A pretty good overview of that abstract thing we call money. Necessary reading for those who think currency still is (or should again be) backed by gold. Also explains why the gold standard failed.
This irrational fear is ultimately a legacy of the way money evolved: We cling to the belief that money needs to be backed by something “solid.” In that sense, we’re just like Marco Polo—still a bit amazed by the thought that you can base an entire economy on little pieces of paper.
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There is, to be sure, something a bit eerie about all this, and periods like the recent housing bubble, when banks made an extraordinary number of bad loans, should remind us of the dangers of runaway credit. But it’s a mistake to yearn for a more “solid” foundation for the monetary system. Money is a social creation, just like language. It’s a tool that can be used well or poorly, and it’s preferable that we have more freedom to use that tool than less.
While the recent credit crises and various bubbles are to be deplored, going back to the gold standard (even if it were possible) would only cause more problems than it would purport to solve. It wouldn’t prevent governments from “printing money” - the hyperinflation in Germany occurred in the 1920s, notwithstanding the gold standard. Instead, we need better government and market oversight to prevent the excesses of investment/merchant banks and other financial institutions.