Need Help Debating Gold Standard

[babyjohn]

i posted this link
http://www.financialsense.com/editorials/hodges/2006/0106.html

He responded

Your graphs are fundamentally incorrect--the world was on a modified gold standard until the early 1970's through the "Bretton Woods" system.

It wasn't working because (a) the gold standard requires unsustainable transfers of gold between nations to correct trade imbalances to promote unncessary currency stability, and (b) the gold standard destroys the ability of a government to control fiscal policy. The gold standard is widely believed to be a cause of the Great Depression by most prominent economic historians--from Keynesians to people like Milton Friedman.

Using a gold standard limits the ability of a government to increase the money supply in downturns and reduces its ability to limit the money supply during economic booms. These are two undesirable outcomes from a Keynesian perspective that result in booms turning into bubbles (like the 1920's) and recessions turning into depressions because the budget must be balanced and the money supply must be restricted. Of course, you could argue we have always done a bad job managing the booms, but our ability to manage a bust requires more robust economic policy.

Gold convertibility also destroys the money supply during recessions as individuals trade their dollars for gold. It is an amplifier of economy decay and not a preventor of downturns. This is the real weakness of the gold standard.

 

[MsDoodahs]

Okay, I'm no economist or anything, so wait until some of the smarter econ guys jump in, but giving it a shot...

He says "It wasn't working because (a) the gold standard requires unsustainable transfers of gold between nations to correct trade imbalances to promote unncessary currency stability"

Unsustainable isn't the right word, I don't think. Maybe "unpalatable." It does mean that nations will have to do gold transfers, and business will have to adapt to changing market conditions and they don't want to - they prefer not to work that hard.


"and (b) the gold standard destroys the ability of a government to control fiscal policy."

Yes, it does - because it forces the gov't to be fiscally responsible - and they prefer not to be.

"The gold standard is widely believed to be a cause of the Great Depression by most prominent economic historians--from Keynesians to people like Milton Friedman."

Because those people prefer easy breezy gov't largess - and a gold standard enforces fiscal responsibility onto governments.

"Using a gold standard limits the ability of a government to increase the money supply in downturns and reduces its ability to limit the money supply during economic booms."

Yes, it limits state control of the money supply - which is why it is hated. Those within the gov't prefer to gain benefit through control of the money supply.

"These are two undesirable outcomes from a Keynesian perspective that result in booms turning into bubbles (like the 1920's) and recessions turning into depressions because the budget must be balanced and the money supply must be restricted."

Yeah, from a Keynesian perspective ... and Keynes got it wrong.

"Of course, you could argue we have always done a bad job managing the booms, but our ability to manage a bust requires more robust economic policy."

Like they "managed" the depression and like they're "managing" the mess we're in today?

 

[bcreps85]

Maybe I am incorrect, but it sounds to me as if he is essentially saying that the problem with the gold standard is that governments can't manipulate it...manipulation is what got us where we are at. Obviously governments aren't going to like not being able to control the currency in a way that will allow them to be fiscally irresponsible for long periods of time before the majority of the population notices, but that is exactly why it is not good for the people.

 

[rockandrollsouls]

i posted this link
http://www.financialsense.com/editorials/hodges/2006/0106.html

He responded

Your graphs are fundamentally incorrect--the world was on a modified gold standard until the early 1970's through the "Bretton Woods" system.

It wasn't working because (a) the gold standard requires unsustainable transfers of gold between nations to correct trade imbalances to promote unncessary currency stability, and (b) the gold standard destroys the ability of a government to control fiscal policy. The gold standard is widely believed to be a cause of the Great Depression by most prominent economic historians--from Keynesians to people like Milton Friedman.

Using a gold standard limits the ability of a government to increase the money supply in downturns and reduces its ability to limit the money supply during economic booms. These are two undesirable outcomes from a Keynesian perspective that result in booms turning into bubbles (like the 1920's) and recessions turning into depressions because the budget must be balanced and the money supply must be restricted. Of course, you could argue we have always done a bad job managing the booms, but our ability to manage a bust requires more robust economic policy.

Gold convertibility also destroys the money supply during recessions as individuals trade their dollars for gold. It is an amplifier of economy decay and not a preventor of downturns. This is the real weakness of the gold standard.

I don't want to get involved too much because this has been discussed about 100 times, but he's right by saying we were on a modified gold standard.

His point on the Great Depression is invalid. Not only did he not provide any evidence to support his opinion, it's simply wrong.

To be short, just tell him he's thinking about it backwards. What causes these downturns and bubbles are precisely the thing he argues for; manipulation of the money supply. In the process of this, you destroy the value of the dollar. Numbers don't lie...purchasing power is decreased severely.

A true gold standard does prevent severe recessions.

Just a few points, but try elaborating on them a bit or doing some more research. It should steer you in the right direction, but this guy simply doesn't understand what causes the business cycle. Tell him that before he tries to argue about macro he should have an idea what he' talking about. The business cycle is fairly severe....it's not a normal fluctuation and is not some unexplainable phenomena.

 

[jclay2]

I will take a shot at this one:

(a) the gold standard requires unsustainable transfers of gold between nations to correct trade imbalances to promote unncessary currency stability, and

Why would there have to be transfers of gold? As far as I am concered, we just need the gold to be backing every dollar we introduce into the system. I am sure we could easily transfer any money to other nations with the paper bills or even electronically. This whole idea of controlling currency stability seems a little bogus. Look at the value of the dollar during the 1800's. The long term of that sucker is incredibly stable. If you look at our dollars value ever since we left the gold standard the thing just takes off like a rocket to the ground.

 

[fj45lvr]

one key thing to keep in mind is that "gold standard" doesn't, in my opinion, have to be necessarily ALL GOLD... What you really are arguing is for a NON-FIAT based currency and that is accomplished by using a MEDIUM(s) of exchange that have value whereas "paper" has nearly NO VALUE .....so GOLD is not the SOLE medium to make the non-fiat monetary system accomplish the KEY goals to LIMIT GOVERNMENTS (in their spending) and prevention of the immoral "taxation"/wealth redistribution through creating and INFLATING a paper currency by simply "printing" bills (although if you had "notes" that were "backed" I suppose a dishonest gov, bank, central bank (depending on who issues them) could NOT ACTUALLY possess the "physical" to "back" all of the notes issued (fractional reserve or NOT) (like what is currently happening with people that buy Precious Metals electronically or on PAPER and don't actually recieve the physical because either they don't want it or the reality is that there is NOT actually enough of the physical medium to recieve it at the time of purchase (and this is seperate from fractional reserve lending practices).

People that try to pooh-pooh gold backed or based currency try to say there just isn't enough to go around (not enough supply) or they wonder how it could be realistically be started when so few people have any to begin with.

It would be MUCH better to just do away with the CONSPIRACY (legal tender laws) and let various currencies be issued and the public can make their own decisions on what they will or will not accept in their various CONTRACTS. Gold works better than alot of elements because it has a standard weight and measure (for example if they used a coin the size of a nickel one can check the dimensions and then they know that if it was gold it should weigh a certain amount (and there really isn't any other substance that could be used to "counterfeit" this by being gold plated because of the specific gravity of gold...a gold plated lead coin would have to be larger than the nickel size to weigh the same.

Tantalum would make another excellent metal as well as silver and others (to assure that there would be enough SUPPLY so the money supply could grow to foster a growing and healthy economy).

 

[Zippyjuan]

Trade imbalances. If you have a trade surplus, then you have money and- if your trading partners are also on a gold standard - gold coming in. Or at least money which could be converted into gold. The US runs a trade deficit- we import more goods than we export. If you have to exchange money for this and the money can be exchanged for gold, you can lose your supply of gold to your trading partners. Your supply is contracting so if your money is directly linked to your supply of gold then your money supply is shrinking and you have deflation. Deflations are not good for the economy ust as high inflations are not good for the economy.

 

[rockandrollsouls]

Trade imbalances. If you have a trade surplus, then you have money and- if your trading partners are also on a gold standard - gold coming in. Or at least money which could be converted into gold. The US runs a trade deficit- we import more goods than we export. If you have to exchange money for this and the money can be exchanged for gold, you can lose your supply of gold to your trading partners. Your supply is contracting so if your money is directly linked to your supply of gold then your money supply is shrinking and you have deflation. Deflations are not good for the economy ust as high inflations are not good for the economy.

Wrong. You look at things as an aggregate. It is up to the free market to decide what happens....some people will accept lesser currency others will not, but you cant just say X maintains a surplus therefore it will not work.

For example, China trades with us and takes our dollars but when they are worthless they will trade with someone else. When you have the upper hand you don't compromise....people change for you...they want your wealth.

 

[Zippyjuan]

Not quite sure of your point and where you think I am wrong that running a trade deficit will not reduce the supply of gold and hence the supply of money in a country. As long as we are willing to buy from them at the price they want, they will sell to us.

If we are on a fixed gold standard, they still get the same amount of gold for their products- even if the price in dollars changes due to the depreciation of our currency. The currency exchange rate will take care of this- keeping the price in terms of gold the same. Unless the currency is fixed or pegged as the Chinese currency currently is.

The level of trade may change because of us- having less gold to buy their stuff with, not because of them.

 

[rockandrollsouls]

Not quite sure of your point and where you think I am wrong that running a trade deficit will not reduce the supply of gold and hence the supply of money in a country. As long as we are willing to buy from them at the price they want, they will sell to us.

If we are on a fixed gold standard, they still get the same amount of gold for their products- even if the price in dollars changes due to the depreciation of our currency. The currency exchange rate will take care of this- keeping the price in terms of gold the same. Unless the currency is fixed or pegged as the Chinese currency currently is.

The level of trade may change because of us- having less gold to buy their stuff with, not because of them.

You have a bit of a misconception with nothing to back it up. Do a little research instead of just speculating. The free market works itself out, Zippy.

 

[Zippyjuan]

Explain to me why it is wrong.

 

[Fox McCloud]

Rothbard pointed out that as long as we truly have a 100% gold standard, and fractional reserve banking is not allowed in any shape or form, things will be ok.

That said, if you have a 100% gold standard and fractional reserve banking, gold will flow out of the country.

We didn't go off the gold standard until, I believe, 1933....that said, the gold standard, at least in my opinion, died in 1913, as the Federal Reserve began printing more money than there was actual gold in the economy (and THAT is what caused the 1920's run up...then the Fed pricked the bubble and caused the crash of '29....and....FDR made it last over a decade with his policies....lovely, eh?) That said, the US government didn't really have to worry about the pseudo gold-standard after '33, as Americans still couldn't own gold; therefore, if everyone tried to do a "run on the dollar" by demanding gold...well...they couldn't.

That said, foreigners could still exchange dollars for gold, and this is the reason why in '71 Nixon nixed (is that where that word came from?) the pseudo-gold standard...why? Foreigners figured out we had more dollars than there was gold, so they started sucking up all the gold (hey, wouldn't you? In essence, they were getting it at a highly discounted rate....lots of dollar +$35 an ounce gold? Great buy)...therefore, to prevent all the gold from depleting, Nixon did what he did.

Not surprisingly, since then, inflation and debt have exploded.

 

[fj45lvr]

Explain to me why it is wrong.

Maybe this is similar to the bankers eventually getting all the money over time due to interest...

Obviously we can't continue in deficits perpetually (as we are discovering now).

and this is also good reason to not have Solely a "gold" based currency but something(s) else that are more readily mined and "added" to the system.

 

[Zippyjuan]

http://www.capital-flow-analysis.com/investment-tutorial/lesson_19.html

From the early 1800s until 1914, the leading world powers promised to redeem their currency in gold or silver at a fixed rate.

When banks in one country accumulated a surplus of currency of another country, they would arrange to have precious metals transferred, thereby settling the trade imbalance between the countries.

Since 1870, Great Britain, Germany, France, and the United States adopted a mono-metallic gold standard.

Under the gold standard, to settle international debts, countries had to ship gold
To settle international debts, the country that had to ship gold would have its reserves reduced, thereby being forced to issue less currency, causing temporary deflation and unemployment.

The country with excess gold could issue more currency, stimulating the economy and increasing imports or foreign investments, thereby contributing to the next cycle in the balance of payments.

 

[rockandrollsouls]

Fox is getting pretty close...but there is a little more.

I won't be telling you the answer, though. Do some research.

If you can't figure it out I'll give you some little hints. You might want to look at where you get your info from, Zippy.

 

[Zippyjuan]

The question from jclay2 was:

Why would there have to be transfers of gold?

I have offered a possible explination. You said mine is wrong. It is wrong because a gold transfer would not occur or because my explination is not a possiblity? Please explain your position.

http://www.uiowa.edu/ifdebook/faq/faq_docs/gold_standard.shtml

The foundation of the gold standard is that a currency's value is supported by some weight in gold. Inherently, it makes sense to value currency by some tangible and precious resource, otherwise, currency is just paper bills. Therefore, by tying paper money to an amount of gold, it gives the holder of the paper money the right to exchange her paper bills for actual gold. Ideally, this requires that paper money be readily exchangeable for gold. If a bank does not have gold, then the paper money has no value. But theoretically, actual gold would flow between nations to ensure that all currencies would be supported by gold.

A pure gold standard was used between the 1879 and 1914 by many modern trading nations. Under the gold standard system, all participating currencies were convertible based on its gold value. For example, if currency x was equal to 100 grains of gold, and currency y was equal to 50 grains of gold, then 1 x was equal to 2 y.

Because currencies were convertible in gold, then nations could ship gold among themselves to adjust their "balance of payments." In theory, all nations should have an optimal balance of payments of zero, i.e. they should not have either a trade deficit or trade surplus. For example, in a bilateral trade relationship between Australia and Brazil, if Brazil had a trade deficit with Australia, then Brazil could pay Australia gold. Now that Australia had more gold, it could issue more paper money since it now had a greater supply of gold to support new bills. With an increase of paper bills in the Australian economy, inflation, i.e. a rise in prices due to an overabundance of money, would occur. The rise in prices would subsequently lead to a drop in exports, because Brazil would not want to buy the more expensive Australian goods. Subsequently, Australia would then return to a zero balance of payments because its trade surplus would disappear. Likewise, when gold leaves Brazil, the price of its goods should decline, making them more attractive for Australia. As a result, Brazil would experience an increase in exports until its balance of payments reached zero. Therefore, the gold standard would ideally create a natural balancing effect to stabilize the money supply of participating nations.

The Gold Standard in Operation

However, the operation of the gold standard in reality caused many problems. When gold left a nation, the ideal balancing effect would not occur immediately. Instead, recessions and unemployment would often occur. This was because nations with a balance of payments deficit often neglected to take appropriate measures to stimulate economic growth. Instead of altering tax rates or increasing expenditures - measures which should stimulate growth - governments opted to not interfere with their nations' economies. Thus, trade deficits would persist, resulting in chronic recessions and unemployment.

Trade deficits can occur for different reasons. Country A may be larger than country B and have more money to buy goods from country B. Country A may have a resource that country B needs like say oil from Saudi Arabia which the US needs a lot of while Saudi Arabia needs little that the US has- due in part to its much smaller popluation. The flow of wealth from the US to Saudi Arabia would not necessarily lead to the US consuming less oil from Saudi Arabia or Saudi Arabia purchasing more goods from the US since they only need so much stuff. Currency exchange mechanisms would not necessarily in this case cause the balance of trade deficit to move significantly towards balanced trade between the two countries. Thus, if we and Saudi Arabia had a gold standard, gold could continue to flow towards Saudi Arabia and away from the US.

 

[shocker315]

Greenspan on gold...there is some good stuff in here you could use in your reply

http://www.lewrockwell.com/north/north204.html

 

[rockandrollsouls]

The article posted has a few important pieces of information in it. Here is a snippet with some key words.

" A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled. Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion."

And, Zippy, the scenario you describe leads me to believe a gold-exchange standard is being referred to. This is different than a gold standard. Also, your oil scenario makes no sense. Gold is money under the standard, not a long term asset. If you were to purchase oil with gold, the amount of oil you get for x amount of gold would be adjusted accordingly. I don't understand where you see a problem with this. It has nothing to do with a flow of wealth, it's using money to purchase what you need. I really don't see where you're coming from.

 

[forsmant]

The hoarding of gold would be pointless as its value is in exchange.

 

[rockandrollsouls]

The hoarding of gold would be pointless as its value is in exchange.

Yes, that's more towards what I'm saying.