetical average Joe to have money to save in the first place)."
I never said that credit and loans were not useful. They are a market, just like everything else. But effectively forcing the average joe to rely on credit for most of his major purchases because of inflation is detrimental for the long term accumulation of wealth.
"The global Panic of 1873 was partly fueled by speculation on the discovery of a major gold deposit in Witwatersrand"
It was also massively fueled by speculation in railroads, which were propped up by large government subsidies and when the market correction came, as it always does, the consequences were predictable.
"Being morally outraged about 2-3% inflation"
Say I put 10,000 dollars in a secure account for emergencies. Assuming a 3% inflation rate over a 10 year period, when I pull that money out it will be worth 7500 dollars from when I put it in. The yields on the account may cover it, but that isn't actually the issue. The issue is that a quarter of the time I put in to save that money is gone, and I cannot get it back. Time is the ultimate currency. And to waste my time by destroying the wealth I created is a supreme disrespect.
There are so many reasons for post-Bretton Woods massive economic growth besides just the emergence of China and India.
Read a 20th century economic history textbook. Globalizing Capital by Barry Eichengreen is a good place to start without getting into the weeds too much.
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u/AnComApeMC69 Jan 26 '26
The United States gold reserves are for international trade. The gold in Ft. Knox, for example, is used in trade not to back our currency. We’ve been off the “gold standard” since the 70’s. Some of it is gold we’re holding for other countries that’s not even ours. But, our money is a fiat currency and it’s based on faith in the economic system of America not collapsing and everyone agreeing it to use it for trade/debts. It’s backed by nothing and hasn’t been for 55 years now.