The Myth of the Gold Standard

olego just prompted me to get off my butt. To wit, he saw and liked Secrets of Oz, but noticed the movie pretty much stopped around 1900. True, but that's when Frank Baum published his book. As long as Bill Still called his movie Secrets of Oz, I guess it made sense to stick with the timeline up to the publication.

Still, there is one aspect of the current economic crisis that Baum did not depict through allegory in his book, at least not in any way in which I am familiar, and it's enormously difficult to understand without first understanding how money is created by banks today. I promised some time ago to do a general post on money, and, goaded by olego, here goes. This post will need some graphics. Let's start with the obvious, the foundation of our money:



Let's pretend this is a dollar bill, and that this thing below is a dollar's worth of gold:



Got that? Good. Now, there are those out there that believe that, in order to repair the damage fiscal irresponsibility has done to our society, we must return to a Gold Standard of money, where each dollar circulating throughout our economy is backed by a dollar's worth of gold held securely in a vault and which can be redeemed by anyone bearing that dollar. This policy can be represented like this:



There's only one problem with this noble and seemingly prudent plan: Not only does the term "Gold Standard" not refer to this one-to-one relationship between paper money and precious metals, ( it never has. )