There is an enormous difference between gold coins and fiat money:

July 08, 2011 – There is an enormous difference between gold coins and fiat money: gold coin prices are regulated by the free market process while the value of fiat money is artificially manipulated by governments.

As Friedrich August von Hayek noted in “Denationalization of Money” (The Institute of Economic Affairs), “The past instability of the market economy is the consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process.”

Hayek, who was a leading economist of the Austrian School, understood that “great financial and economic crises are not inherent in capitalism, but result from government interventionism in monetary affairs,” says Thorsten Polleit in the Daily Mises. “In other words, monetary policy … fights the correction of the problem by recourse to the very action that has caused the debacle in the first place.”

The free market often moves at a glacial pace, but its progress is inexorable. Governments rise and fall but the markets remain. “Free markets allow for productive and peaceful economic cooperation nationally and internationally,” says Polleit. “Suppressing them would therefore come at a fairly heavy price.”

Governments today face a decision: either return to sound money or have their nation’s prosperity dwindle to nothing. Sound money is simply free-market currency, its value determined by economic fundamentals. The most direct and widely recognized sound money policy is to pin currency in some fashion to gold, but it is not the only means to the end.

Hayek argues that an even better approach would be to abolish all legal tender laws (and therefore central banks) and let currencies vie for the favor of all money users. It’s a Darwinian solution in which only the fittest would survive. Reaction to quantitative easing in such a system would be swift and deadly while nations such as Switzerland and Venezuela – which hold gold reserves equivalent to at least 80% of their money supply – would surely come out winners.

It is extremely unlikely that either of those policies will be adopted here any time soon – the Funny Money School is far too deeply entrenched – so eventually the markets will force the issue. Seeing their wealth disappear before their eyes people will rush “to exchange their fiat money … for sound money media such as gold and silver, thereby driving down the exchange value of fiat money (even to the disappearing point),” says Polleit.

For centuries the free market has done quite well preserving the value of gold coins while driving all fiat money into oblivion.

Kevin Johnson

Senior Staff Writer – GoldCoin.net