I just finished reading “What is seen and Unseen” (read some of my previous posts about that). The basic idea is that every time the government wants to do something, the government has to take the money from people first and we need to pay attention to that. It’s a nice way of organizing your thoughts about government spending, but it isn’t overly accurate now.
Back in Bastiat’s day, all currency was backed by something, usually a metal like gold or silver. In other words, every pound note distributed had a corresponding pound of silver to go with it. The government could only distribute as much money as it had in metal reserves. Today, we have what is called fiat money. It is worth something because the government says it is and everyone goes along with it. Nowadays, the government can make all the money it wants whenever it wants. See this post for an explanation about why that is bad…
There is a small, but vocal group that says that we need to go back to a metal standard in order to avoid the problems that fiat money can lead to. That has some appeal, but it is never going to happen. Milton Friedman had some ideas on how to make fiat money behave a lot like backed currency. A big part of that involved taking the discretionary power of fixing the value of money away from the Fed. That isn’t going to happen either. There are some technical issues involved that I won’t go into, but there are some more pressing issues. Back then, money was synonymous with cash. It was easy to keep track of how much money there was because there was only one kind. These days, there is far more electronic money than cash, how would you back that up with anything? I worry that current spending habits are incompatible with backed money.
The more I read, the more I think I should be buying gold….