Gold Standard and money supply growth

[therealjjj77]

That would really make it confusing at the grocery store. Businesses would have to keep ten times as much money around to be able to make change in the different currencies-as well as a register with at least ten drawers in it. That would greatly add to the cost of doing business and if the businesses passed along the costs would mean more inflation.

This would not cause inflation unless they used a dishonest currency, like the FRNs. Also, it wouldn't be confusing. Businesses, and people alike, could choose which they accept and don't accept. Have you ever noticed that Sam's Club doesn't accept every kind of credit card? Or other stores as well. Those superior currencies would triumph and replace those that are dishonest. At least then you as a consumer, and them as a business has a choice.

I believe that our economic problems are based on policy issues, not on what sort of money we use. The first thing we need to do is balance the budget and start trying to pay down the debt. Once that is gone, you have much more flexibility to deal with other issues. Otherwise, things will continue to get worse.

The Federal Reserve Bank's first intention was to take as much of America's gold as possible. That's why the U.S. had to pay the Federal Reserve Bank back in gold. That's also why America's gold was confiscated in April of 1933 with executive order 6102. The second intention was to own all of the land and property. What do you think the U.S. used as collateral for these debt notes? You(if you have a birth certificate or social security number).

 

[NaT805]

All the sources you list Zippyjaun is not historical data. It is keynsian economics THEORY on what happened in history. We are talking about austrian school of economics theory, not keynsian. The arguements you apply are non relevant in austrian school, they have been solved. I hope you realize everything you talk about IS keynsian economics.

 

[therealjjj77]

Perhaps you could illustrate for me how it would be any easier with using multiple currencies instead of one. Today, if you spend $4.50 and give the clerk a $5.00 bill, they will give you fifty cents back. If you have multiple currencies, they not only have to be able to calculate how many Euros or Rubles or Pesos or whatever that equals and also have them on hand to give to you. I do not see that as an equally or even more simple process.

This would be a non-issue. With computers today and the technology we have, you would only press one button to select a different currency. This would not be a problem in the least. You could easily reprogram a register to do this. In fact, this already occurs in New York with places that accept euros.

However, the euro is another fiat money system. What we are arguing for is allowing money to be used that is measured by gold and/or silver.

Imagine if you are building a house and the yard stick changed length every so many minutes. Are you going to be able to accurately build that house?

Gold was the measure upon which money was based. It was the yard stick, so to speak. The government was responsible for the weights and measures so that the yard stick never changed. You could put your price in "dollars" and "cents" instead of "ounces" of gold. This way denominations could be broken down in smaller amounts based on other precious metals.

 

[Zippyjuan]

Historical inflation data is not based on any economic theory- only collected data. Inflation levels were indeed higher and more wildly varried prior to both the creation of the Fed and the US abandoning the gold standard. You can choose to disreguard these numbers, but it does not change them. History is the only viable way we have to compare what occurs under the different monetary situations. Things have not always gone perfectly under the Federal Reserve system, but it has worked much better than what came before. They made terrible mistakes that contributed to the depth and length of the Great Depression.

I know you will probably not agree with it, but you might want to read this:
http://www.huppi.com/kangaroo/L-gold.htm

two reasons in particular for returning to the gold standard. The first is that it prevents nations from an irresponsible expansion in the money supply to pay its debts. This is what happened to Argentina. After printing too much money and suffering disastrous inflation, Argentina passed a law tying its currency to the U.S. dollar. This may not be the optimal strategy for Argentina, but it's far better than what it was doing. Likewise, Italy has sought a measure of monetary responsibility by tying its currency to the German mark. So the gold bugs do have a few case histories to point to.

Even so, this reason is weak. Argentina did not need a gold standard to tie its currency to a more responsible country and solve its problems. Furthermore, a monetary policy that's right for one country might be completely wrong for another. For example, in the early 1990s, Europe tried to unify its currency by tying it to the German mark. But subsequently the German economy boomed while the rest of Europe became mired in double-digit unemployment. And following Germany's anti-inflationary monetary policy only made things worse, because it was exactly the opposite policy they should have been following. Finally, many countries have established long and sound reputations with fiat money -- Switzerland, Japan and the U.S., for example.

The second reason cited for a gold standard is because it creates certainty in international trade by providing a fixed pattern of exchange rates. The current system contains a degree of uncertainty -- in the last five years, the dollar has swung between 80 and 120 yen. This tends to make economic analysis and planning difficult for international traders. The costs of such uncertainty are difficult to determine, but they are expected to be significant. However, trade comprises only 10 percent of the U.S. economy, and compared to the enormous benefits of fiat money, these costs are minuscule by comparison.

What are the benefits of the current system? The most important has already been mentioned: the elimination of depressions. Being able to expand the money supply in times of unemployment and recession is a critical tool for government. Before World War II, eight U.S. recessions worsened into depressions (as happened in 1807, 1837, 1873, 1882, 1893, 1920, 1933, and 1937). Since World War II, under Keynesian monetary policies, there have been nine recessions (1945-46, 1949, 1954, 1956, 1960-61, 1970, 1973-75, 1980-83, 1990-92 ), and not one has turned into a depression. In fact, no nation in the world has suffered a depression under Keynesian policies.

The current monetary system also gives us protection from less scrupulous or unfortunate countries. A bank run that starts in Europe is not going to end up in America, thanks to the flexibility and autonomy of the Federal Reserve Board.

And fiat money also gives economists a chance to tie the appropriate size of the money supply to what's actually happening in the economy. In the end, the amount of gold a nation has is completely irrelevant to its level of economic activity. Gold is a commodity that experiences price swings. A change in dentistry or electronics is enough to change the entire market. To see how unrelated it is, consider the following trends. Since the U.S. dropped the gold standard in 1971, the price of gold has risen tenfold. But consumer prices have risen only two and a half times. If the U.S. had instituted a full gold standard in 1971, the result would have been the worst deflation since the Great Depression. And considering that widespread unemployment is usually the result, not deflation, it is easy to see the why such a policy would increase the risk of a depression.

Gold bugs also face an enormously challenging question: what kind of gold standard would they like to create? One based on fractional reserves? But that led to countless bank runs. Furthermore, as a practical matter, it doesn't stop banks or governments from changing the money supply, simply by changing the amount of fiduciary notes.

So the only purist alternative is a return to commodity money, where a bill is backed 100 percent by gold. But there is no longer enough gold in the modern world to cover the needed economic activity. We have already mined all the major deposits, and without new discoveries to match the growing economy, a pure gold standard would see a troublesome fall in commodity prices. Even worse, industry is also increasing its demand on the gold store. In past centuries gold had very little secondary use, so it proved useful as money. Today, modern technology has found a growing number of applications, and industry is consuming more and more of it. In response to all this, a monetary authority could periodically reduce the amount of gold defined as the dollar, but this is no different from the floating, fiat money that the gold bugs so bitterly criticize.

So the gold bugs would have to resolve historical and theoretical challenges of King-Midas proportions before they could ever reinstate the gold standard. But if a workable gold standard requires a tremendous amount of design, effort, regulation and safeguards, we might as well use fiat money, which is already simple and enjoys a successful track record.

 

[NaT805]

http://www.youtube.com/watch?v=iYZM58dulPE

 

[Gilby]

If the dollar is say defined as 0.25 ounces of silver, then you have indeed defined the price of silver at four dollars an ounce (an arbitrarily selected number). That is not a free market price- it is defined.

What is the free market value of a dollar? How is it defined?

What is the free market length of a meter? How is it defined?

Or how about a gram?

Silver is money. A unit mass of silver has been defined as a dollar. To change that is to make it arbitrary based on political means, which is a coerced valuation.

 

[Zippyjuan]

"Money is simlply another name for the most generally accepted medium of exchange" The truest quote in the video. Today, in this country, it is the US Dollar. It does a pretty good job of describing what the Fed does as far as how it can change the money supply. Fractional reserves is also covered to illustrate that it does not necessarily require a lot of action by the Fed to increase or decrease the money supply. There is a lot if inuendo in the piece that can give the impression that the Fed is in favor of high inflation. That is actually something they try to avoid. Otherwise the inflation of the last 20 years would be significantly higher than it has been.

Another interesting point in the video is that Nixon took the US off the final gold standard because the US did not have enough gold to even pay for the US foreign trade deficit. That situation is even worse today. Foreigners own some $2.25 trillion of our $9 trillion debt. We do not even have a $1 trillion in gold reserves so if we did adopt a gold standard, foreigners could demand 100% of our reserves. The video recommends a 100% gold standard- $1 of gold in the government vaults for each $1 in circulation. There is not enough gold in the entire world to do that. (In 1990 the US had reserves of $105 billion if valued at $400 an ounce. http://minneapolisfed.org/pubs/region/91-12/reg9112b.cfm Figure the price has about doubled since than and you still have $200 billion- enough for one year of the Iraq/ Afghanistan wars.

It is hard to find a good figure outside Wiki for the world's supply of gold, but they say it is

In 2001, it was estimated that all the gold ever mined totalled 145,000 tonnes.[2] As one metric tonne equals 1,000 kilograms (or 32,150 troy ounces), one tonne of gold equated to a value of US$23.8 million in September 2007 ($739/troy ounces), so the total value of all gold ever mined would be some US$3.4 trillion.[

or about the amount of money the Federal Government is slated to spend in the next year. http://en.wikipedia.org/wiki/Official_gold_reserves

The Fed was set up as independent of the Congress and President (aside from the Chairmen subject to appointment by the President and subject to aproval of the nomination by Congress) to avoid the ability of either Congress or the President to medle in the money supply and less subject to political whims or goals.

 

[Zippyjuan]

What is the free market value of a dollar? How is it defined?

What is the free market length of a meter? How is it defined?

Or how about a gram?

Silver is money. A unit mass of silver has been defined as a dollar. To change that is to make it arbitrary based on political means, which is a coerced valuation.

You are being silly. You know there is no free market in how long a meter is but there is definately a free market price for silver. The price of silver will change but the length of a meter will not. Unless the world decides to change it Some countries still use feet and inches. If you are still unsure of how long a meter is, perhaps this will help.
http://physics.nist.gov/cuu/Units/meter.html

If you are wondering about the price of silver, here is a current chart: Note it is not a flat line as it would be if it had a defined value.
http://www.kitco.com/charts/livesilver.html

Yes, you are correct that if you define a dollar in terms of an exact amount of silver, in turn giving silver an exact value in terms of dollars, that you are creating a value for silver based on coersion and political means, not a free market based on supply and demand for both dollars and silver. The price of silver cannot change if demand or supply changes.

The free market of a dollar is what it will buy at this point in time based on the supply and demand of dollars and the supply and demand of whatever good you wish to purchase. It is not fixed. It is free to find its own optimum level in the market place.

 

[srmpass98]

Funny, my undergrad paper was on the "Gold Standard" and the so called theoretical model of the Austrian School.

You have to understand that most of the proponents of the "Gold Standard" (and equivalents) do so to put controls on inflationary monetary supply; where a disproportionately large amount of dollars chases too few goods.

Historically, the gold standard breeds deflation, which is far more devastating to the economy then fiat inflation. The effects of deflation are devastating, a contraction of monetary supply; defaults on loans as real interest rates relative to nominal interest rates spirals out of control; liquidity and credit crunch, and subsequently deflationary pressures on employment, wages and productivity.

You need only to look back at the years leading up to the inevitable collapse of the stock market in 1929 to know how the gold standard, especially in regards to a fixed exchange rate, contributed to the Great Depression.

Simply put, a simplistic gold standard cannot compensate for a largely emotional, turbulent market and hence some semblance of "sound" managerial fiat currency needs to be instituted for this primary reason:

Inflation targeting.


My thesis was based on the Gold Standard prior to the Great Depression and the collapse of the Bretton Wood's system (fixed exchange rates that was backed by a denomination of gold).

 

[RonPaulalways]

If the dollar is say defined as 0.25 ounces of silver, then you have indeed defined the price of silver at four dollars an ounce (an arbitrarily selected number). That is not a free market price- it is defined.

If you make dollar notes redeemable in silver, you have not fixed the price of silver to any thing. If someone wants to buy 1 ounce of silver for 8 dollars, when those 8 dollars could have been redeemed for 2 ounces of silver, the government is not going to stop them.

We need more information to decide if things got worse or not. What happened to wages? Did they rise along with the CPI? If so, then people had exactly the same purchasing power. If wages went up faster than the CPI, they would be better off- if wages grew more slowly, then people were worse off.

Whether people were better off or not is irrelevant to the question of whether going off the gold standard has increased inflation. It HAS increased inflation. CPI is one of the best measures of inflation, and it has increased dramatically after 1971. Straight inflation measure have also increased dramatically since 1971.

Here are a couple graphs to illustrate this:

Inflation:

CPI:

Your graph does nicely describe any exponential growth. If something grows at even say two percent a year it will have the same shape as the one you show.

It's not a graph of money supply, but a graph of CPI. If only money supply was growing exponentially, that would not be a problem, since the economy also grows exponentially, but what is happening is that the CPI is growing exponentially, meaning that the growth in the money supply is outpacing the growth in the economy.

**EDIT** I agree with you about the CPI now. Even the CPI will grow exponentially if it grows at a constant percentage rate.

I refer you to a graph I linked to earlier. Over the last 20 years, inflation has rarely ventured above 5%. The peak of the 1980's is lower than the peak of the 1940s which is lower than the peak inflation of the 1920s.
http://en.wikipedia.org/wiki/Image:US_Historical_Inflation.svg

I agree that the dips and spikes have been far smaller in magnitude since the federal reserve centralized every thing, particularly after 1971 when it had total control over money supply, but that does not mean that it has been healthy. The market was allowed to correct itself before the federal reserve took control, now the government just pumps out more money to avert the immediate correction, while making the long term prognosis far worse.

As for the money supply, it would be natural and necessary for the supply of money to increase as the economy grew. Nixon had some bad policies that led to a big increase in inflation- and part of that was indeed too much money in circulatoin to fund the Vietnam War. It took almost a decade to work that out of the system. Inflation now is about average from what we have experienced in the past.

Inflation is not average as the graphs I linked demonstrate.

As far as the money supply, it expanded by less than 2 times in the 34 years before 1971. In the 34 years after 1971, the money supply expanded by a factor of 13! There is no way this can be explained by economic growth.

 

[Gilby]

The free market of a dollar is what it will buy at this point in time based on the supply and demand of dollars and the supply and demand of whatever good you wish to purchase. It is not fixed. It is free to find its own optimum level in the market place.

Same as this:
The free market of a fixed unit mass of silver is what it will buy at this point in time based on the supply and demand of silver and the supply and demand of whatever good you wish to purchase. It is not fixed. It is free to find its own optimum level in the market place.

Again, a dollar is a unit mass of silver. I don't know how else I can get that in your head. Your definition of a dollar seems to be that it is a bill of credit, in which the supply can be easily manipulated by the one who creates it with little effort. My definition is that it is a physical asset that has a limited supply and demand, and therefore not subject to manipulation because nobody can just create more of it. I understand your confusion comes as the result of government forcing us to use their bills of credit in place of real dollars.

A dollar does not have a value that is fixed to a unit mass of silver, it is a unit mass of silver. Do you understand that difference? For example, an Eagle is a unit mass of gold. It does not have a value of an Eagle, as it is an Eagle. It does have a value of about 25 dollars, but it is not 25 dollars.

Let's put it another way. I create a new currency, which I call "silver grams". So one silver gram is a gram of pure silver. Is that really me "creating a value for silver based on coersion and political means, not a free market based on supply and demand" as you claim? It's simply a definition that is fixed and therefore creates a standard, so that others know what it is when they price something in silver grams.

Put simply, silver is money.

 

[Gilby]

My thesis was based on the Gold Standard prior to the Great Depression and the collapse of the Bretton Wood's system (fixed exchange rates that was backed by a denomination of gold).

Your paper was about a gold redemption standard, instead of an actual gold is money standard. Austrian economics does not say to let the government print as much money as they want and allow it to be redeemed for gold at will, as what happened from 1914 to 1971. Obviously they will print too much and not be able to redeem it when requested by the holders of the paper notes. Instead, a real gold standard is where gold is money. While the US government has no power to issue paper money, should not be able to commit fraud and therefore have to have it 100% backed. The only power the government has is to coin money, meaning that they can only issue standardized coins, as the Coinage Act of 1791 had them do. The free market then would be free to use that or make their own currencies.

 

[NaT805]

Getting people to abandon their public school keynsian viewpoint is like trying to get someone to stop believing in God (Or start).

 

[therealjjj77]

Since the U.S. dropped the gold standard in 1971, the price of gold has risen tenfold. But consumer prices have risen only two and a half times.

This is not that hard to understand. Let's say that widget "A" was priced at 1 oz. of gold. However, through competition and innovation in the free market, widget "A" was able to be produced at 0.5 oz. of gold ten years later. (Remember that this is NOT because of the government or the dollar or the gold, but from the free market becoming more efficient.) If you were basing your money on a fiat money system, it would seem that the inflation of widget "A" relative to the dollar only increased a small amount while the inflation of gold relative to the dollar increased significantly more.

This does not support the argument for a fiat money system but in fact more strongly shows how much greater we'd be off if we had an honest money system.

The TRUE inflation would be that relative to gold or silver. Not that relative to widget "A", "B", and "C".

 

[therealjjj77]

Getting people to abandon their public school keynsian viewpoint is like trying to get someone to stop believing in God (Or start).

I went through the public schools and was taught keynesian economics and used to strongly believe in it. I also used to be an athiest and am now a Christian. =P

 

[Zippyjuan]

I posted this quote from Milton Friedman (noted libertarian economist) in the other Gold Standard thread, but I think it applies more to the points being discussed here:
http://www.reason.com/news/show/118175.html

I do believe that every individual should be free to own, buy, and sell gold. If under those circumstances a private gold standard emerged, fine—although I make a scientific prediction that it’s very unlikely. But I think those people who say they believe in a gold standard are fundamentally being very anti-libertarian because what they mean by a gold standard is a governmentally fixed price for gold.

A fixed exchange rate between gold or silver and the dollar is against free market principles.

 

[therealjjj77]

I posted this quote from Milton Friedman (noted libertarian economist) in the other Gold Standard thread, but I think it applies more to the points being discussed here:
http://www.reason.com/news/show/118175.html

A fixed exchange rate between gold or silver and the dollar is against free market principles.

The fixed rate is not on the people but on the government. Also, the requirement is that the government pay their debts only in gold or silver coin(of which there was a standard on what the "coin" was defined as)(Article 1; Section 10).

The limitations are placed on the government by "We The People". The limitations are not placed on "We The People". We could use whatever we want for money. But this required the government to be honest and live within it's means and the Constitutional boundaries we set up for it.

 

[Truth-Bringer]

As for my desire to use Federal Reserve notes, I use them because they work for whatever I need to purchase.

No, you will use them for all public and private debts, which creates a de facto monopoly due to the vast amount of those transactions, or else you will face the legal system.

If you wish to trade silver or gold for goods, you are free to do so- provided that the person you wish to make the exchange with agrees.

No, it appears we are not free to do so.

If you were to refuse to pay a debt or accept payment for
debt in Federal Reserve Notes, a complaint can be filed against you.
You will then eventually have a case filed in court. If you ignore the
summons and fail to appear in court, a warrant will be issued for your
arrest and men with guns will come to your home to take you to jail. If
you tell them you're not going and to leave your property, they will
forcibly try to take you in. If you physically resist and fight back,
they can and will legally kill you. That is enforcing the legal tender
laws by threat of force, and by force if the threat isn't sufficient.

While the law is geared to debt payments - public and private - it
rarely works this way. Technically, you're supposed to be able to buy
goods and services with anything you want, but the average citizen has
NO CLUE about this, so the DE FACTO result of the legal tender laws is
to discourage, hamper and prevent this.

Note also the the U.S. Mint has now put out (false flag) warnings
threatening people with arrest and incarceration if they use the liberty
dollar instead of Federal Reserve Notes - http://www.libertydollar.org

http://www.washingtonpost.com/wp-dyn/content/article/2006/10/09/AR2006100900993.html

I say false flag because they clearly mistated the law:

http://arbyte.us/blog_archive/2006/09/US_Mint_vs_Liberty_Dollar.html

Anyone who tries to come up with a gold backed private currency is
usually, conveniently, attacked by the government and driven out of
business. For example:

Fascinating story of man who won in federal court over the fiat
currency/income tax issue but was then tried in state court on a 19 year
old law that no one had ever been prosecuted for:

http://www.the-moneychanger.com/dangerous.phtml

And don't forget Anthony Hargis. He didn't even get a jury trial or an
appeal after the government raided his gold-backed private non-bank and
destroyed his business:

www.strike-the-root.com/51/hargis/hargis4.html

www.strike-the-root.com/51/hargis/hargis5.html


FBI and Secret Service Seize Over 2 Tons of Liberty Dollars

But few people will.

Appeal to the Majority fallacy.

You may also use other currencies but in the countries that use them. Here we use dollar denominated Federal Reserve Notes.

Because of government mandate. Again, this is an illegitimate exercise of control over peaceful, honest, voluntary activities.

I do not have any personal control over you so I do not understand why you think I might.

If you vote to empower people to use force against me when I am behaving peacefully, honestly, and voluntarily, then you are indeed attempting to exercise control over me.

Again, I wish you could be honest about these things and stop spewing irrational arguments and distortions.

 

[Truth-Bringer]

I posted this quote from Milton Friedman (noted libertarian economist) in the other Gold Standard thread, but I think it applies more to the points being discussed here:
http://www.reason.com/news/show/118175.html

The points you can't refute:

Choosing a currency is a peaceful, honest, voluntary activity.

Every adult individual has the right to engage in peaceful, honest, voluntary activities.

 

[Gilby]

A fixed exchange rate between gold or silver and the dollar is against free market principles.

Yes, an ounce of gold has a fixed exchange rate of an ounce of gold. Milton Friedman is wrong, as no government enforcement is needed to make that be the case.

Like I've said before, a dollar is a unit mass of silver. So fixing a unit mass of silver to a dollar also does not need government enforcement.

Flip your argument around and we can claim that the government has imposed a fixed exchange rate for one federal reserve note to a dollar. Not very free market.

I would agree with you on fixing the price of gold to a dollar, as that can change and has changed. Many problems did result from the government fixing that.

The real problem is that the government makes laws and regulations that hinder our ability to use anything else as currency, therefore they force a monetary system on us that they can easily use to steal from us by them issuing more money at nearly no expense. It's simply wrong and immoral. It's a violation of the charter that spells out what constitutes the federal government.

A free market currency is one that is not forced on the public by anyone. Historically, gold and silver have been the currency chosen by the free market.