[Since precious metals
have been struggling in recent days, diving back into the archives while we're away in
order to see what I was thinking and writing about gold and silver years ago
seemed like an interesting thing to do. From May
9, 2005 - exactly seven years ago today and about two months after the
original blog began when the gold price was languishing at about $425 an
ounce - comes the article below that looks at the world's monetary system
from a distinctly engineering point of view.]
As an engineer, the role
that gold has played in monetary systems throughout history is fascinating to
me. If you are an engineer or scientist by profession, you were taught the
Scientific Method – observe, postulate a theory, then test the theory.
If the theory survived the testing, it would be accepted as being true, or as
being an accurate model, or as being a viable system – something that
could then be used to reliably predict future outcomes.
Sounds like a pretty good
method. So, why isn’t the Scientific Method used to create and control
It seems that throughout
history, over long periods of time, the same mistake is made again and again
– although intentions are initially noble, governments and their banks
always end up creating too much money. At first things seem to go well
– everyone prospers for a while, but it always ends badly. More money relative
to things that the money can purchase causes the money to lose value, people
lose faith, and disasters occur – a moral hazard.
Surely, these can’t
be the results of using a system developed using the Scientific Method, where
the outcome can be reliably predicted.
Now, these problems only
occur when a monetary system uses fiat money – money that is not backed
by anything other than faith in the government and the economy of the country
that issues it. The same government that, in recent centuries, in most of the
western world, offers themselves for re-election every few years –
their aim is to please their constituents, while at the same time controlling
the money supply – maybe this is part of the problem.
Another type of monetary
system, one which uses commodity money, for example gold coins and paper
money backed by gold, doesn’t seem to suffer the same fate as fiat
money systems – this must be because in a commodity backed system,
money can not be “created” – it
has to be dug out of the ground. Digging is harder than printing or making
entries in an account.
In fact, you might guess
that the commodity backed monetary system is the result of the Scientific
Method first used thousands of years ago – a system which has stood the
test of time – continually tested over millennia … and surviving.
Maybe the real problem with government and money over the centuries is that
there has been a proven monetary system available, but governments just
don’t use it enough, or they stop using it from time to time – and
then problems arise.
Today, we find ourselves
thirty some years removed from any linkage to gold, and look around –
debt, credit, stocks, bonds, hedge funds, real estate.
If we are not going to
use the monetary system that we know has worked successfully throughout
history, maybe someone should run some tests to see if the system we are
using can really endure. Maybe we should conduct some experiments,
somehow, instead of just continuing to create more money – money
creation as a cure for all the world’s economic problems – we
know how that will probably turn out.