IMF "Paper Gold" vs. a Real Gold Standard

If there is one thing governments love to do, it is to spend money. If they cannot tax it away from their citizen/subjects, or borrow it from financial markets, then governments turn to that third method of funding their expendtiures: they "create" the desired sums of money.

The G-20 in London last week agreed to expand the quantity of IMF Special Drawing Rights (SDRs) by $250 billion, a 10-fold increase from the amount originally created back in the 1970s.

I discuss the "return" to IMF "paper gold," as SDRs were nicknamed almost from the start, in a new piece of mine, "IMF Special Drawing Right 'Paper Gold' vs. a Real Gold Standard."

China, Russia and a U.N. committee headed by Nobel Prize-winning economist, Joseph Stiglitz, have called for the dollar to be replaced with a new international reserve currency --the IMF's Special Drawing Rights (SDRs), or "Paper Gold" as it was nicknamed after coming into existence in 1969.

While it as remained for the most part an imaginary unit of account on the books of the International Monetary Fund, there is now a call for it to eventually become a "real currency" managed and controlled by the IMF. It would create SDRs "out of thin air" to serve as reserves to expand member countries' national currencies, or to use to maintain artificial foreign exchange rates or cover the costs of imports or debt a country really can't afford.

But why have a new "paper gold" international currency, when there is an historical international money -- gold -- that served this purpose very well before the era of government fiat monies beginning in 1914. Of course, a real gold standard would limit what governments around the world love to do -- spend money on special interest groups and ideologically-motivated projects.

Which is why governments prefer "paper gold" to a real gold standard that would limit their ability to turn the handle of the monetary printing press.

Of course, the most desirable "policy" would be to "denationalize" money, that is, separate money from the state completely, and leave the choice of a medium of exchange, its supply and value to the market forces of supply and demand.

Alas, governments are determined to maintain their control over the printing of money. And now they will jointly internationalize the process of fiat money creation through the use of this IMF "paper gold," to do what they love to do most: spend, spend, spend through the debasement of the hard earned wealth and income of the those who peacefully work and produce in the private sector.

by Richard Ebeling
April 8, 2009 10:38 AM