Once again, I need a little help from my Austrian friends. You see, I can't quite make that leap of faith that would turn me into a gold bug.
After the recent financial crisis, I've tried hard enough, to be sure. I've read my Mises, so fully accept that it was the inevitable implosion of a fake boom that resulted from 25 years of incontinence by the monetary authorities. Indeed, our cash today is worth about a fiftieth of what it was a century ago. Markets, as I keep saying, depend on trust: they can't survive when the currency itself is untrustworthy.
The answer is to have a currency that keeps its value. Friedman suggested a monetary rule, by which the money supply is expanded only as fast as the economy, keeping prices stable. Alan Walters pointed out that because of the 'seignorage' in the system – as we grow wealthier, we keep more cash in our wallets – it actually has to expand slightly faster. Keynes thought that, because nobody willingly takes a pay cut, a little inflation might be a convenient way of adjusting wages without strikes. The trouble with all these ideas is knowing where to stop.
Hence the notion that we should return to a commodity currency, linked, say, to the value of some basket of goods. The snag there, as Mises pointed out, that the choice of the basket becomes a political decision; and politicians will always find reasons (the 1985 Savings and Loan crash, the 1987 crash, the Russian debt default, 9.11...) for making 'exceptional' expansions that are somehow never reversed.
A money tied to gold, then? (You certainly don't want to use the stuff itself – it's heavy, and it wears down. Better to use notes that are completely exchangeable for bits of it.) But there are snags. Since there is a lot more paper cash around than there is gold, so the price would skyrocket: nice for those rich folk with lots of jewellery, but not for the rest of us. Indeed, whole countries with small currencies and large gold reserves would become instantly rich, while those with big currencies who've sold off their gold reserves (thanks, Gordon), would be made poor. Doesn't seem fair, or even practicable. And the supply of gold fluctuates too, so prices will still change. Moreover, the Russians have far too much of the stuff, so they could use it as a political weapon, as they do oil.
Mises himself thought that such political realities would rule out a return to gold any time soon. His second-best was to have firm limits on the monetary authorities. Sadly, that hasn't worked so far. The question, then, is how in practical terms, could the world ever make the transition?