Wednesday, August 12, 2009

The reason for using a commodity money

In 1923 Ludwig von Mises published an essay, "Stabilization of the Monetary Unit -- from the Viewpoint of Theory." He was addressing the monetary crisis governments created when they abandoned the gold standard in 1914 and went to war. His recommendation, cited below, was ignored in favor of a fiat paper standard governments or their central banks could manipulate at will. Without sound money, economic crises are unavoidable.
The reason for using commodity money is precisely to prevent political influence from affecting the value of the monetary unit. Gold is not the standard money [merely] on account of its brilliance or other physical and chemical characteristics, but because the increase or decrease of its quantity is independent of any orders issued by political powers. The crucial function of the gold standard is that it makes changes in the quantity of money subject to the laws determining the profitability of gold production. (as translated by Jorg Guido Hulsmann in his paper, "Mises on Monetary Reform: the Private Alternative," November 13, 2008)

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