When you hear the phrase “gold backed currency,” you probably think of a gold coin. What’s so appealing about gold coins? They have a unique history, and are a tangibly backed currency. But are they credible? And what about the inflation risks? Despite its relative stability, gold coins aren’t perfect, and its credibility has been called into question. So is it really a better idea?
It is a form of tangibly backed currency
If money is backed by something tangibly, such as gold, it is considered sound money. Gold backed currency has been around since 1879 when the U.S. dollar became backed by gold. Gold has valuable money characteristics, including being scarce and fungible. A gold-backed currency would only be backed by gold, and would therefore have real value. Sound money advocates say that ending the gold standard in 1971 was a mistake that led to a country’s financial demise.
A gold backed cryptocurrency is digitally stable, with a lower volatility than other altcoins. It is backed by gold and the spot gold price. There is no central authority that can manipulate gold prices. This makes gold backed currency a more secure long-term store of value. This makes it more stable than alternative forms of Tax management, including fiat currency and stablecoins.
It is not fully credible
A gold backed currency is not fully credible. According to the global monetarist theory, the supply of gold is inconsequential to the amount of money in circulation. Money supply does not depend on policy, as prices, interest rates, and incomes are determined globally. Core countries influence these variables domestically only to the extent that they help determine them in the global marketplace. Until a gold backed currency has actual gold reserves, it is not fully credible.
The first problem with gold backed currency is its inability to fully back up a reserve currency. The gold value of the currency must be convertible into gold. In this way, the currency would be considered a real value and would be considered sound money. In 1971, Nixon ended the gold standard on the U.S. dollar, and sound money advocates argue that ending the gold standard exacerbated the nation’s financial decline.
It can cause inflation
Inflation is a common problem when gold is used as a national currency. When a country is forced to sell gold to increase its currency value, the central bank is forced to raise the dollar price and suspend redemption. This resulted in significant price inflation. In the 1920s, the UK national debt rose to 7% of GDP, the highest level ever. The price of gold also increases, making it harder to pay down debt.
There is some evidence that a gold standard can lead to higher inflation, but this argument is weak. Inflation can also lead to deflation, where prices decline and debts become worth less. In addition, it can discourage firms from investing, since they will have to save more money to repay the debts. As a result, a gold standard can act as a constraint on economic growth. Regardless of how the gold standard affects economies, it is important to understand its risks and benefits.
It is a form of 21st-century alchemy
The process of creating gold from base metals is often described as alchemy, as in the ancient Greeks and Romans who transformed gold into elixir of life. King believes the role of the financial markets is to help real economy players deal with “radical uncertainty.” Whereas statistical probabilities measure risks, radical uncertainty can’t be measured. Historically, only real money was used in alchemy.
The alchemist aimed to mature, purify, and perfect a particular substance. He had several aims: the creation of a magical substance that would be a panacea, or a way to transform base metals into gold. Alchemy was considered to be a form of science, and the process is still used today, although we may not know exactly how it works.