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Can anyone here defend the use of metal backed currency in this day and age?

I've read several comments on these boards that suggest something akin to the following:
"If only the US would get rid of it's 'paper' (I assume people mean fiat) currency and go back to gold/silver, everything would be better."
What I have yet to see is any defense of this position. Why? Would someone mind helping me to understand why a backed currency is intrinsically better than a fiat one?


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    May 4 2012: The definition of money is: a symbol backed by confidence.

    This mean that if I give you a piece of paper printed by the U.S. or any other government you will have confidence that you can exchange that paper for goods and services.

    This is not the case in Zimbabwe, the Wiemar province before world war 2, Argentina from 1944 to 2010, etc. This is because the money was not backed by anything.

    In fact in the U.S. Bernanke has been indulging in "Quantitative Easing" which is just printing money without anything backing it. This is going to bring inflation to the U.S. wily nilly.

    The U.S. currency is de facto backed by oil and Chinese investment. But sooner or later this going to come to an end.
    • May 6 2012: I think where we differ in economic reasoning is our definition of money itself. I define it as anything that performs three tasks: acts as a medium of exchange, a store of value, and a unit of account. While confidence is required to perform these three tasks directly, it isn't the real necessity of money.

      But the issue of inflation with fiat currencies brings the worry of deflation in backed currencies. Population growth alone is skyrocketing in recent centuries- we don't have enough new precious metals to make enough new money to keep the money supply per capita constant, let alone have the slow growth of the money supply per capita that often brings economic growth. The solution I see in this backed but growing world is to shift to less valuable, more available metals, but as that becomes the trend, the currency effectively approaches a fiat currency- people don't put the value of the metal in it, they define value based on the government backing it.

      Furthermore, in terms of rapid expansionist policies, there are ways to cut inflation quickly. They're often painful for the economy, but are possible. Which gets to the heart of the beauty of a fiat currency- it allows governments to use monetary policy to exploit relationships like the Phillips Relationship to better grow an economy in the medium run.
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        May 6 2012: You yourself say "they define value based on the government backing it." I'm not opining it is just a fact that money is an idea backed by confidence. In order for any exchange to occur a person has to have confidence in receiving the goods bargained for, money is just one more extension of that.

        The money can equal any amount of a mineral. You might say well then the current value of a U.S. dollar is 1/1642 of an ounce. I'm not saying that having the money backed by gold is the answer but it certainly helps keep inflation in check.

        The money supply does have to be monitored oversupply = Wiemar Province, under-supply = the great depression in the U.S. I wouldn't down play the difficulty in controlling inflation, Nixon and Carter tried for many years without sucess, Argentina for many decades with out sucess. Either malady is equally as bad to this day U.S. citizens say anything but deflation and German citizens say anything but inflation.

        I don't know what the Phillips Relationship is?.
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        May 6 2012: how could confidence not be essential? as a medium of exchange, it is unavoidable that at some point, people have to hold a cash balance. i would not want to hold any cash if i don't trust its future value. store of value is even more obvious. how could it be a store if it does not keep its value?

        deflation being a problem is a myth. during the 1800's in the US, deflation was the norm. exactly for the reason you explained: stuff multiplied, money didn't. and that was the best century ever in the western history economically. so we don't need per capita constant amount of money, we want stable money that can not be created.

        the philips curve is another myth. it does not work, especially not in the long run, but not really in the short run either. it is not observed in real life, and there is no sound theory backing it up.

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