 Part 1
As there have been quite a number of responses since last writing, my intention is to deal with some of what are viewed to be the more serious concerns raised by those of you good enough to have left more than a down arrow in your wake. Should there be both the time and energy left, an attempt will be made to deal with some of the matters not pertaining to the use of precious metals as money that were tossed in my direction; the odd one deservedly so.
Most of us would seem to be in agreement as to the cause of a good 98% of the cases where a gold and/or silver based monetary system has suffered either a large fluctuation in its purchasing power, or its outright collapse. The causative agent in these cases was government action; specifically, running up an unsustainable debt burden. (We need not concern ourselves here with a discussion of whether or not running a debt of any sort should be within the purview of government.)
That leads us to the remaining 2% of cases. On this page i have only made reference to the Spanish situation under Phillip II. Arguments made against the legitimacy of this case have included that a functioning world economy did not exist at the time, labor was controlled by guilds and the inflation really was not that bad, certainly nothing like experienced in modern day Zimbabwe. All of those things are true and all are completely beside the point. Also true is that Phillip inherited not just the throne, but quite a substantial debt. None of these things alters the fact that the gold pouring into Spain from the new world had the twin effect of reducing the value of the gold (as reflected in the 500% rise in inflation during his reign) while raising his borrowing costs substantially. If gold really is the best representation for money, time and place would not matter. Having more gold would always be better than having less gold. But Phillip was forced to default on four separate occasions even though the gold kept arriving by the boat load.
Let us leave poor Spain behind and cite further examples noted elsewhere. In the past i referenced how at the end of the Western Roman empire, the very concept of money itself vanished. There would not be a gold coin minted for 600 years. As OTE might explain, in the Dark Ages, with Maslow's hierarchy of needs in mind, gold became a pretty useless object. Japan also endured a similarly lengthy period during which not a single new coin was minted. A standard sized bag of rice became the currency. No amount of old coins could be traded for a bag of rice. The final example referenced --and the only one to receive comment--had to do with America being forced to demonetize silver in 1873 after large new deposits were located in the American west. The criticism received over this final example was supplied by OTE. As I recall, he had two objections. The first was that the American dollar of the day has nothing in common with the dollar of today. The second prong was that it was the government and not the market that set the price of silver. With the first part, whether they are totally different animals as claimed or not is immaterial to what happened back then. Silver was one of the two precious metals that the dollar was based on and large new discoveries drove the market price down to such an extent that the silver dollars being put out by the government were not worth the denomination stamped on them. That is why people spent them and hoarded their paper dollars. It was a case of bad money driving out the good, just as Gresham's Law says it must. As for the second prong, it made even less sense. The market showed in a most emphatic manner that it, not the government, would set the price of silver. The government had to capitulate to the market. It had but two options as to how to do so. It could have either chosen to redefine the silver to gold ratio, or it could have chosen the path it did, which was to demonetize it. Even if we want to imagine that the government had never defined the amount of silver in a dollar but through mutual agreement, silver was being used to represent money, the large new discoveries in the west would have destroyed those who had their savings in the form of silver. It really is another case of too much of a good thing wiping out the value of peoples' savings.
Of course, fluctuations can work in either direction. While silver had long been demonetized in America, it was still being used as late as 1964 for circulating coins. But with the market price of silver rising in 1964 to $1.29 per ozt. and there being 1 ozt. in every 5 quarters, America was again forced by the market to do something about the situation. This might be thought of as another response to OTE's second objection in a case where the government was not basing the dollar on silver. The public was all too happy to trade in their paper dollars to buy silver at cut rate prices from the government. It was a no lose situation for those who bought, for their coins would never be worth less than what they paid for them, but it could not be tolerated by the government
In the first of these examples from America, savers were hurt as was the government. In the second case, (had silver still enjoyed the status bestowed upon it by the Constitution) savers would have benefited and the government would still have lost. As (at least in theory) the government is really the people, we are in a no win situation when items with a significant intrinsic value are used to represent money, for market forces that the government is unable to control will dictate value. This very problem is again raising its head with both the American penny and nickel.
Let me address one of the more common arguments coming from you before moving on. It has to do with gold having thousands of years of being both treasured and used as money. Those statements are mostly true and entirely so if we disregard that 600 year interregnum known as the Dark Ages. But neither is a good reason as to why they should be used as money again. We should want as money that which is best able to maintain its purchasing power, not something that is subject to large fluctuations. Both gold and silver have experienced such fluctuations both in historical times and in our own. As well, that most people through the ages have seen gold and silver as the best form of money is quite beside the point. Did not countless generations believe our own planet to be not only flat, but the centre of the universe? It was common sense and it was also wrong.
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