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What’s wrong with “hard money”

October 23, 2007

It’s a bad idea to use gold (or gold-backed certificates) as money.  Dan Sullivan’s recent LandCafe  post cogently explains why:

Money is a place holder for wealth, not for labor. You get the fruits of someone’s labor for money, not the labor itself. If the productivity of labor goes up, the value of monetary debts should not go up with it. Rather, labor should be able to pay the debts more easily.

Legitimate wealth degrades in value, or has to yield value to those who maintain and protect that wealth. If money is to be a place holder for wealth, the money should degrade just as wealth degrades. People do not hoard actual labor-produced wealth for just this reason, but they do hoard money that increases in value in relation to wealth, and they particularly hoard gold.

I am not at all convinced that a steady, mild inflation is a bad thing. Certainly it is better than deflation, which causes great economic distress.

The only part I may not be persuaded of concerns deflation. It’s said to be bad, and I can understand intellectually why it would damage an economy if money is a more lucrative investment than wealth.  But never having seen deflation up close, perhaps I don’t fully understand it.

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