re: #480 subsailor68

Sigh, where’s 3wood when I need him? I don’t really understand all the issues around tying a currency to a commodity (like gold or silver). I read an article recently (maybe Thomas Sowell - can’t remember or I’d try to find a link). It was a response to Ron Paul supporters who support a return to the gold standard. The point of the article was (and my numbers are probably off a little, but the point’s the same) that the GDP of the U.S. last year was around 12 trillion, and the total value of all the gold EVER mined is around 7 trillion, so a return to the gold standard would force an instantaneous contraction of the economy by about 60 percent - if we already owned all the gold in the world (which we don’t).

So, in my really lacking understanding, my question to the smart lizards here is - wouldn’t the same concept apply to any commodity of finite supply?

Yes. Any commodity of finite supply used as a base for a currency would eventually cause deflation in response to economic and population growth. As long as there is still more “out there to be mined” and the supply of the commodity increases at near the rate of economic growth then it would be ok. Obviously that will not always be the case, and the supply increases will eventually stop. With the case of gold we are way past it’s usefulness as money for the whole nation or the world. Paulians are chronically stuck in 1789 on a lot of issues so this should not be a surprise.

I’m not particularly thrilled with fiat currency, but commodity based currency has its own set of different problems that are just as bad if not worse.