Gold Backed Currencies

No national currency is currently linked directly to gold. We're not on a gold standard. However, many currencies are nevertheless backed by gold. We may not be able to go into a bank and exchange our currency for gold, but we can go to a gold smith, a coin store or a bank to buy gold. Our currency is therefore backed by gold through the gold market.

Some countries may demand sales tax on gold purchases, in which case the gold market can be considered to be restricted. But as long as gold can be bought with local currency, that currency is backed by gold.

This means that the world is not all that different from when currencies were officially linked to gold. The gold backing of the dollar is still there even if Nixon declared the gold window closed back in his days.

Prudent savers used to demand gold from their banks whenever they had more currency than they felt comfortable with. Everybody knew that currency was credit, and only fools trust credit as much as real assets.

This wisdom has somehow been lost during the progressive era. The belief that government issued credit is as good as gold has been embraced despite the fact that all currencies are down more than 95% relative to gold over the past century. However, the belief in the benevolence and wisdom of government has been shattered, and a consequence of this will be that old wisdoms related to money will re-emerge.

It will again become common practice to exchange currency for gold and silver as part of a prudent savings plan, and this will happen regardless of what governments say or do. Only if they outright ban ownership of gold and silver will they be able to avoid the trend reversal. But such a ban will only serve to diminish the value of that currency in the eyes of international finance, and a ban on gold ownership is therefore an unlikely path going forward.

Gold and silver will become more common in investment portfolios, and this development will lead to an increased awareness of the dangers of credit and credit related investments. People will wake up to the fact that gold and silver are free of counterpart risk. It can also be used as an alternative to going into debt when making costly purchases.

A consequence of this will be an increased reluctance to invest into anything credit related. People will choose gold and silver over government bonds and currency saved in banks. They will increasingly save in gold and silver, and they will increasingly pay for houses and cars with savings rather than debt.

This will in turn crush anything built on the assumption that credit will be for ever expanded into the future. The appetite for debt won't be there, and no amount of credit issuance will change this. Attempts to reignite credit bubbles will merely result in gold and silver prices going up.

This won't happen over night. It will take decades to unfold. But the net effect will be that people once again will live largely debt-free lives.

Liberty