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Does Gold Work As Money?

Gold. The symbol of royalty. The olympian's trophy. The most precious of the precious metals. Scarce and beautiful. Durable yet divisible. Civilizations universally agreed it was valuable. 

Up until the past century, paper money was backed by gold - a dollar representing claim to a given weight. Now we operate in a fiat system where money is backed only by government decreed - giving them the power to create money "out of thin air". 

Whenever there's fiscal stimulus or "money printing" as some would have it, inflation fears arise along with demand for the gold standard. But does gold really work as money? 

Inflation happens where there's too much money chasing too few goods. Fiat currency can lead to this if we're not careful. Zimbabwe is notorious for hyperinflation. 

However, managed properly, fiat currencies enables policymakers to adjust the money supply based on economic needs - smoothing out the cyclical ups and downs. 

With the gold standard, the money supply is fixed to the gold supply. This is a problem. 

A discovery of a large new mine can lead to an oversupply of money (inflation). Excess outflows can lead to a scarce supply (deflation). Gold supply is volatile meaning our purchasing power would be just as volatile. While fiat has risks, its flexibility allows for stability. 

Every nation has given up on the gold standard. We've realized money is just a medium of exchange and our true value comes from the skills of our workforce and the goods we produce. 

The food we grow, the houses we build, the real economy continues regardless of how much gold there is. It doesn't make sense to peg our economic prosperity on the supply of a metal. No matter how pretty it is. 


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