What's all the fuss about? If gold is "just another commodity," why doesn't the US Treasury dump all its gold holdings on the market? Why do central banks worldwide continue to hold gold as monetary reserves? For the simple reason that gold is still money.
What makes gold one of the best longterm investments is the high probability that gold will return as the basis of the world's monetary system. In fact, we can go so far as to say that gold must return—officially or unofficially—if the relatively free societies of the West are to be preserved.
Fiat money, says Franz Pick, "is a creature of the law." Monetary theory, he adds, can only be understood if one knows the legal basis of money. From the vantage point of Austrian economics, this is not entirely correct. But we can see that the depreciation of money goes hand-in-hand with the corruption of the law. Both have the same source: the political process.
The political benefits of control of the printing press and the power to tax need not be restated here. It should be clear that without a limit on politicians' behavior, corruption of the law and corruption of money will continue until both are destroyed.
There is now no legal limit in the United States on the potential destruction of the US dollar. The constitutional provision that only gold and silver coin may be made legal tender has been interpreted out of existence by the Supreme Court…as have many other constitutional limitations on political action.
Politicians are not going to change their behavior to reduce their political profligacy. Barring a change in public opinion, something I, for one, do not see as likely, initiatives such as California's Proposition 13 notwithstanding, the US federal government will continue to pile up budget deficits until a hyperinflationary collapse is inevitable.
The real meaning of hyperinflation is the public's rejection of the government's money. When that happens, three possibilities exist:
1. The government forces the people to accept its money by imposing wide-ranging controls on all forms of economic activity. This would lead to an authoritarian state or the second American revolution.
2. The people turn to privately issued monies, and the private sector takes over from the government the function of issuing currency. This is truly an exciting possibility. As money is the basis of all economic activity, a free market in money could prove the basis of a truly free society.
3. The government replaces the worthless currency with a new one which has the confidence of the people. To gain that confidence it will need a little more than the "full faith and credit of the US government." Unless the people are stupid, they will see precisely where that "faith" got them.
If it's true that "people get the government they deserve," then that means that the people, in the final analysis, determine what kind of government they want. Only time will tell whether Americans will succumb to the growing police power of the US government or whether they will rebel against it. But if they do rebel, the government will literally be forced to issue a gold-backed money.
To politicians, a government-issued currency is infinitely preferable to private monies. Government money represents power. Politicians will want to keep the power of the printing press, even if that power is restricted by the discipline of gold. If, after the significant destruction of the US dollar, the people refuse to accept, use, and hold any paper substitute, a gold-backed money will be the only alternative which will allow politicians to retain control over the printing press.
The reason why gold rather than some other commodity will be chosen to back a new US dollar is simply that gold is the only hard asset governments hold. A second, and perhaps equally important, reason is that gold is already coming back into the world's monetary system. (It would be more accurate to say that gold never really left the monetary theater; it was merely pushed into the background for awhile.)
The first important event since Nixon closed the gold window and made the US dollar completely inconvertible was a German loan to Italy, with some of Italy's gold reserves pledged as collateral. Since then Portugal has sold some of its gold to prevent a complete bankruptcy of the state.
Just a few months ago, the International Monetary Fund reduced the amount of gold it offered to the public at its monthly auctions; some was set aside for "less developed countries" who could buy at the average price of each month's auction. And, of course, central banks may now freely buy and sell gold on the open market since the expiration of IMF restrictions.
To my mind, the key to this question lies in Europe rather than the United States. A Swiss central bank official confided his private and, he stressed, "nonofficial" view that he saw no alternative to gold. Other European governments are reacting slowly to the international decline of the US dollar by talking about some form of European monetary union. Europeans are dependent upon the US dollar, still the currency of international trade, since they are more dependent on trade than the United States.
European central bankers, like the Swiss official, are much more oriented towards gold than the US Treasury or Federal Reserve Board. Indeed, via the threat of creating a European gold-backed money which would replace the US dollar as the world's premier currency, they could well force the United States to return to gold before the otherwise inevitable destruction of the US dollar.