Gold Standard and money supply growth

[nbruno322]

Can someone please explain how the gold standard would address the growth of the economy, or would the money supply stay constant?

Also, is there enough gold/silver in the world, mined or unmined, to back the dollar 100%? If not how would it work?

I understand the constitutionality and support the gold standard, but need clarifications on the above issues. Thank you in advance.

 

[darwarison]

deleted

 

[fisharmor]

As I understand it, that is ultimately the only complaint. The gold would follow the law of supply and demand just like everything else.

In a growing economy with a stagnant gold supply, the demand for the gold goes up and so therefore its value does as well.
In a stagnant economy with a growing gold supply, the demand for the gold goes down and so therefore its value does as well.

This has happened in the past, where a large vein of gold gets hit and floods the market. It plays merry hell with the market, and enough people didn't like that that they came up with other cockamamie arrangements - like Keynesianism.

As I understand it, Keynes basically said that if the government (or a federal reserve) acts as a buffer using fiat currency, it can feed money into the supply of money when the economy is growing, and then take money out of supply when the economy is stagnant. Our troubles now are coming from the Fed creating money when the economy is stagnant - it's what's causing the housing bubbles, high gas prices, high grocery prices, and soon, high EVERYTHING prices.

Of course, I'm new at this, so everyone feel free to pipe up. As I understand it, there is not really a good alternative being pitched here to cover the original argument against gold, other than:

-the constitutional argument: anything else is illegal, and
-the paleoconservative argument: no matter what you're talking about, whenever the federal government gets involved they FUCK IT UP.

 

[kgiese]

History Repeats

Seizure of the American Publics' Gold
Under the pretense of helping to end the Great Depression came the 1933 Gold Seizure whereby the Roosevelt Administration outlawed private ownership of gold. Under the threat of imprisonment for 10 years, a US$10,000 fine or both, everyone in America was required to turn in all gold bullion to the U.S. Treasury.

The rationale for the seizure was that the declining prices of the Great Depression were a direct result of overcapacity. This flawed reasoning resulted in the creation of disastrous policies such as National Industrial Recovery Act where business cartels were deliberately constructed to keep prices high and the Agricultural Adjustment Act that ordered mass destruction of livestock and crops in order to reduce supply and drive up prices. In a time when unemployment is at record highs and people are suffering from economic hardship, these policies are the complete opposite of what is required.

As a final component to the Roosevelt Administration's desire to increase prices was to devalue the dollar. To do so required that the dollar be uncoupled from gold. As long as the dollar was tied to a gold standard, the amount of money in circulation could not dramatically increase as the public would convert the paper into gold when they became aware of the over-issuance of paper currency.


Example of a US$100 gold certificate from the late 1920's

On April 5, 1933, Roosevelt signed Executive Order 6102, which ordered people to turn in their gold to the government at payment of $20.67 per ounce. Individuals could hold up to $100 in gold coins, and there were some exceptions for dental use, jewelry, and artists and others who used gold in their jobs.

While U.S. citizens could be ordered not to hoard gold, Roosevelt knew he could not impose such a law on sovereign nations. Foreigners could still exchange there U.S. dollars for gold, but shortly after issuing Order 6102, Roosevelt devalued the dollar to US$35 per ounce thereby decreasing the value of the dollar overnight by 40.94%.

The result of these policies allowed greater ability of the Federal Reserve to increase the amount of money in circulation thereby increasing their revenue from interest.

 

[CUnknown]

There actually isn't enough gold to back our dollars. We have printed so much money that it's no longer possible to back them all with gold. The price of gold would have to double or so, if we were to do this, and that of course would be a market distortion.

However, a 19th century gold standard is not something that Ron Paul is actually saying we should go back to, at least not immediately. It would be perhaps a durable goods index, or some other standard (including gold in some way, I bet), so as to back our money with something. It would be a gold standard updated for our 21st century economy. I'm not an economist, so I can't really explain how this would be done. It's something that would need to be figured out.

 

[therealjjj77]

Actually, despite what people may think, the ounce of gold was equal to a set amount of dollars and that amount had been reset several times throughout American History. The idea of a gold standard would be that we set an amount of dollars as equal to an ounce of gold. Also, these dollars would have to be backed by that much gold and redeemable for such at any time. The amount is irrelevant. It's just it has to stay the same for it to work. So if it is $900/ounce of gold(instead of $20.67/ounce like how our country started), then people would base their prices on that and we wouldn't see inflation anymore.

The main issue would be having Congress emit bills of credit instead of a central bank. Also, Congress should not produce any more dollars then there is gold to represent them. Also, the private sector should not be interfered with in being able to compete with the government on producing alternate currencies. Encourage your representatives to vote for Ron Paul's bill regarding this:

http://www.washingtonwatch.com/bills/show/110_HR_4683.html

Some people feel that you would see deflation. This is what should be happening as things are always being produced more efficiently in a free market. (It is technically not deflation.) Also, to combat any deflationary effects from a limited gold supply, gold prospecting would continue to grow the gold supply along with the demand. The higher the demand is for gold, the more gold prospecting that happens. Also, this diversifies the money supply instead of condensing it to a small group that manipulates the laws.

 

[Xenophage]

Can someone please explain how the gold standard would address the growth of the economy, or would the money supply stay constant?

Also, is there enough gold/silver in the world, mined or unmined, to back the dollar 100%? If not how would it work?

I understand the constitutionality and support the gold standard, but need clarifications on the above issues. Thank you in advance.

The money supply doesn't need to fluctuate much, if at all. Explain, if you can, one reason why it should? Its an absolute lie that increasing the money supply is a good thing economically. Money does NOT equate to wealth. Pumping more dollars into our economy makes people feel richer, for a short period of time, and can mask economic realities in the short term, but has the ultimate effect of doing nothing for the economy and generating inflation.

There IS enough gold and silver. As soon as you peg the value of the dollar to an amount of gold, the value of gold will adjust. If you don't want to distort the value of gold, simply peg the dollar to a small enough quantity of gold!

I'm sometimes shocked at the level of misunderstanding people have of the simple law of "supply and demand."

 

[Mini-Me]

The money supply doesn't need to fluctuate much, if at all. Explain, if you can, one reason why it should? Its an absolute lie that increasing the money supply is a good thing economically. Money does NOT equate to wealth. Pumping more dollars into our economy makes people feel richer, for a short period of time, and can mask economic realities in the short term, but has the ultimate effect of doing nothing for the economy and generating inflation.

There IS enough gold and silver. As soon as you peg the value of the dollar to an amount of gold, the value of gold will adjust. If you don't want to distort the value of gold, simply peg the dollar to a small enough quantity of gold!

I'm sometimes shocked at the level of misunderstanding people have of the simple law of "supply and demand."

Hehe...well, to play Devil's Advocate in response to your first question, there actually are some Keynesian arguments for expanding the monetary supply in the face of unemployment and recession and contracting the monetary supply in the face of inflation. The ultimate reason for this is that the phenomena of price stickiness (borne out of psychology and the fact that debt is given in nominal, not real, terms) prevents the market from reacting to deflationary pressure in time to self-correct. In other words, the market tends to quickly raise prices in response to inflationary pressure, but it doesn't reduce prices in response to deflationary pressure. The essay I linked to explains this aspect of Keynesian theory fairly well I think...however, part of the essay does indeed have a fatal flaw in that it ignores the point you made that the value of gold as a currency will naturally adjust (based on supply and demand) to equal the value of the goods and services offered by the economy. Still, it's a pretty decent read if you want to understand what arguments actually exist for manipulating the monetary supply based on certain market conditions.

Now, personally speaking, I have the gut feeling that the Austrian economists are right on this and that the market can and will indeed self-correct in time if it's not being manipulated by outside forces (after all, it was the Fed's rampant expansion of the paper money supply and abuse of the gold standard that caused the roaring 20's and the Depression, not the gold standard itself). Also, I do recall that later in his life, Maynard Keynes was "deeply moved" by the criticisms of the Austrian economists. That said, I have not looked into their theory enough to understand myself what their arguments on this are (If anyone has any links that will concisely explain the Austrians' take on price stickiness and deflation, please let me know!). However, the blunt truth is that it actually doesn't even matter - even if the Keynesians are correct, their theory can never ever be judiciously implemented in practice, because any elected or unelected group of elites with the power to manipulate the money supply can and will use this power for their own personal gain. Furthermore, as we have seen, Congress uses this money-printing power as a blank check to overspend more and more without directly and transparently taxing the people (which would result in public outrage). In other words, no matter how astute Keynes's theory may or may not be, giving a central authority the power to manipulate the monetary supply will always inevitably result in debasement of the currency and wealth transfer rather than judicious use of that power.

 

[Zippyjuan]

The main issue would be having Congress emit bills of credit instead of a central bank.

I would not want Congress in charge of the money supply. Even if it was pegged to gold.

As soon as you peg the value of the dollar to an amount of gold, the value of gold will adjust.

If the value of a dollar is pegged to a certain amount of gold, it cannot by definition adjust. If you said that one ounce of gold is worth $1000 dollars, that is it. It will not become $1100 or $900.

 

[Zavoi]

Even under a gold standard, the government could contract the money supply by spending less than it collects in taxes, putting the rest in its rainy-day fund; or expand it by spending money from the aforementioned rainy-day fund. However, the finitude of the amount of gold means that the money supply cannot be expanded indefinitely, or else the government will run out of gold.

 

[NaT805]

Can someone please explain how the gold standard would address the growth of the economy, or would the money supply stay constant?

Also, is there enough gold/silver in the world, mined or unmined, to back the dollar 100%? If not how would it work?

I understand the constitutionality and support the gold standard, but need clarifications on the above issues. Thank you in advance.

They on average mine 3% gold a year, so there would be a 3% increase in the supply of money (inflation), to account for economic growth, and new population.

There is enough gold to have a 100% gold standard. The question isn't about the amount of money you have, its purchasing power. How much can you buy with the money you have? If we went to a gold-coin standard there would be rapid deflation. Gas under 99 cents a gallon, 10 cents for a soda. Everything would cost less, to account for the limited supply of gold.

 

[NaT805]

The money supply doesn't need to fluctuate much, if at all. Explain, if you can, one reason why it should? Its an absolute lie that increasing the money supply is a good thing economically.

Having an increase in the money supply is required in order for an economy to work. The gold standard is perfect because of its average 3% inflation. Predictable so everyone feels safe, and it can't be manipulated, so people feel safe.

The reason you need inflation is without it, eventually people would be paying in micro ounces of gold. The increase in the money supply allows the new "population" to carry gold. The more people you have, the higher the demand for gold is, so it gains value, thus leading to less and less amounts required to buy things, ending up using micro ounces of gold for purchases. The increase in gold demand is met with the 3% inflation, it doesn't affect prices much because it's more meeting the demand. The market works out the kinks. Inflation is a good thing, it keeps prices stable in this sense.

 

[Dr.3D]

There does not need to be any increase in monetary supply for an economy to work.

There is no such thing as inflation if there is no increase in monetary supply in the first place.
The value of the money would increase as the demand for it increased. What is in limited supply always increases in value. Now if you are thinking about value in terms of dollars, then you are incorrect in your thinking. Value is not measured in terms of the dollar but rather what the dollar can buy.

If there is a need for more money, then the use of smaller parts of the same gold and silver backed dollar would be used. For instance what $.50 would once buy, $.25 would later buy.

 

[RonPaulalways]

There does not need to be any increase in monetary supply for an economy to work.

An increase in money supply is needed because otherwise there will be deflation as the economy grows. Deflation encourages hoarding and makes it difficult to acquire money when it is needed for a transaction. A deflating currency will result in people simply using an alternate currency for trade. Gold or silver does the trick because more is mined every year, and in the event of a shortage, higher prices will encourage more mining, thereby increasing the supply and regulating the price.

 

[BigRedBrent]

As I understand it, Keynes basically said that if the government (or a federal reserve) acts as a buffer using fiat currency, it can feed money into the supply of money when the economy is growing, and then take money out of supply when the economy is stagnant. Our troubles now are coming from the Fed creating money when the economy is stagnant - it's what's causing the housing bubbles, high gas prices, high grocery prices, and soon, high EVERYTHING prices.

Of course, I'm new at this, so everyone feel free to pipe up. As I understand it, there is not really a good alternative being pitched here to cover the original argument against gold, other than:

-the constitutional argument: anything else is illegal, and
-the paleoconservative argument: no matter what you're talking about, whenever the federal government gets involved they FUCK IT UP.

This is my simple explanation of the Fed:
http://www.ronpaulforums.com/showthread.php?p=1228697

 

[Zippyjuan]

Ron Paul actually does not support going back to a true gold standard like we once had- aware of the problems that occured and the difficulty and even inability of the government to respond to any financial crises. He does support letting people use gold and silver coins but the problem is the value of gold is so high today that you would have a coin about the size of a quarter worth about $500 and who would want to carry that around in their pocket where they could lose it? http://www.nolanchart.com/article290.html The largest paper currency currently issued is the $100 bill. Most money today is electronic anyways so gold or silver coins would have little to no impact on the money supply or the value of the dollar.

Prices would not necessarily fall. In the 1920's you had over 20% inflation even though you had dollars backed by gold and gold coins in circulation. The average rate of inflation in 1920 was 15.9%. The next year it was negative 10.85%. http://inflationdata.com/inflation/Inflation_Rate/HistoricalInflation.aspx?dsInflation_currentPage=7 And wages tended to drop sooner and faster than prices. It was lower demand that led to the lower prices- people could not afford to buy the goods. And that means fewer workers needed to produce the goods so more layoffs and people out of work. You will not still make $40,000 or whatever if gas drops to $.90 and sodas $.10.
http://en.wikipedia.org/wiki/Gold_standard

[edit] Perceived stability offered by gold standard
The gold standard, in theory, limits the power of governments to inflate prices through excessive issuance of paper currency. It is also supposed to create certainty in international trade by providing a fixed pattern of exchange rates. Under the classical international gold standard, disturbances in the price level in one country would be wholly or partly offset by an automatic balance-of-payment adjustment mechanism called the "price specie flow mechanism." At the time of the Bretton Woods agreement, it was believed that markets were always internally clear; Say's Law. However, in practice, wages, not capital, depreciate in price first.

In 1920, the average manufacturing worker put in 51 hours a week. http://eh.net/encyclopedia/article/whaples.work.hours.us
For that he received $29 a week if he was considered a skillled worker, about $22 if he wasn't skilled. About $.057 an hour vs. $.43 an hour. http://eh.net/encyclopedia/article/Smiley.1920s.final
Butter was $0.70 a pound, bread $0.12, and eggs $0.47 a dozen. Say he bought all three for $1.29. The skilled worker put in 2.26 hours to buy them and the unskilled worker three hours. http://www.thepeoplehistory.com/20sfood.html
The prices sound cheap to us now, but when you consider how long people had to work back then to get them, they are considerably cheaper now. Just looking at a number for inflation does not tell the whole story about if we are better off or not.

 

[Truth-Bringer]

Ron Paul actually does not support going back to a true gold standard like we once had- aware of the problems that occured and the difficulty and even inability of the government to respond to any financial crises. He does support letting people use gold and silver coins but the problem is the value of gold is so high today that you would have a coin about the size of a quarter worth about $500 and who would want to carry that around in their pocket where they could lose it?

You are thinking two-dimensionally. We have the internet today. There are already multiple sites offering digitally traded gold accounts: http://www.e-bullion.com

One need not carry the gold itself. One could also carry paper warehouse receipts.

 

[Scott Wilson]

Money has three forms.

1. Commodity Money - Actual coins of intrinsic value (ie. gold or silver).

2. Promissory Money - Paper or electronic money redeemable in specie (ie. it is backed by commodity money)

3. Fiat Money - Paper or electronic money backed by nothing (what we have today).



Ron Paul wants a monetary system based on 1 and 2.

 

[NaT805]

An increase in money supply is needed because otherwise there will be deflation as the economy grows. Deflation encourages hoarding and makes it difficult to acquire money when it is needed for a transaction. A deflating currency will result in people simply using an alternate currency for trade. Gold or silver does the trick because more is mined every year, and in the event of a shortage, higher prices will encourage more mining, thereby increasing the supply and regulating the price.

Exactly.

 

[NaT805]

Ron Paul actually does not support going back to a true gold standard like we once had- aware of the problems that occured and the difficulty and even inability of the government to respond to any financial crises. He does support letting people use gold and silver coins but the problem is the value of gold is so high today that you would have a coin about the size of a quarter worth about $500 and who would want to carry that around in their pocket where they could lose it?

Ron Paul does not want to go back to a gold standard, he wants to go forward to a gold standard. And he supports a full gold-coin standard. Where we all carry gold and pay with gold coins. That is naturally what man has chosen over thousands of years of history. With his plan to legalize competing currency, eventually people would pick a gold-coin standard because everything else always fails because its abused. If people physically held coins they would physically be carrying something of value, not something that represents value. Gold cant be counterfeited, paper notes repsenting gold can. With the people physically holding onto wealth it will keep the money in the hands of the people, not in the hands of the bankers. The wealth rightfully belongs to the people.

Don't think of gold as a commodity. Think of it as another currency. The value of gold now isn't high today. The value of gold has been pretty much constant. The value of the dollar is LOW. So it takes more dollars to convert it into gold. Just like if you converted into euros, you end up with a less.