There are many problems with any hard currency and stifling money supply growth is one of them.

- Fiat money centralizes wealth creation power with the central government. Convertible currencies gives wealth creation power to all who possess it or its basis, be that gold, silver or some other valuable material. This decentralization of power has been anathema to all governments.

- Gold or other hard money systems are easy to evade. The history of the gold backed dollar in the 20th century is the history of the US 'going off' gold. At bottom, no system or discipline is better than the persons who use or abuse that system.

- Arbitrage activities tend to undermine gold systems, particularly if they are complex. See Walter Bagehot's description of 'Foreign drain and domestic drain' on reserves; if the price of currency differs in another region, imbalances can rapidly occur and lenders of last resort have the choice of either exhausting reserves or abandoning the hard currency regime and printing.

- Governments have a long history of confiscating gold in private hands, which undermines the confidence in gold- backed currencies. The most famous is FDR's confiscation order upon his inauguration in 1933.

- The single greatest complaint against gold (or other hard currency bases) is that it does not earn intrinsic interest; that is, it isn't fiat- money- like.

- The next great complaint is that gold backed currencies are inherently deflationary ... while they are inflationary at the same time! Since gold currencies have real value, holders hoard it, which is deflationary since there are fewer bills in circulation relative to goods and services. Consequently the treasury is required to print more currency to put it into circulation for daily business, this is against a fixed - or, if currency hoarders are converting their paper to physical gold - a declining reserve basis. As a result, there is a constant increase of currency. This increase in paper is inflationary on its face, although it is a 'concealed' inflation because the increases are hoarded in turn; one does not know exactly the wealth of a neighbor and the total money supply is uncertain. There are times when this hoarded money will appear suddenly in circulation, usually when it is unwelcome since it usually results in devaluation. All of this process describes the matter of the 'bad' - which is the increase in printed currency - 'driving out the good'.

By the end of the 19th century, the European financial powers had ironed out most of the kinks relative to hard money; large and liquid marketplaces and coordination between central banks kept arbitrage to a reasonable minimum and allowed capital to flow to investments that brought a high standard of living to most Europeans.* World War I put an end to this system; perhaps as a result, some blame for that war was directed toward the system that to some degree enabled it. Just as the current fiat system will undoubtedly be held liable for the cataclysm that is unwinding under our feet.

In reality, where hard currency enabled the social and industrial mechanisms that made that war inevitable, it was fiat money - particularly Walter Rathenau's brilliant innovation of fastening credit expansion to industrial output measured by statistics - that allowed the Europeans to prosecute it for as long as they did. After centuries of experience with both systems, it is probably fair to reject the fiat regime as it better rationalizes and rewards anti- social activites.

Can a hard money system work? This topic has been discussed here previously and on other financial/economic websites. While laying out the details of a workable hard currency regime is far beyond the limitations of a comment attached to a post on a website, the main characters are useful to describe:

- A hard currency regime is necessary in order to place value on currently undervalued externalities. Fiat regimes are structurally incapable of doing so, they measure abstract inputs with the end of increasing credit rather than fixing the wealth- value of objects. even abstract objects. This is what hard currencies do; they apply standards of wealth to objects, starting with gold or silver. Fiat systems don't and probably cannot. Gold in a fiat system is another industrial commodity to be 'used' (burned up) in some wasteful manufacturing process. Long- running externalities such as air pollution remain outside the ambit of all fiat regimes. These must be approached indirectly with regulations rather than by incentives inherent to the financial regime, which is where they should be - and most effectively would be - addressed. The idea is to provide incentives for conserving, for keeping the air clean or fisheries whole because clean air or functioning fisheries are more valuable - and useful - than dirty air or non- existant fish. The purpose of keeping the air clean is that it will allow some capitalist to get filthy rich from doing so. Fiat regimes measure all things in relation to their ability to allow credit creation.

- A hard currency regime would be decentralized; it would be done in an organized way with a central oversight mechanism that would keep imbalances from developing and to manage arbitrage. Decentralization would keep the overall structure from being compromised; some banks within it might fail or be ruined, but no single bank 'too big to fail' would not uproot the entire system. Diversity would keep control out of the hands of a few central government apparatchiks. Diversity would provide the structural robustness that centralized credit creation prevents. An example of the structure I have in mind is a Federal Reserve system broken up into fifty or so individual State Federal Reserve banks.

- A hard currency regime would incorporate fixed rates of return on deposits to the currency basis structure. A reasonable statutory rate (of 4 - 5 percent) would keep currency in circulation at all times without the need for printing. A return on all deposits would be subsidized if necessary; it would cost the government much less to do so than to subsidize all credit during a credit expansion then spend much more to rescue the broken system @ collapse. A hard system would be manifest as a robust, high yield billion dollar- scale economy rather than as an insolvent trillion dollar- scale economy, such as we have now.

- The basis structure would be open and available to all, banks would be depository at all levels, including at the highest. The current Federal Reserve system only does business with other banks and is conequently cut off from all hard capital (deposits) except indirectly through client banks. The fatal flaw of the Fed is that its reserves are either Treasury paper or commercial trash; over time, these items become interchangeable. The Fed has to borrow most of its capital from the Treasury. A hard system borrows down the economic food- chain, from depositors, aggregating earned income that is saved, providing a return on that saving.

- In the current fiat system, the central bank is isolated from the people it supposedly exists to serve; it therefore does not serve them. In a hard system, the banks cannot exist without the trust and cooperation of the people whom they would serve. Capital would flow from the public, not be borrowed from the Treasury. There is a great deal more to this feedback loop that would make the hard system more accountable that any fiat system, but I will not go into it here ...

- The basis would not be limited to gold or other metal but would also include such as mineral leases, watershed easements, undeveloped land, productive farmland, oil and gas reserves, forests, etc - all 'things' that can be conveyed by deed or title and other things that cannot easily but have value, nevertheless ... such as fisheries. Public property would be 'depositable' as well. Investments that would increase or improve this reserve base would allow the increase in the money supply, 'Business As Usual' or 'Growth' as it is currently defined - aggregated liabilities in the true sense - would erode the currency basis. Neither 'Depletion' nor externalities would exist in this regime, at the same time, proper husbandry, resource conservation would be rewarded through by an increase in available money and attendant purchasing power. This would accrue both to both the individual depositor and to the system as a whole. The key here is again, yield; the cost of credit. Fixing a yield to 'idle' properties such as farmland would permit that idleness to compete on a level investment playing field with 'development'. The increased cost of credit would require any value added approach to actually add value and to do so over time, to compete with a property as it is, where the currency as a whole is the bearer of value, rather than the 'money- like' individual loan that carries value in the fiat system. 'Investments' such as speculative building schemes would simply not be affordable with property and improvement costs added to expensive credit; this then compared to the return available simply by having the property earning a yield within the system without any development.

- The hard regime would apply financial values to the commons.

I can go on and on; I have a truly marvellous proof of this proposition which this margin is too narrow to contain.

*Many would comment that colonial expansion and exploitation was responsible for the increase in living standards in industrial countries. This would be true only to the extent that the costs of maintaining the colonies did not exceed the returns from them. Most of the European colonies produced losses for their masters, requiring much effort on the part of governments to rationalize maintaining them.