Gold standard NOT a good idea?

[jon_perez]

I have been analyzing this issue of fiat money vs. gold standard and I believe there are reasons for NOT wanting to go back to the latter. E.g. that there is justification for Keynes to have said that gold was a barbarous relic.

What is a fiat dollar worth? What it is worth is not nothing but rather all the goods and services that can be bought with it. The value of the dollar is backed up by the productivity of the american economy. Even if the amount of dollars were to stay constant but US productivity plummets, the value of a dollar relative to other currencies would also go down. The converse applies, if the money supply grows slowly, and productivity goes up substantially, the currency will appreciate.

Consider the case of a simple economy with houses (assumed uniform) as goods and gold as the assumed-to-be-intrinsically-worthless-but-hard-to-manufacture money:

Year 1: 10 houses, 100 ounces of gold
price of 1 house = 10 ounces of gold

Year 2: 15 houses, 100 ounces of gold
price of 1 house = 6.7 ounces of gold

Year 3: 5 houses, 100 ounces of gold
price of 1 house = 20 ounces of gold

We see that in Year 2, gold appreciates, but that in Year 3 even gold can depreciate! Now you might say that Year 2 is a good thing because a house 'becomes cheaper'. However, you can bet that the same conspiracy theorists now whining about cabals being behind the Fed will find a new scapegoat under a gold standard. When the supply of gold money is not able to match the increased number of things there are available to buy, it is the people who hoard gold that will be accused of being the new cabal and in the same position as the Fed is of being able to "confiscate the people's wealth" through control of the money supply. The accusation of the conspiracy theorists is that in a fiat standard, wealth is stolen by those who print the money, but in a gold standard, wealth can also be stolen by the clever manipulation of the supply (e.g. hoarding) of the tokens of wealth (gold).

In a sense, gold does not have that much intrinsic value either compared to all the things it is able to buy. Its one real advantage over paper is mainly the difficulty of conjuring it out of thin air. Since virtually all central bankers are familiar with the fact that hyperinflation is caused by expansion of the money supply, the question here really is which of the two is more preferable:

1) putting trust in central bankers and expecting them to responsibly discharge their explicit duty of maintaining the stability of a fiat money supply.

2) the danger of private interests being able to hoard gold and control/manipulate the money supply

 

[OptionsTrader]

Flawed logic and flawed inferences.

Instead of guessing and going down all of these flawed paths, read some books on the subject and educate yourself.

Start by reading Rothbard's What Has Government Done to Our Money?



http://www.mises.org/store/What-Has...e-for-the-100-Percent-Gold-Dollar-P224C0.aspx

 

[kylejack]

Ron Paul supports legalization of alternate currencies, not a return to the gold standard. Anything can compete as a currency in Ron Paul's America: gold, silver, oil, labor credits, land certificates...anything.

 

[theseus51]

In those examples, gold isn't "depreciating". Gold is steady. It's the houses that are being worth more, or less.

Like now, gold isn't going up. The dollar is going down. Big difference.

 

[OptionsTrader]

And for some history in video:

http://mises.org:88/Paul-Partee

 

[jon_perez]

In those examples, gold isn't "depreciating". Gold is steady. It's the houses that are being worth more, or less.

When you make something the token of exchange (e.g. money), it suddenly acquires something other than its intrinsic value. A house is worth a house. An ounce of gold is worth an ounce of gold. And a piece of paper with something printed on it is worth exactly a piece of paper with some ink on it.

However, in the case outlined, gold as money 'depreciates' in terms of the number of houses it can buy (since there are fewer houses relative to the amount of gold, just as in the case where there are too few american goods and services relative to the amount of dollars).

The one advantage of a gold-based money system over a fiat-based one is that governments cannot conjure it out of thin air. But by the same token, the fact that there is less flexibility to adjust the money supply in a gold-based system means that in times where there are too few or too many goods and services relative to the amount of gold money circulating, price stability can suffer greatly.

If you can accept that checks-and-balances and jawboning can ensure that a central bank will not irresponsibly inflate (or deflate - the equivalent of hoarding gold under a gold standard) the money supply, then a fiat money system is not necessarily inferior to a gold-based one and even has some important advantages.

Ron Paul supports legalization of alternate currencies, not a return to the gold standard. Anything can compete as a currency in Ron Paul's America: gold, silver, oil, labor credits, land certificates...anything.

Yes indeed. This is a very interesting proposition and it would be fascinating to know what sorts of mechanisms RP intends to introduce to make such possible. If I understand correctly, this has something to do with removing taxation on such instruments?

Forcing government money to compete with privately-created money would force the government to improve the quality of its own money greatly or risk going out of the game (and losing control) entirely. However, you do not want to [immediately] abolish the government's capacity to create money either, because you also want to force privately-created money to also compete with the goverment's!

While I agree that there are grains of truth to be found in the charges and faults levelled against the Fed, I don't think it is as wanton and rapacious as some people (who probably have their own vested interests and agendas as well...) try to paint it as.

 

[kylejack]

Yes indeed. This is a very interesting proposition and it would be fascinating to know what sorts of mechanisms RP intends to introduce to make such possible. If I understand correctly, this has something to do with removing taxation on such instruments?

That's one part, but the more pressing part is the outright legalization of using them as currency. The US Mint currently states that using Liberty Dollars is illegal:

These medallions are privately produced products that are neither backed by, nor affiliated with, the United States Government. Prosecutors with the Department of Justice have determined that the use of these gold and silver NORFED "Liberty Dollar" medallions as circulating money is a Federal crime.

http://www.usmint.gov/pressroom/index.cfm?flash=yes&action=press_release&ID=710

 

[saku39]

Mo Money, mo problems

I have been analyzing this issue of fiat money vs. gold standard and I believe there are reasons for NOT wanting to go back to the latter. E.g. that there is justification for Keynes to have said that gold was a barbarous relic.

It's hard for me to take Keynes seriously. He was in favor of a mixed economy, which is the negation of freedom in one sense and his idea of unemployment being inversely proportional to inflation was proven as totally incorrect by the stagflation of the 1970's.

What is a fiat dollar worth? What it is worth is not nothing but rather all the goods and services that can be bought with it. The value of the dollar is backed up by the productivity of the american economy.

The value of the dollar is not backed by productivity. It is backed by the idea of stability. Until the 1970's people believed you could count on the US dollar to be the most stable and strong currency in the world. After the 70's, the economy, while still prone to boom and busts, was relatively stable in comparision to the rest of the world except for maybe the yen and now, the euro.

That has changed in the past decade or so. Our currency has never been weaker. The dollar index is at historic lows.

Even if the amount of dollars were to stay constant but US productivity plummets, the value of a dollar relative to other currencies would also go down. The converse applies, if the money supply grows slowly, and productivity goes up substantially, the currency will appreciate.

The value of the dollar would not go down as it is not tied to productivity. As I said before, it is tied to the idea that the US is the most stable country with the most stable currency in the world. Of course, through the course of the past decade, the confidence in the dollar is at an all time low.

The growing money supply/productivity notion is just Fed monetarist talk. Growing the money supply is just another way to say that you're going to devalue the currency. This stealing of value hurts poor people the most because by the time the money gets to them, it's lost it's value. ALL inflation is a travesty. It is not some necessary evil. It is a cycle that in the end just hurts the entire system. At some point, the currency becomes useless. It's just a matter of when. It might take years, it might take decades, but throughout history it's always happened.

In addition, when the money supply increases, a boom happens-- which is then followed by a bust. Booms and busts as we know them would cease to exist if there was Helicopoter Ben or Greenspan to turn the spigot and flood the economy with cash. The 1929 crash, the 1930's great depression, the 1970's stagflation, the 1980-1982 recession, the 1987 crash, the 1997-2000 dot-com boom/bust, and the current housing collapse are all brought about by the Fed screwing with interest rates and messing with the money supply.

Lastly, you do not need to "grow" the money supply. You can actually have a static supply of money and the currency would still work. There would be one big difference. Because there is a static and therefore, limited supply-- The value of the money would increase over time. Businesses and consumers would have to now account for deflation as opposed to inflation.

Huge booms and busts would cease to exist. Stupid mal-investment, sub prime housing loans, junk bonds, fly by night novelty tech companies, etc would disappear because they are bad investments. Wall street and big bankers would act like responsible businessmen because there would be no Fed to save them from their stupid whims.

Consider the caose of a simple economy with houses (assumed uniform) as goods and gold as the assumed-to-be-intrinsically-worthless-but-hard-to-manufacture money:

Year 1: 10 houses, 100 ounces of gold
price of 1 house = 10 ounces of gold

Year 2: 15 houses, 100 ounces of gold
price of 1 house = 6.7 ounces of gold

Year 3: 5 houses, 100 ounces of gold
price of 1 house = 20 ounces of gold

We see that in Year 2, gold appreciates, but that in Year 3 even gold can depreciate!

What does this prove? I can put up some hypothetical price study of the prices of cars and crickets, but that doesn't make it true.

I will agree on this: Gold is not infallible. But will say as a caveat that a commodity backed currency will always be better than fiat.

When the supply of gold money is not able to match the increased number of things there are available to buy, it is the people who hoard gold that will be accused of being the new cabal and in the same position as the Fed is of being able to "confiscate the people's wealth" through control of the money supply. The accusation of the conspiracy theorists is that in a fiat standard, wealth is stolen by those who print the money, but in a gold standard, wealth can also be stolen by the clever manipulation of the supply (e.g. hoarding) of the tokens of wealth (gold).

Again, you are under the impression that you need to constantly have new money coming into a system for it to work. As I said before, you don't. The less supply their is, the more the money is worth.

The concept of liquidity for growth is something Friedman pushed. That was his argument for why the Fed created the Great Depression. Friedman, who I think is great and consider one of the best economists to ever live-- is wrong here.

Growth can happen without having some burst of cash, but it will be slower and steadier.

In a sense, gold does not have that much intrinsic value either compared to all the things it is able to buy. Its one real advantage over paper is mainly the difficulty of conjuring it out of thin air. Since virtually all central bankers are familiar with the fact that hyperinflation is caused by expansion of the money supply, the question here really is which of the two is more preferable:

1) putting trust in central bankers and expecting them to responsibly discharge their explicit duty of maintaining the stability of a fiat money supply.

2) the danger of private interests being able to hoard gold and control/manipulate the money supply

If legal tender laws were repealed and parallel currencies would be allowed, you would see a change. There would be no more need for a Fed. And private interests, while able to have a little influence, would not be able to control much of anything. (People that try to corner the commodities market usually end up broke.)

I would trust the people most involved in the economy. The people-- businessmen, consumers are the ones that matter here, not a central bank or private cabal.

 

[OptionsTrader]

Read everything on http://www.mises.org including the superb 1983 Paul vs. Partee debate http://mises.org:88/Paul-Partee

 

[Gilby]

What is a fiat dollar worth? What it is worth is not nothing but rather all the goods and services that can be bought with it. The value of the dollar is backed up by the productivity of the american economy.

Indirectly. Fiat money is backed by the coercive power of government. Why do we demand the dollar bill? Because we are forced to pay taxes with it. Our tax system is based on taxing productivity, therefore, productivity is indirectly in the equation.

Consider the case of a simple economy with houses (assumed uniform) as goods and gold as the assumed-to-be-intrinsically-worthless-but-hard-to-manufacture money:

Year 1: 10 houses, 100 ounces of gold
price of 1 house = 10 ounces of gold

Year 2: 15 houses, 100 ounces of gold
price of 1 house = 6.7 ounces of gold

Year 3: 5 houses, 100 ounces of gold
price of 1 house = 20 ounces of gold

This is an invalid example. You're assuming that gold isn't demanded for anything other than as use as money, therefore it would have no buying power. You're also assuming that there is no other goods or services in this economy and that people don't save for future needs and wants.

We see that in Year 2, gold appreciates, but that in Year 3 even gold can depreciate! Now you might say that Year 2 is a good thing because a house 'becomes cheaper'.

Yes, year 2 is a good year, because they produced 5 new houses. Year 3 is a bad year because 10 houses were destroyed and there was no new production. The demand for gold is the same, and the supply is the same, therefore it's value is the same. The demand for houses is the same, but the supply is lower, so it's value is higher. In a fiat money world, you'd have to go in and confiscate some people's money to reduce it's supply. That's detrimental to those it's stolen from.

However, you can bet that the same conspiracy theorists now whining about cabals being behind the Fed will find a new scapegoat under a gold standard. When the supply of gold money is not able to match the increased number of things there are available to buy, it is the people who hoard gold that will be accused of being the new cabal and in the same position as the Fed is of being able to "confiscate the people's wealth" through control of the money supply. The accusation of the conspiracy theorists is that in a fiat standard, wealth is stolen by those who print the money, but in a gold standard, wealth can also be stolen by the clever manipulation of the supply (e.g. hoarding) of the tokens of wealth (gold).

The conspiracy would revolve around who burned down all the houses, or who convinced everyone that it was a good idea to build these houses in an area that gets a natural disaster every few years.

Wealth is not stolen by manipulation of the supply. Lets say I saved a lot of gold and did it maliciously in that I wouldn't accept anything in exchange, even if economically a good deal for me. Unrealistic example, but let's say I did. That would decrease the supply available in the marketplace and increase the buying power of everyone else's gold. Good for them, bad for me because I lost out on the good deals. Now when I dump the gold I saved, the increased supply would allow me to buy less in the marketplace. Good for them again, bad for me because I got a bad deal on what I purchased. So in a free market, manipulating supply is detrimental to the manipulator. Further, it would be hard for me to get enough gold to make a significant impact on the entire market anyways. Instead the entire free market will save or not depending on the signals in the market. If tough times are expected in the future, people will buy the things they need, increasing the price of the things needed, and this sends a signal to the market to increase production of those items, which results in a general preparing for the future.

1) putting trust in central bankers and expecting them to responsibly discharge their explicit duty of maintaining the stability of a fiat money supply.

Giving someone power and not expecting them to use it for their benefit is very dangerous.

2) the danger of private interests being able to hoard gold and control/manipulate the money supply

Gathering enough gold to be sufficient in manipulating the money supply would be very hard. Further, the manipulation is most detrimental to the manipulator.

 

[Bradley in DC]

It's great that people are thinking about important questions: we don't see that among supporters for other candidates, but there are so many false premises here I wouldn't know how to explain it all. We'll start with you saying that Dr. Paul says the exact OPPOSITE of what you claim he says: he does NOT want to go BACK to any previous system.

 

[RonPaulIsGood]

Me too believe that the economic growth of the economy after Paul's tax cuts would outpace the supply of gold. I suggest the government to steal personal property from stores to get money.

 

[J Free]

Ron Paul supports legalization of alternate currencies, not a return to the gold standard. Anything can compete as a currency in Ron Paul's America: gold, silver, oil, labor credits, land certificates...anything.

The big problem with the term "gold standard" is that it a)evokes memories of the 19th century when only gold was the standard and gold was mostly used to settle international trade (which meant banks owned it and manipulated the supply of it in particular countries - which created the panics/booms - which led to the Federal Reserve) and b)implies that none of those other things can be money.

A different term really does need to be created. Otherwise, it is going to be near impossible to explain what competitive money really does look like.

 

[Gilby]

A different term really does need to be created. Otherwise, it is going to be near impossible to explain what competitive money really does look like.

Hard money standard. Or commodity standard.

 

[TVMH]

The big problem with the term "gold standard" is that it a)evokes memories of the 19th century when only gold was the standard and gold was mostly used to settle international trade (which meant banks owned it and manipulated the supply of it in particular countries - which created the panics/booms - which led to the Federal Reserve) and b)implies that none of those other things can be money.

A different term really does need to be created. Otherwise, it is going to be near impossible to explain what competitive money really does look like.

I believe I've heard Dr. Paul use the phrase "currency backed by hard assets".

EDIT: Guess I was a bit late.

 

[Daveforliberty]

The other shoe

If you can accept that checks-and-balances and jawboning can ensure that a central bank will not irresponsibly inflate (or deflate - the equivalent of hoarding gold under a gold standard) the money supply, then a fiat money system is not necessarily inferior to a gold-based one and even has some important advantages.[/

That's just it. We can't trust banks, even a central bank. They are political and biased toward the elite.

The other shoe, of course, is fractional reserve banking. If that monster isn't done away with, inflation would be natural anyway in this digital world of ones and zeros.

 

[J Free]

The other shoe, of course, is fractional reserve banking. If that monster isn't done away with, inflation would be natural anyway in this digital world of ones and zeros.

There's nothing wrong with fractional-reserve banking as long as the risks of the business model are not underwritten by the state.

The business model is not "fraud" as some see it. It is a business where the timing of asset cash-flows (loans) does not equal the timing of liability-flows (deposits). Definitely the riskiest form of banking - but also the form most amenable to growth.

The second it gets underwritten by the state -(and that includes the state borrowing from it) you get problems.

Then again, the same applies to any other form of money. If the state comes down on the side of either deflation or inflation; it massively screws with individuals and the markets. And it is impossible for it to balance it all. So the key is let the market create competitive money. Some forms will be inflationary (will devalue over time relative to assets/production) - those will tend to be used for consumption (Gresham's Law). Other forms will be deflationary (appreciate in value relative to assets/production) - those will tend to be used for savings.

 

[Brutus]

"Price stability" is a false measure. Prices are by their nature unstable because conditions which cause them are unstable. Inflation is orchestrated price instability for the benefit of those doing the printing, debtors, robbing silently from savers.

Gold isn't perfect, but it has the advantage of being harder to manipulate on a grand scale. Yes, demogogues interested in having the ability to create currency out of thin air will scapegoat anyone in order to increase their power. That is nothing new. Is Marx a reason to ditch private property?

Since central bankers have YET to resist the temptation to inflate I see no reason that this will ever change. We have seen that politicians and bankers think no further ahead than the next election. Since they have the government license to steal they can make for themselves lifeboats that their victims are unable to emulate. They are renters of the country, and as renters they have no incentive to maintain its capital value, but to exploit it as quickly as possible.

There is a lot of scholarly work on market determined money (it could be other than gold, but the key is that it is determined by people exercising their freedom, not government fiat) which answers your concerns.

Keynes is worse than a stopped clock. The only reason he received any attention is that he gave the government an excuse to do what it wanted to do anyway.

 

[Daveforliberty]

There's nothing wrong with fractional-reserve banking as long as the risks of the business model are not underwritten by the state.

I disagree, but I am not an economist. Fractional reserve banking inflates the money supply. It seems to me the only thing that would deflate it again is for the bank employing fractional reserve banking to go under. Which may not happen for many, many years, if ever. So the money supply is inflated.

 

[jon_perez]

Price stability is the main rationale given for a 'discretionary' monetary policy.

From what I understand, so-called Austrian economics postulate that it is ok for prices to deflate and inflate so long as it is 'free market forces' that determine such and that there is no need to artificially manage the supply of money to 'stabilize prices'.

I believe what's complicating the picture is that you have 2 factors to contend with: the money supply and the supply/demand situation for the stuff the money can buy.

Assuming the supply/demand situation is unchanging, then an increase in the money supply is supposed to increase prices. The opposite also applies, it is assumed that a decrease in the money supply will eventually deflate prices. In practice, things do not always work out as neatly (e.g. Japan has been experiencing deflation in spite of nearly zero interest rates), but I suppose the assumption is fairly sound.

Now, here's the kicker: how can one assure this so-called "price stability" if the supply/demand situation is always in flux (as it is in the real world)? Price controls are supposed to be the antithesis of capitalism, and yet it seems that central banks assume that their job is to manipulate the money supply in order to keep prices constant. It's a subtler approach than price controls, but isn't it more or less the same thing in the end?