We discussed how government interference in market causes all inflations and depressions here The Price of Rice, What caused it to go so high? And here The story of Money; what causes Inflation.
Q>Yet, even price of gold can change, appreciate or depreciate. So, how is it more safe than the Fiat Currency? Read more about Fiat Currency1
The price of gold can rise and fall, but you can’t print more gold to temporarily float an economy, at the cost of later, catastrophic inflation.
Gold backed currency is the most stable, most immune to inflation, and most representative of the actual value of an economy. The fiat system (described in all its horrible failure in the previous two posts) can never even begin to match the stability, honesty, and genius of the gold-backed currency system.
Yet, some may point out and question like “You can’t print more gold, but you can mine more, and release more onto the market if you want to undermine the price of gold. Likewise, you can restrict the supply of gold by mining less, forcing the price to rise.”
That’s just as good as printing more money: no – it’s better.
And it is already being done. The major gold producers limit the amounts of gold they produce to meet their economic and political requirements (or those of their masters). ”
First of all the question is conspiratorial. Yes, by dumping more gold into the market gold prices can be brought down, gold being a single fungible commodity, its prices can be easily adjusted.
Take for example; today there are 100 tones of gold into the market. So, all the prices are adjusted to that. a laptop can be bought for 1 KG of gold. Now tomorrow if someone brings another 100 tones of gold into the market, the prices will be readjusted the new value of gold. Yeah the prices will rise, but then now everybody has an incentive to save their gold.
People will start holding back their gold since the prices are high this literally means some amount of gold is pulled back from the market(so some gold is dumped and some is taken back as a reaction to this), when the gold is distributed across the market(basically when your salary increases because there is more gold into the market) you will start spending at the regular rate. In numerical terms if the gold supply rises at 2% per year, and economy grows at 4% per year, then the investors and share holders will adjust the prices by 2%(less).
Similarly if gold supply rises at 4% per year and economy grows only at 2% per year, then the people will bring up the prices by 2%.
Every ounce of gold you have now fetches more, and you work and give more to earn an ounce of gold.
So you start working in terms of half ounces.
Main difference between fiat currency and gold currency inflation would be that information travel will be much faster.
There is no single opaque entity to decide how much to expand the money supply rather now numerous people dig up gold or save/consume gold. The information propagation about the quantity of gold is much faster.
If tomorrow government declares that they are doubling the money supply overnight, on Television channel, everyone will immediately double their prices, thereby effectively neutralizing the government’s expansion of money supply. Government won’t be able to buy anything more now. So its in best interest for the govt to NOT allow the information of expansion in money supply to propagate. Because of this anyone directly on the payroll of the govt gets more benefit and those who are on the fringe of receiving that money are screwed up.
In terms of gold, if 1000 more tones of gold is discovered and as soon as people find it out, they double their prices and salaries. They don’t wait till they start earning double to spend double.
So that laptop I wanted to buy is immediately now for 2KGs of gold. It doesn’t matter whether I have that gold or not. I would simply wait till my salary reflects the extra gold in the market and then I go and buy the computer.
Now let us discuss the problem of artificial restriction of the gold supply.
Well first of all Gold is not like Oil, if there is less gold (prices are higher) then people will use less gold, unlike in oil where it’s very difficult to reduce oil consumption.
Secondly, to restrict the gold supply you will have to form a cartel of gold producers, very difficult in free market.
So when gold prices will rise, the first reaction of people would be to bring out their gold savings.
I will sell my mom’s old jewelry now because it fetches me good value.
Once all the gold savings are out, and the prices still continue to raise then people will merely adjust their values and salaries accordingly.
Instead of getting 1Kg of gold in your paycheck, next year you will only get half kg of gold, then next year 250g of gold.
You are working the same, you are able to buy the same amount commodities, my rent has come down by half, my expenses are also half now(in terms of gold). I am spending half the amount of gold, but getting the same value.
That’s just as good as printing more money:no – it’s better.
This is not as “good or bad” as printing more money.
That’s like saying oh having free market in cell phone services is the same as having government’s monopoly in telecom, because you pay the taxes and you get to use the telephone, and there you pay the monthly subscription fee and you get to use the telephone.
What the questioner fails to see is that gold currency represents privatization of currency.
The unjust power to create wealth out of thin air is taken from the government (and nobody is allowed to have it).
Now there is a competition in the free market.
There are various sources of money supply(the gold diggers), just like no single country pumps out all its oil in one day or a month, no gold miner is going to do the same with his gold.
Also, if any gold miner tries to hold back the gold production to raise the prices then it will be countered by the other gold miners who will now produce more.
If some day we run out of new gold, that means our gold supply is now restricted to a specific quantity, then all we have to do is follow a price drop rate every year, depending upon the economic growth that year.
So if economy grew by 10% last year, which means every calculation about gold, will now have to presume the weight of gold less by 10%.
So if you were accepting 1 KG of gold by your employer every month, now you will accept only 900 grams. Everything you pay for will now cost 10% less.
I gave example of laptop there, which may again raise some questions because laptop is not a commodity which is sought desperately everyday.
Let’s say, if I need one Kilogram of wheat flour or Rice to make food, I wont wait for my salary increase, I can’t, I have to eat everyday until salaries are increased….
So, what will happen for the daily usage commodities in times of such influx of extra gold?
Remember one thing; whenever there is a problem like this, this is a demand in the market to find a solution for this.
And anyone who finds a solution to this problem/demand makes profit.
Basically you check the gold prices every day. If gold prices go up, you automatically get paid less salary, if gold prices go down, you are automatically paid more salary, at the same time, and everything you buy has a higher price.
The market will form a mechanism for this thing.
“Whenever destroyers appear among men, they start by destroying money, for money is men’s protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, ‘Account overdrawn.” – Francisco’s Money Speech, Altas Shrugged