Why is gold making record highs?

How did we get here?

1) 1787 - The Constitution is signed, mandating that only gold and silver are to be money, with the power to coin granted to congress.

2) 1780-1913 - Banks engage in fractional reserve banking. Repetitive boom bust cycles occur as banks expand credit during booms and subsequently contract it by writing off bad loans during busts.

3) Banks often fail during busts as the public demands access to their money. The bank runs expose the fact that the banks are insolvent, having lent out multiples more money than they have on deposit.

3) Despite these boom/busts, over time value of the dollar holds steady because it is tied to gold. Base money can only increase at rate of physical gold increases.

4) 1913 - Powerful banking interests finally succeed at hoisting a banking cartel on the American public called the Federal Reserve System. Bank runs are no longer a problem for the insolvent banking industry as they can borrow money from the Fed to cover redemptions.

A Free Market Look at "Too Big to Fail"

Consider a company that has several divisions. One of them is losing money. What does the company do? It slows or shuts down operations in that losing business and devotes those freed up resources to the parts of its business that are making money. What makes sense for one business makes sense for the economy as a whole. Consider the typewriter.

Thirty years ago, typewriters were an integral part of daily life and a necessity for almost every institution. Today the typewriter has gone the way of the dodo bird, replaced by printers for personal computers. In the interim the world hasn’t stopped. People haven’t gone running hysterically through the streets day after day. Life went on and hardly anyone noticed. That is the beauty of the free market. Absent from government interference companies adapt to new market conditions. Those that do not adapt fail and are replaced with new companies. The resources from the failed companies are sold or liquidated through bankruptcy proceedings and they are freed up to be used by the more efficient entrepreneurs.

Imagine a company in 1980 that manufactured only typewriters and computer printers. No doubt the typewriter division at the time was the nuts and bolts of the business. It was the source of most of the profits, employed the most people, and commanded the most resources. It certainly could have been the opinion of management that if the typewriter business slowed dramtically they would have to fire most of their work force and even still might not survice.

Life without a central bank

Some people have a hard time imagining the United States without a central bank. The reality is we had no central bank for most of our first 130 years. We had tremendous price stability. There was no inflation and the dollar was tied to gold. The Federal Reserve was created in 1913. The result is our dollar is worth about 4 cents compared to what it was worth at its inception. We removed the silver from our quarters and dimes in 1964. In 1971 we removed our gold backing from our dollars and have been a purely paper currency ever since.

The real reason the Federal Reserve was created was to allow the bankers to engage in fractional reserve banking without risking a bank run. See here for more on fractional reserve banking.

Consider the following story and substitute gold for the fish to understand what banking would be like with a return to the gold standard. This is an example of 100% reserve banking with an honest money. No central bank is needed for this, just a money issuer that is trusted to make good on redemptions, like the US government before it removed the precious metal backing from the dollar. Banks did engage in fractional reserve banking before the Fed and there were bank runs, but the very fact that bank runs were possible made banks much more conservative with their lending habits.
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Two hundred people became marooned on a desolate tropical island. After several weeks of turmoil as they became accustomed to their new environment, they began assessing their situation. Fresh water and shelter were both in abundance. The main problem was food. There had been a modicum of success fishing. This quickly became the staple protein source. The islanders learned how to dry and salt the fish to preserve them. They had discovered a fairly large variety of food including coconuts, berries and tropical fruits. Still the salted fish remained critical to their survival.