-- Posted Wednesday, 10 November 2010 | | Source: GoldSeek.com

In a gold backed currency system, there are violent de-leveraging crises as the credit system is brought back into line with the inflexible monetary base.  But savers are protected through these crises as the value of their gold savings go up, creating the spending power that quickly brings the economy back to life.  Over the long run, as productivity increases, the benefit accrues to savers and producers.  This increasing wealth is the "deflation" that we have been taught to fear.  In fact, it is a great thing for people who work and save.

With an unbacked currency, the de-leveraging crises may be smoothed out, as long at the currency system remains stable.  However, there is a constant drain of wealth from producers in society to those who create the currency.   Periods of price instability tend to be associated with bad economic conditions, hurting savers when they can afford it least.   The creators of the currency skim off the wealth that they print and ALSO a large chunk of the the extra productivity. 

During the life of an unbacked currency system, gold serves as a measure of confidence in the system.  As long as confidence can be restored quickly, gold remains a measuring device only.  But at the end of an unbacked currency system, when it is no longer possible to restore confidence, gold actively destroys the corrupt system, attracting all wealth until the currency system fails.

Vincent Bressler
vincentbressler@yahoo.com

-- Posted Wednesday, 10 November 2010 | Digg This Article | Source: GoldSeek.com

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