Credit goes to Swamibu from flickr.com

This has been on my mind for a long time. The current financial crisis makes it even more urgent. Once again we have seen that big government is not – and probably will never be mature enough to handle the money supply and therewith our most important medium of exchange.

This ability to tinker with our money at will (think Iraq war or bail outs for banks) gives government the power to spend money it doesn’t hae and never earned through taxes. Its people pay for it by less favorable exchange rates, less purchasing power, a lower standard of living and higher inflation. Since most of our fellow citizens don’t have the necessary education to see the connections, government can channel their anger to more obvious “outside” enemies. Some popular examples include foreign governments (usually emerging market countries), greedy managers, immoral capitalists and investors, minority groups, immigrants, you name it.

A de facto gold-standard would force governments to raise the money for their useless wars, useless subsidies to dying industries and useless civil servants by taxing people in more obvious ways. That way the public may realize how much money “their” country actually burns. In 1966 Ludwig Von Mises wrote in his book “Human Action: A Treatise on Economics“:

The gold standard makes the determination of money’s purchasing power independent of the changing ambitions and doctrines of political parties and pressure groups. This is not a defect of the gold standard; it is its main excellence.

You can find the full excerpt in a recent article of the Capitalism Magazine. If you’re interested in how a gold standard might work I can also recommend another excellent episode of Econtalk.

Credit for the pretty picture goes to Swamibu from flickr.com.