Returning to a Gold Standard – Why and How.

By Rory Hall

Returning to a Gold Standard – Why and How. | gold-dollar-eagle-720x340 | Economy & Business Special Interests

Fraser Murrell delves into the history of the Gold Standard and how a modern day version could be put in place.

Author: Dr Fraser Murrell, Melbourne Australia
First Posted: Thursday , 20 Nov 2014

In the 1600s, Sir Isaac Newton presided over a (bi-metal) Gold and Silver Standard, with the flaw being the fix of silver to gold. In the 1900s, John Maynard Keynes “revolutionized” economics, with the result being certain economic collapse. In both cases there was a logical error in the key definition of “price”, which is critical to the stability of the economy. This note examines the problem and then goes on to present a workable Gold Standard, which it is argued, is the most stable frame of reference for our economy.

FRAMES OF REFERENCE

Life would be chaotic if “time and space” changed regularly or even our definition of it changed regularly. Fortunately, Newton sorted it all out back in the 1600s, developed the Laws of Motion, allowing mankind to proceed with certainty. However, if some Government “expert” later decided that time ran backwards on alternate days and space was shaped like a banana, then chaos would return.

In economics, the central concepts are “time and price” and again Newton considered this problem and deemed that “price” should be defined with reference to weights of gold and silver (more on this later). Once again the real world proved him (almost) correct and as a result there was economic certainty and “Britain Ruled the Waves”. But then along came economic “experts” like Keynes who changed all the critical definitions and as a result we have been plunged back into chaos.

To understand Keynes’ distortion of our economic frame of reference, consider the following example. A man walks into a bank in 1971 with savings of $1,000 (cash) and $1,000 (gold) and today in 2014 he retires and withdraws both. Ignoring for the moment interest and fees, under an (ideal) Newtonian frame of reference there would be price stability, so that the value of each withdrawal will have the same purchasing power as that deposited – in other words “price” is independent of “time”. BUT under Keynes’ new definition of “price and time” the results are that the $1,000 (cash) remains $1,000 (cash) but can now only buy $25 worth of 1971 goods and the $1,000 (gold) is now deemed to be worth $40,000 (cash) even though it can still only buy $1,000 worth of 1971 goods.

The first point is that Keynes has introduced inflation into the concept of “time” and secondly he has introduced volatility into the definition of “price”, because (as it turns out) a man who saved all his money in cash would have been robbed by a factor of 97.5% (in real world terms) and a man who saved all his money in gold would have retained his original purchasing power, but would have been deemed to have invested $1,000 (cash) and received $40,000 (cash) and therefore have made a taxable “capital gain”, thus losing (approximately) half to the Government.

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