How “anchoring” a currency changes nothing at all.
Money is one of the few things that distinguish humans from other primates. While various species of primate engage in barter, homo sapiens is the only primate that has invented the concept of fungibility.
Without money, the modern world would be completely impossible. Suppose you want to buy an automobile. Well, what does the seller want? Fifty eggs, half a beef carcass, ten stainless steel pots & pans, a carpet, and a dining table. How are you going to acquire all those items, keep them fresh, and deliver them? Worse still, how would an automobile or all the manufactured items in the list even come into existence? General Auto isn’t going to set up assembly lines based on millions of people showing up with baskets of eggs, home-made clay pots, and hand-woven carpets.
Humans solved this problem thousands of years ago by adopting one simple mental trick: we agreed to pretend.
We pretended that shells had some nominal value. This was an incredible intellectual breakthrough because if we pretend a shell has a nominal value then we can use shells instead of having to barter. This means in turn that a world of trade opens up. People can specialize and the quality of items can improve. Large-scale activities become possible across vast distances.
But here’s the thing to remember: those shells don’t have any real value. Shells only work as a medium of exchange if everyone agrees to play “let’s pretend.”
Later, when it became obvious that there’s an abundance of shells and therefore anyone can become “shell rich” by simply going down to the shoreline with a bag, people looked for other substances to use in the great game of pretend. As metals were not simply lying around on the beach waiting to be picked up but had to be laboriously mined and smelted, people gradually came to use metals instead of shells.
At first, as best as we can tell, lumps of metal were first utilized but over time people needed to standardize so coins were invented. This was another great leap forward because different kinds of metal and different sizes of coin could represent different levels of value.
But again, we need to remember: none of those coins had any real value. Gold and silver aren’t actually useful. You can’t eat metal, and most metals are too soft to be used in cutlery or weaponry. Silver and gold only work as a medium of exchange so long as everyone is willing to continue to play “let’s pretend.”
Thousands of years later, after towns had grown into cities and after city-states had grown into nations, governments realized that asking people to cart around heavy lumps of metal was quite silly (though, astonishingly, we still do, which shows how long it takes us to catch on to new ideas) so they abstracted value onto paper, which was much easier to deal with.
At this point some people became very confused. They failed to grasp the fact that all money is pretend. They thought governments were “cheating” by printing “pretend” money.
Today there’s no shortage of Internet content on “fiat money” and how we should all return to “real” money based on gold. The general argument seems to be that because governments can print money, it has no real value. Often the poor misguided folk writing these articles proceed to imagine that “freedom” can only be achieved by going back to gold. Their reasoning is incoherent but their belief is strong. Gold = value = freedom.
But of course, governments can always dig up more gold.
Today we have private corporations mining gold and refining gold and then storing it in bunkers because the need for gold in micro-electronics and in jewelry is totally insufficient to prop up its supposed value. Therefore we just store it away in vaults because gold is intrinsically not much use to anyone. If governments wanted to acquire more gold they could revoke those mining permits and just dig the stuff up themselves, just as they can print more money.
So the idea that gold is a “real” store of value is flat-out wrong.
Why, therefore, don’t governments just print more money to finance their budgets?
Well, sometimes they do. And the result is always the same: inflation.
Because no nation is self-contained, all nations rely on international trade. But when you print excess money and create inflation, your currency becomes worth less and less. That makes imports expensive and over time imports become unaffordable, which in turn means your economy begins to run short of all manner of things from toilet paper to pharmaceuticals. Today Venezuela is the textbook example of hyperinflation resulting from imagining that governments can just print money without consequences. But many nations have been down that path, from Argentina to Israel to Zimbabwe. It always ends badly, and in the end a grownup has to step in and attempt to re-establish fiscal probity.
The same thing can happen with gold and silver. Indeed, it did happen to the Iberian peninsula as boatloads of silver and gold flooded Spain and Portugal after they invaded and looted South America a few hundred years ago. Inflation doesn’t require paper money to take hold. It will happen anytime the nominal store of value increases in quantity while net productivity (output) remains the same.
So inflation is not a function of “fiat money.” It is purely a function of supply, which is why people abandoned shells all those thousands of years ago.
Inflation is easy to start and very painful to defeat. Only ignorant politicians and ignorant electorates support policies that lead to inflation. Which means, it happens quite a lot. But it’s not the consequence of paper money being detached from “real” value by being tied to gold, or shells, or any other supposed repository of value. It’s the consequence of ignorant people hoping that by magic the law of cause and effect won’t apply to them.
Remember: if a government opts to “back” its currency against gold, it can always get more, and ultimately that will lead to inflation. Gold does not act in any way as a “guarantor” of value and so it can’t “anchor” a currency.
Today, of course, people ranting about “fiat money” are very out-of-date because paper money is slowly going the way of shells and silver coins. Increasingly, money is an entry in a database table (or, for the hopelessly optimistic, an entry in a blockchain). And if we expect multinational banks to settle trillions of dollars of daily trades by pushing around wheelbarrows full of gold, we’re in for a major disappointment.
In the end, money is what it has always been: an imaginary but extremely convenient means whereby trade is enabled and barter is rendered unnecessary. Nothing has an absolute value and nothing is a “store” of value.
People who don’t understand this basic fact are likely doomed to spend their final days living off tinned mac & cheese while surrounded by ammunition, waiting for zombies to scrabble and tear their way into the shack where the solitary occupant will sit heavily on the sofa clutching their beloved rifle in one hand and a syringe of insulin in the other, with a tiny lump of shiny metal in their pants pocket as the ultimate guarantor of their “freedom.”