Commodity Alternatives to Fiat Currency

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Advocates of Commodity Currency

Several experts today advocate for a return to a gold-backed currency, citing concerns over fiat currency stability and the benefits of a tangible asset base.

Jim Rickards, an economist and author, argues that a gold standard could provide a stable foundation for currency value. He states, "A gold standard is not a backward step; it's a way to ensure that money retains its value over time" (Rickards, 2016, p. 45).

Similarly, Steve Forbes, Chairman and Editor-in-Chief of Forbes Media, contends that a gold-backed currency would curb inflation and promote economic stability. He asserts, "The best way to achieve a stable dollar is to link it to gold" (Forbes, 2014, p. 23).

These perspectives highlight a growing discourse on the potential merits of re-establishing a gold standard in contemporary economic policy.

History of Commodity Currencies

The use of valuable commodities as currency has a rich history, often involving items like gold, silver, and other precious metals due to their intrinsic value, durability, and divisibility. Commodities provided a stable medium of exchange long before modern fiat currency systems emerged. "The earliest recorded use of metal as money dates back to 600 BCE, with coins minted in Lydia," explains economist Carl Menger, who argued that the scarcity and desirability of precious metals made them an ideal basis for currency (Menger, 1892, p. 40).

In ancient civilizations, gold and silver gained popularity as universally accepted standards of trade. Historian Barry Eichengreen points out that “by the time of the Roman Empire, gold and silver coins were widely used for commerce, taxation, and even to back debts” (Eichengreen, 1996, p. 17). This precious metal-based economy laid the groundwork for centuries of commodity-backed currencies, providing a hedge against inflation.

The gold standard formalized the use of a commodity-backed currency in the 19th century, becoming the basis of the global economy by the late 1800s. Under the gold standard, currencies were directly linked to gold reserves, promising stability in international trade. "The gold standard was adopted as a means of creating stability across currencies, which facilitated global trade,” writes economist Peter Bernholz, highlighting its role in limiting governments' ability to inflate currency supply (Bernholz, 2003, p. 82). However, the system began to unravel during the Great Depression and was ultimately abandoned in 1971 when the U.S. decoupled the dollar from gold.

This historical reliance on valuable commodities as currency showcases a long-standing belief in the benefits of asset-backed money, where gold and silver served as a bulwark against monetary instability.

Commodity Currency Characteristics

The characteristics required for a commodity to succeed as the backing of a currency—portability, divisibility, durability, universal availability, usability, inflation resistance, low volatility, and counterfeiting difficulty—are widely discussed among economists and monetary theorists. These qualities have been central in historical arguments advocating for commodities like gold or silver as effective currency backings.

Economist Carl Menger, a founder of the Austrian School of Economics, emphasized that for a commodity to serve as currency, it must possess "qualities that make it universally acceptable and easy to transact with" (Menger, 1892, p. 120). Menger argued that divisibility and portability are particularly critical for practical use in trade and transactions.

Friedrich Hayek, another Austrian economist, expanded on this idea, highlighting inflation resistance and durability as essential for maintaining long-term value. Hayek (1976) stated, “Only assets that cannot be rapidly inflated by arbitrary expansion will retain value and trust over time” (p. 45). This quality, he argued, was critical in ensuring the public’s trust in a currency's stability.

Milton Friedman, a Nobel laureate in economics, noted the importance of low volatility and difficulty in counterfeiting. Friedman (1984) argued, “For a commodity to serve as a currency standard, it must exhibit stability in value, or it will fail to function as a reliable measure of wealth” (p. 63). He pointed out that commodities like gold, with intrinsic qualities that resist counterfeit efforts, are more effective in stabilizing economies and currencies.

These views collectively underscore that for a commodity to successfully back a currency, it must meet stringent criteria to maintain its role as a stable, trusted standard in economic systems.

ABOUT THE AUTHOR

Economic Liberty, LLC (https://economicliberty.llc) is a dedicated to helping ordinary people attain individual economic sovereignty - freeing their financial lives from the mercurial whims of government regulators and state-sponsored banks.

References

• Friedman, M. (1984). Money Mischief: Episodes in Monetary History. Houghton Mifflin.
• Hayek, F. A. (1976). Denationalisation of Money: An Analysis of the Theory and Practice of Concurrent Currencies. The Institute of Economic Affairs.
• Menger, C. (1892). Principles of Economics.
• Bernholz, P. (2003). Monetary Regimes and Inflation: History, Economic, and Political Relationships. Edward Elgar Publishing.
• Eichengreen, B. (1996). Golden Fetters: The Gold Standard and the Great Depression, 1919-1939. Oxford University Press.
• Menger, C. (1892). Principles of Economics.
• Forbes, S. (2014). Money: How the Destruction of the Dollar Threatens the Global Economy—and What We Can Do About It. McGraw-Hill Education.
• Rickards, J. (2016). The New Case for Gold. Portfolio.