There is a popular notion, at least among American libertarians and gold bugs. The idea is that people will one day “get woke”, and suddenly realize that the dollar is bad / unbacked / fiat / unsound / Ponzi / other countries don’t like it / <insert favorite bugaboo here>. When they do, they will repudiate it. That is, sell all their dollars to buy consumer goods (i.e. hyperinflation), gold, and/or whatever other currency.

Redemptions Balanced With Deposits

No national currency is gold-backed today. In a gold backed currency, each currency unit begins life with someone who chooses to deposit his gold coin in exchange for the paper currency. And it ends life with someone redeeming the paper to get back the gold coin. A good analogy is bone in the human body. One process is constantly removing bone material. And another process is growing more. What seems to be a static bone, with fixed length and mass, is constantly being torn down and rebuilt. The seemingly stable bone is actually in equilibrium between two opposing forces.

So it is with the gold standard. Some people are redeeming paper to get the gold coin. Others are depositing gold coins to get paper. The seemingly stable gold standard is actually in equilibrium between two opposing processes.

We often hear that governments hate the gold standard because they cannot print gold. This is true, but there is another reason. When people don’t like the interest rate or the soundness of the banks, they withdraw their gold coin. What had seemed to be stable, is no longer. This has nothing to do with quantity of currency or gold. It has everything to do with honesty.

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