By Evan Oscherwitz
If you ever have the misfortune of bumping into an Austrian School adherent, one of the first tools with which they will attempt to brainwash you is the notion that having a commodity-backed currency is a completely foolproof way to avoid inflation and prevent a currency from becoming flat.
However, even an economic dilettante can see the holes in this logic.
In order to know why the concept of a commodity-backed currency is impractical, one must first understand what a commodity-backed currency is.
A commodity-backed currency is one whose value is tied to that of a good, such as wheat or silk. The value of the currency increases and decreases with that of the good to which it is attached.
The commodity most commonly proposed to fulfill this responsibility is gold, which is problematic for a myriad of reasons, the first being the complete and utter lack of inherent worth.
Gold, like any other jewel or “precious metal”, for that matter, has no intrinsic value. This essentially means that the only value it has is the value which it is assigned by society. Aside from a select few extremely narrow fields, gold has no use-value, most of the demand for it stemming purely from ornamental value.
The Austrians have dubbed this proposal the “Gold Standard,” which is a deceptively positive name when one considers the extent to which it is defective.
For one, the gold standard would sink the economy of any country that is not a world leader in gold exportation. The United States meets this criterion, ranking eighth in gold output. This puts secondary gold exporters at an immediate disadvantage, as one cannot simply artificially produce gold for export.
Furthermore, gold’s value decreases over time, as with stagnant funds in a savings account. The copious amount of gold sitting in American reserves would progressively lose more and more value, thereby devaluing the U.S. Dollar as well. This in turn would lead compound interest to have the opposite effect that it currently does.
Conversely, commodities that do possess intrinsic worth are not any more suitable for the role than gold is. Though they have use-values and exchange-values, which gold lacks, they are subject to extreme price fluidity, thereby making the currencies they back extremely volatile and putting the nations imprudent and inept enough to implement such a policy at dire risk of sovereign defaults.
Moreover, goods with inherent worth, such as the stated example of wheat, are more often than not harvested from nature, meaning that shortages will inevitably occur on a somewhat regular basis.
When these shortages do occur, the price of the good escalates along with the value of the currency, but this is merely an illusion of success since the shortage will result in less exports, meaning less revenue, meaning less disposable income for consumers, and so on and so forth.
While economic depression is obviously not desirable, the converse situation can prove to be equally costly. A surplus of the good in question results in the very thing commodity-backed currencies are supposed to prevent: inflation. Due to the abundance of the good, its value decreases, resulting in the currency also decreasing in value.
Commodity-backed currencies do not prevent the crises they are meant to ward off, and may even end up causing them. The fact that currency alone does not possess use-value does not necessarily warrant the need to tie it to a good, especially when the good in question is also intrinsically worthless.
The general consensus on currency is that exchange-value is sufficient to make it a suitable method of paying for services. This widespread belief alone makes commodity-backed currencies altogether unnecessary.