But enough of my ranting about the government's runaway ego and rampant corruption, let's get down to the key points from Wednesday's WSJ article, Capitalism Needs a Sound-Money Foundation:
Let's give the Fed some competition. Abolish legal tender laws and see whose money people trust. A gold standard stands in the way of runaway government spending.As mentioned in the WSJ article above, too much fiat money creation results in inflation, higher prices and debasement of the currency. Savvy investors have been turning to gold and silver to hedge against inflation, protect their wealth and book significant profits as precious metals and mining companies skyrocket in value.
Under a gold standard, if people think the paper money printed by government is losing value, they have the right to switch to gold. Fiat money (i.e., currency with no intrinsic worth that government has decreed legal tender) loses its value when government creates more than can be absorbed by the productive real economy. Too much fiat money results in inflation — which pools in certain sectors at first, such as housing or financial assets, but ultimately raises prices in general.
If capitalism is to be preserved, it can't be through the con game of diluting the value of money. People see through such tactics; they recognize the signs of impending inflation. When we see Congress getting ready to pay for 40% of 2009 federal budget expenditures with money created from thin air, there's no getting around it. Our money will lose its capacity to serve as an honest measure, a meaningful unit of account. Our paper currency cannot provide a reliable store of value.
So we must first establish a sound foundation for capitalism by permitting people to use a form of money they trust. Gold and silver have traditionally served as currencies - and for good reason.
While I would like to see a return to the gold standard and think it is a critical step to solving our political and economic issues, I believe we will see the Federal Reserve, banking industry and government continue and accelerate current efforts to print our way out of the economic crisis.