Gold standard NOT a good idea?

[DebtFree]

For over 700 years, England used wooden tally sticks as money until the Bank of England was created in 1694.

http://www.xat.org/xat/moneyhistory.html

THE TALLY STICKS (1100 - 1854)


King Henry the First produced sticks of polished wood, with notches cut along one edge to signify the denominations. The stick was then split full length so each piece still had a record of the notches.

The King kept one half for proof against counterfeiting, and then spent the other half into the market place where it would continue to circulate as money.

Because only Tally Sticks were accepted by Henry for payment of taxes, there was a built in demand for them, which gave people confidence to accept these as money.

He could have used anything really, so long as the people agreed it had value, and his willingness to accept these sticks as legal tender made it easy for the people to agree. Money is only as valuable as peoples faith in it, and without that faith even today's money is just paper.

The tally stick system worked really well for 726 years. It was the most successful form of currency in recent history and the British Empire was actually built under the Tally Stick system, but how is it that most of us are not aware of its existence?

Perhaps the fact that in 1694 the Bank of England at its formation attacked the Tally Stick System gives us a clue as to why most of us have never heard of them. They realised it was money outside the power of the money changers, (the very thing King Henry had intended).

What better way to eliminate the vital faith people had in this rival currency than to pretend it simply never existed and not discuss it. That seems to be what happened when the first shareholder's in the Bank of England bought their original shares with notched pieces of wood and retired the system. You heard correctly, they bought shares. The Bank of England was set up as a privately owned bank through investors buying shares. Even the Banks resent nationalisation is not what it at first may appear, as its independent resources unceasingly multiply and dividends continue to be produced for its shareholder's.

These investors, who's names were kept secret, were meant to invest one and a quarter million pounds, but only three quarters of a million was received when it was chartered in 1694.

It then began to lend out many times more than it had in reserve, collecting interest on the lot.

This is not something you could just impose on people without preparation. The money changers needed to created the climate to make the formation of this private concern seem acceptable.

Here's how they did it.

With King Henry VIII relaxing the Usury Laws in the 1500's, the money changers flooded the market with their gold and silver coins becoming richer by the minute.

The English Revolution of 1642 was financed by the money changers backing Oliver Cromwell's successful attempt to purge the parliament and kill King Charles. What followed was 50 years of costly wars. Costly to those fighting them and profitable to those financing them.

So profitable that it allowed the money changers to take over a square mile of property still known as the City of London, which remains one of the three main financial centres in the world today.

The 50 years of war left England in financial ruin. The government officials went begging for loans from guess who, and the deal proposed resulted in a government sanctioned, privately owned bank which could produce money from nothing, essentially legally counterfeiting a national currency for private gain.

Now the politicians had a source from which to borrow all the money they wanted to borrow, and the debt created was secured against public taxes.

You would think someone would have seen through this, and realised they could produce their own money and owe no interest, but instead the Bank of England has been used as a model and now nearly every nation has a Central Bank with fractional reserve banking at its core.

 

[jon_perez]

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.

Right, but wouldn't this push people to hoard the unit of money (e.g. gold) instead of investing it and putting it to "productive use" ? If the money supply consists entirely of gold then it would grow at the rate of 2% (?) yearly. If output grew at much higher than that rate, then it would encourage people to hold on to their gold instead of spending it as each unit of gold would tend to buy more "output" as time went by. Wouldn't the fact that less money is now circulating in the economy lead to a depression?

It seems to me to be a choice between a central bank (ostensibly beholden to the government/the people) that controls a fiat money supply (ostensibly in the public interest) versus the possible emergence of (private, and without any mandated responsibilities or duties) cartels that can hoard and restrict the money supply (like has happened in antiquity).

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.

Right, but what if big interests collude to hoard the cash (which history has proven has happened many times before). This would definitely retard or quite likely even reverse economic growth.

I think the idea of a free market in money is a very interesting one and seems to be very much in the spirit of laissez-faire capitalism, but I am quite aware of the reasons why the world has been led into using fiat money today (e.g. I believe there is credence to the "cross of gold" type arguments). The way I see it, this so-called free market in money that RP supporters talk about is going to have to be more advanced than any previous money systems (incl. the current one) and will be essentially a kind of experiment.

 

[Gilby]

Right, but wouldn't this push people to hoard the unit of money (e.g. gold) instead of investing it and putting it to "productive use" ? If the money supply consists entirely of gold then it would grow at the rate of 2% (?) yearly. If output grew at much higher than that rate, then it would encourage people to hold on to their gold instead of spending it as each unit of gold would tend to buy more "output" as time went by. Wouldn't the fact that less money is now circulating in the economy lead to a depression?

No. Use some common sense to figure this out. If output is increasing, is that bad for the economy? Is that a depression? Obviously not. Low prices are good for an economy as it means things are being produced more efficiently.

Money is anything that is exchanged for something else. Gold is simply a common exchange medium. In fact gold isn't really needed at all in the exchange, it's simply the index that prices are denominated in. Would you save the gold which may be able to buy more in the future? Maybe, but you'd probably rather invest it in that future output as that will return more. You'd buy a bond instead. Saving, or as you've called it, hoarding, is a natural reaction to the marketplace based on current signals. I'm going to save physical gold, instead of a gold bond (promise to pay in the future including interest), when I think that the bond issuer is not going to be able to meet their obligations. So, when the future economy looks good, and it looks like bond issuers will be able to pay back their obligations, there will not be as much saving. This lowers prices of goods now, because it's expected that much more will be available in the future and hoarding the goods now are not necessary. However, if the future economy looks bad, then people will save the money instead of buying bonds, because it is expected to be less likely to be paid back. This raises current prices in the marketplace to let everyone prioritize their spending to get what they absolutely need, and ensure the best distribution of available goods. If people do buy bonds, the interest rate will also be higher because the risk is higher. This higher interest makes sure no capital is wasted, because the cost of capital is higher, and is instead focused on the markets that are expected to have the highest demand in the future.

It seems to me to be a choice between a central bank (ostensibly beholden to the government/the people) that controls a fiat money supply (ostensibly in the public interest) versus the possible emergence of (private, and without any mandated responsibilities or duties) cartels that can hoard and restrict the money supply (like has happened in antiquity).

Right, but what if big interests collude to hoard the cash (which history has proven has happened many times before). This would definitely retard or quite likely even reverse economic growth.

They would do it at their own detriment. Hoarding or spending when the market is signaling otherwise, means that you will get bad deals. You're buying goods when prices are high and selling goods when prices are low.

If they are not honoring their contracts then that is a problem that has a legal solution. Such would be the case if they are engaging in fractional reserve banking. While fraud such as fractional reserve banking would still exist, you would buy insurance to cover your assets in the case of a bank going bankrupt. The insurance providers would approve deposits in certain banks and would keep them in check.

I think the idea of a free market in money is a very interesting one and seems to be very much in the spirit of laissez-faire capitalism, but I am quite aware of the reasons why the world has been led into using fiat money today (e.g. I believe there is credence to the "cross of gold" type arguments). The way I see it, this so-called free market in money that RP supporters talk about is going to have to be more advanced than any previous money systems (incl. the current one) and will be essentially a kind of experiment.

Obviously with new technology, the financial market can have a lot more offerings out there, but it's still the basic fundamental methods as used in the past that have been proven to work.

Essentially, free markets would allow the value of things to not be changed by those in power. Instead, it's the entire market that chooses based on the natural signals -- supply and demand of all goods and services. Less money will be malinvested. People will still make mistakes, but they wont be marketwide like we have now. No more major booms and busts.

 

[saku39]

Right, but wouldn't this push people to hoard the unit of money (e.g. gold) instead of investing it and putting it to "productive use" ?

No. People would only hoard money if they thought it it was in their best interest to hoard-- like say in situation where society and markets have broken down. Persecuted Jews in 1930's Germany hoarded whatever they had because markets were closed or hostile to them. People in New Orleans after Katrina hoarded whatever they had because markets and society pretty much ceased to work for a few days.

But in a regular market or even a market in a recession would still have people buying and selling. It's required for life.

If the money supply consists entirely of gold then it would grow at the rate of 2% (?) yearly. If output grew at much higher than that rate, then it would encourage people to hold on to their gold instead of spending it as each unit of gold would tend to buy more "output" as time went by.

Gold is practically inflation free. There is an inflation of 1-2% a year but it's negligable when you consider birth rates-- Population and economic growth always outpaces gold inflation so growth in the gold supply is essentially rendered moot.

If there was a sudden explosion of growth, people wouldn't hold on to gold, they would spend it more. Part of the concept of inflation is the idea of scarcity. The less scarce a commodity, the more valuable it tends to be.

But say there was a contraction of supply. Would people hoard? Not unless the markets and society at large stop working. People still need to buy and sell things. And interesting thing would happen, the value of money would go up. Short term, in a contraction of supply, investment would suffer, but the markets themselves would be fine. The only things that stop them are scenarios like war and natural disasters.

Wouldn't the fact that less money is now circulating in the economy lead to a depression?

You don't need to have constant injections of liquid cash for an economy to work. With gold, economic growth happens, but it isn't as fast under a fiat system. It would be steady and sustained. But booms and busts as we know them today would cease to exist.

It seems to me to be a choice between a central bank (ostensibly beholden to the government/the people) that controls a fiat money supply (ostensibly in the public interest) versus the possible emergence of (private, and without any mandated responsibilities or duties) cartels that can hoard and restrict the money supply (like has happened in antiquity).

Part of the current problem is that the central bank isn't beholden to anybody but themselves. In our case, the Fed, there is no oversight. There are no recordings or transcripts of meetings. We don't have figures on what they do for the most part. The inflation statistics that they put out are garbage. They aren't beholden to us and they don't care about us. They only care about making sure Wall Street has cash. Why else would they reward the idiots that bought up all those stupid SIVs and doomed hedge funds. Some fool makes bad investments and instead of going out of business, the Fed bails them out. In bailing them out, inflation increases.

The idea of private entities issuing currency doesn't bother me as much. It's based on a contract. When I pay Verizon for my phone, it is based on the contract we have-- They receive money for the service they provide. If they stop providing me service, I stop paying and vice versa. You can always choose another private company if you're disatisfied with the one you're currently using.

In the case of gold, I can go to XYZ company and I give them my gold, they give me a receipt or credit my account. They charge me a percentage for storing my gold. They get paid for storage and I get security for my gold. And I use a paper receipt or a debit card as currency in transactions like buying dinner, making a car payment, etc.

If they screw up or treat me wrong, they not only lose the percentage of my gold, they might get sued as well. It's in their best interest to provide a service that keeps me satisfied.

Right, but what if big interests collude to hoard the cash (which history has proven has happened many times before). This would definitely retard or quite likely even reverse economic growth.

It's practically impossible to corner the market on a commodity. The people that have tried have always failed miserably. You do bring up an interesting point-- The idiots that try not only doom themselves but they hurt market the tried to corner as well.

That is something to consider and something to talk about, however. The possiblity of tampering.

 

[RonPaulIsGood]

My view on the gold standard has changed.

I am strongly pro gold standard.

If the supply of money is constant and the supply of goods grows, then it would lead to monetary deflation.

The consumer price index is a fraud. It just measure the goods that expand and increase numerically yearly. It does not measure goods of constant supply, like housing, education and healthcare.

The cost of the goods of constant supply would raise price because the constant supply of goods can't catch up with the supply of money.

For example, the quantity of houses is the same every year, but the quantity of money expands up, so the price of homes would increase yearly. That would lead our people malinvesting by buying houses just to sell it for more money.

Too much malinvestment of houses would lead to a Great Depression. Investing in homes is MUCH more inefficient allocation of resources than money because housing costs the environment lumber and wastes the people's labor.

We want more people investing in Gold instead of the costly other stuff.

http://en.wikipedia.org/wiki/Austrian_Theory_of_the_Business_Cycle

 

[Channing]

To have a working gold standard you need to get rid of the fractional reserve banking though. If you allow fractional reserve banking to continue together with a gold standard you will always run into the problem that the money supply inflates beyond what you have in gold to back it up with. That creates a bubble with the continual danger and possibility of the currency crashing. That's why Nixon went off the gold standard in the early 70's because people were actually starting to demand gold for their dollars.

 

[DebtFree]

Actually, what causes inflation is the interest.

Consider the case of small British islands of Jersey and Guernsey:

Current examples of debt-free public money in small Islands: "The Isle of Guernsey's secret of success is the fact that it has been a "protectorate" of the British Isles for centuries and, as such, is able to make its own laws and thereby determine its own destiny. By controlling its own money supply from 1816 onwards, Guernsey was able to avoid the century old trap of borrowing when it didn't have to. Guernsey decided to issue £6,000 of their own "interest-free" Guernsey State Notes. This was in addition to the current supply of English pounds which two main banks were circulating on the island already.

By 1837, £50,000 had been spent into circulation by the government for the primary purpose of local projects such as the sea walls, the roads, a new marketplace, a church and a college. This £50,000 more than doubled the money supply. But there was no inflation. In 1914, while the British restricted their own money supply, Guernsey issued more ... another £140,000 over the next four years. By 1958, over £500,000 of interest-free money was in circulation on Guernsey and still no inflation. By 1990, there was a total of £6.5 million in circulation issued interest-free. There was no public debt as in the rest of Britain which was still paying for its war debts. And yet on Guernsey, prosperity was very much evident everywhere.

When Dr. Jacques Jaikaran visited Guernsey in 1990, he reported on the state of the Guernsey economy in his book The Debt Virus: There were about 60,000 permanent residents; the average family owned 3.3 cars; their unemployment rate was zero and their standard of living was very high. Also, there was no public debt and a surplus of public funds was earning them interest. The Guernsey Treasury increased the money supply by 50% over a 3 year period and this increase did not cause any inflation. The price for a gallon of gas in the UK was about $5, but the price in Guernsey was about $2. Contrary to the teachings of economics in all higher institutions, inflation, it was claimed, was not related to the volume of money, but rather to the size of the commercial debt. Dr. Jaikaran also mentioned that Guernsey's income tax was only a "flat" 20%. Not bad, compared to the rest of the world."

"Debt is like a cancer in society. It causes the ills of unemployment, bankruptcy, poverty and destitution, which lead, in turn, to crime and ill health. At some point in the future, at least in some countries, the rate of money-creation, increasing at an exponential rate, will be overtaken by the size of the government debt, increasing at an even faster exponential rate. At that point, all wealth will go to pay an unrepayable loan, and there will be no social services. This is already the case in Third World countries, where the real wealth of those countries is exported to pay an unrepayable debt, and where every newborn baby is already in debt to foreign banks. In the Channel Islands it is different. There, the government has not delegated the money-creating powers to the banks. There, the government creates debt-free money and spends it into the economy, rather than lending it into the economy, so that the government has no debt to the banks. Partly as a result, Jersey and Guernsey experience prosperity unknown in many countries. Income tax is only 20%. There is no VAT, inheritance tax or capital gains tax."

http://www.seek2know.net/money2.html

 

[jon_perez]

The consumer price index is a fraud. It just measure the goods that expand and increase numerically yearly. It does not measure goods of constant supply, like housing, education and healthcare.

Housing, education and healthcare are goods (and services I would add) that are in constant supply?? I beg to differ.

For example, the quantity of houses is the same every year, but the quantity of money expands up, so the price of homes would increase yearly. That would lead our people malinvesting by buying houses just to sell it for more money.

Surely you realize that homes are constantly being built and torn down, thus their quantity does not remain the same.

Too much malinvestment of houses would lead to a Great Depression. Investing in homes is MUCH more inefficient allocation of resources than money because housing costs the environment lumber and wastes the people's labor.

We want more people investing in Gold instead of the costly other stuff.

http://en.wikipedia.org/wiki/Austrian_Theory_of_the_Business_Cycle

WTF??

 

[jon_perez]

To have a working gold standard you need to get rid of the fractional reserve banking though. If you allow fractional reserve banking to continue together with a gold standard you will always run into the problem that the money supply inflates beyond what you have in gold to back it up with. That creates a bubble with the continual danger and possibility of the currency crashing. That's why Nixon went off the gold standard in the early 70's because people were actually starting to demand gold for their dollars.

Actually, it's not people, but rather other countries that held USD. The US government did not allow citizens to exchange their USD for gold at that time.

 

[jon_perez]

Actually, what causes inflation is the interest.

Actually, even top economists cannot fully agree 100% on what is responsible for inflation, although monetarist theory is what's currently in vogue and it points to a too-rapidly expanding money supply (not interest) as the culprit behind inflation.

Central banks raise their targetted interest rate (in order to try to contract the money supply) when there is a threat of inflation and reduce it if there is a threat of recession. This is a form of central planning and management of the economy although far subtler than in communism or socialism.

 

[nexalacer]

To have a working gold standard you need to get rid of the fractional reserve banking though. If you allow fractional reserve banking to continue together with a gold standard you will always run into the problem that the money supply inflates beyond what you have in gold to back it up with. That creates a bubble with the continual danger and possibility of the currency crashing. That's why Nixon went off the gold standard in the early 70's because people were actually starting to demand gold for their dollars.

Not really. You can allow fractional reserve banking, but the difference would be the banks would have be LIABLE for the risk it entails. Right now, if they over-lend and lose confidence, the government backs them up, which is basically saying it's ok to break your contract because we will fix it for you.

A free-market will work best when there is 0, zip, zilch, nada, niet, absolutely ZERO government interference.

 

[jon_perez]

A free-market will work best when there is 0, zip, zilch, nada, niet, absolutely ZERO government interference.

If you look at history, there have definitely been times where people shrank away from this view because it did not seem to be the case at all.

The Keynesian doctrine of heavy government regulation of the economy propelled the world from the end of WWII all through the 60s and only started to falter in the 70s.

It seems that in economics, truth and/or the optimal approach keeps changing over time.

 

[nexalacer]

If you look at history, there have definitely been times where people shrank away from this view because it did not seem to be the case at all.

The Keynesian doctrine of heavy government regulation of the economy propelled the world from the end of WWII all through the 60s and only started to falter in the 70s.

It seems that in economics, truth and/or the optimal approach keeps changing over time.

Who's plant are you? What planet do you come from? The Keynesian doctrine created the excess money that was necessary for the global bloodbath that was the cold war. Without the worthless inflated dollar created by Keynes' horrible economic policies, the extreme escalation of the world's military-industrial complex could not have been completed.

And truth does not change, the interpretation does, and the interpretation of most economics of the 20th century is severely flawed because it does a poor job of taking into account human action. The only school to accurately understand human action in the economic sense is the Austrian School.

The reason it's not taught is that the states took over the education system before scientific study in the field of economics. Since it was in control, it dictated the best economic systems to study for its own interests: that is, the ones that increased state power the most. And so, Keynes won, until in less than 50 short years, it collapsed. Meanwhile, it took the lives of over 150 million human beings.

So keep praising Keynes, keep praising the ability of the government to murder to increase. It's quite despicable.

 

[jon_perez]

^ Keynesianism worked for a time and then it suddenly lost steam. So that was my point... that different economic theories seem to work for different times and backdrops. Socialism seems to have worked great for Canada and Europe (at least until recently for the latter...)

Quips like "which planet are you from?" really don't serve to bolster an argument at all.

 

[nexalacer]

^ Keynesianism worked for a time and then it suddenly lost steam. So that was my point... that different economic theories seem to work for different times and backdrops. Socialism seems to have worked great for Canada and Europe (at least until recently for the latter...)

Quips like "which planet are you from?" really don't serve to bolster an argument at all.

Yeah, I get kinda emotional when people try to push economic policies that lead to the death of millions of people.

Socialism didn't work great for either from the start. Look at the national debt, think about how their children will have to pay for it, and look forward to their crash in the next 20 years. Something that was not sustainable without the fuel of war for even 100 years didn't "work." Honestly.

 

[jon_perez]

The Keynesian doctrine created the excess money that was necessary for the global bloodbath that was the cold war. Without the worthless inflated dollar created by Keynes' horrible economic policies, the extreme escalation of the world's military-industrial complex could not have been completed.

So Keynes was in on the conspiracy too? Damn, these reptiles are everywhere...

I tend to think he was a well-meaning economist who got a [heck of a] lot of things right but not everything... who had his (protracted) moment of glory but whose time seems to have more or less passed...

 

[JosephTheLibertarian]

I'd prefer free market currency.

 

[fsk]

Keynes himself was probably not in on the conspiracy.

However, he promoted the right philosophy at the right time. He was hailed as a "genius" to make sure that the politically correct ideas got promoted. Truer ideas, such as Austrian economics, got suppressed.

 

[JosephTheLibertarian]

Keynes himself was probably not in on the conspiracy.

However, he promoted the right philosophy at the right time. He was hailed as a "genius" to make sure that the politically correct ideas got promoted. Truer ideas, such as Austrian economics, got suppressed.

why?

 

[bmcosti]

The Twinkie Standard

I have heard many people especially in the Media criticize Ron Paul for his promotion of a Gold Standard. They suggest that this is completely laughable, but in all honesty our current system is a horrible failure. We have lost over 95% of the value of our dollar since 1913. When from 1800-1913 the dollar's value increased significantly (More than 70%) due to a sound money system and technological advances.

Heck in comparison to what we have today a currency backed by Twinkies would retain more value than our greenbacks today. They average dollar is in circulation for less than 5 years, and twinkies last much much longer than that.

I know I am oversimplifying it a bit, but jeez how much worse can it get?