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The best money that money can buy

The internet is full of crazies who think that gold is the only real money. They talk about “fiat” or paper money as a Ponzi scheme and usually subscribe to delusional ideas about the world being run by Jewish lizards from outer space.

But some of the gold enthusiasts seem like serious, rational people. Jim Rickards is one. The former general counsel of failed hedge fun Long Term Capital Management, Rickards is obsessed with the idea that gold still dominates international relations. In his view, Italy isn’t a basket case economy crippled by corruption and inefficiency — it’s one of the richest countries in the world thanks to its gold reserves.

Since around 2009, Rickards has been saying that the world is in the middle of a currency war, driven by central bank money printing.

Any day now, he’s been saying for three years, the Russians or the Chinese will orchestrate an attack on the dollar and we’ll be looking at world war three.

Rickards is an adviser to the US military. In other words, the military pays him to come up with creative ways to justify defence spending. He’s certainly earning his money.

Jim Lehrer is another prominent advocate who has written on the subject in the Wall Street Journal’s op-ed page. In a letter to the Journal last year, he called for a return to the gold standard:

What the world now needs is a true gold standard without official reserve currencies, a monetary policy with which the U.S. can now lead the way. Prompt settlements of residual balance-of-payments deficits in gold and budgetary equilibrium, will mean the end of inflation and a world-wide economic boom.

Both these ideas — that gold money promotes peace and encourages prosperity — are exactly backwards. Every country on the planet has rejected gold-backed currency systems. Every single one. Even Switzerland.

The historical case, which gold fanatics often point to, makes the case even more obvious. Consider the Romans. During the early republic, Rome realised that a commodity currency made it dependent on countries that controlled such commodities — its rivals to the east. The only way it could get hold of that money was to trade with its enemies, on its enemies’ terms. Or conquer them.

Contrary to the popular image of the marauding Roman empire, they chose a more peaceful option: fiat currency. By minting coins from readily available local metals such as copper (with values unrelated to their commodity value), the Romans were no longer at the mercy of their enemies and from 700bc to 200bc they built a sophisticated and modern republic.

It was only after the Romans had been ravaged by the Punic wars that they succumbed to the voodoo of commodity money. And I mean that almost literally. The Romans adopted commodity money based on a prophesy, according to some accounts.

The result was a few centuries of marauding Romans, on the lookout for gold and silver, and the decline from republic to empire, with grotesque income inequality, slavery and all the horrible things we associate with the Romans.

This is the period of Roman history that Rickards admires — the one that embraced conquest, military power, slavery, divine rulers and an absurdly rich ruling class. In other words, the Rome that epitomises imperial decline.

This is Rickards channelling Roman history on Twitter to make a point about the terrorist attack in Benghazi:

Rickards thinks that this is something to admire, which explains why he thinks gold money is a good idea. He’s a warmonger.

And war certainly has a good track record under gold money systems. Consider the European voyages of discovery and the eventual rise of the British Empire. Remarkably, folks like Rickards use this as evidence of gold’s wealth-creating power.

But the reality is that gold didn’t “create” wealth. The Spanish slaughtered millions of people in South America, and enslaved millions more to dig out the gold for them. The British then slaughtered the Spanish to steal the gold from them. And on.

That was good for whoever had the gold — Dutch, Spanish, Portuguese — but more or less disastrous for humanity on the whole. The era of colonisation wrought havoc around the world and its legacy still has a profound effect globally.

And so it went on until two world wars finally brought the old system to its knees.

It’s still the case that the only rich countries in the world are, basically, the Europeans — plus the US and Japan. No other countries have joined the club during the past century.

This is the enduring legacy of the damage done by colonisation and the obsession with gold and silver.

Since Nixon formally ended the gold standard in 1971, some countries have at least come close to becoming rich — Korea and Taiwan, notably. And Hong Kong and Singapore, which are more like tiny island states than countries, are even richer.

Anyway, I shall return to this subject to jot down some further ideas about the history of money — and address the great lie of gold enthusiasts: that gold-backed money somehow restrains governments.

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  1. December 13 2012 at 5.02 am

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