Why the gold standard is still a bad idea

[Dichromate]

There's been a lot of talk, particularly on the internet over the past few years (Ron Paul fanboys) about how we should return to the gold standard

While I acknowledge that present monetary policy is insane, and that the current means by which the federal reserve and other reserve banks around the world create money, through loans, is idiotic, there are big problems with hard currency economies that preclude a return to gold backed currency.

First and foremost is the fact that returning to commodity backed currency in any form necessarily means eliminating the possibility of any sort of meaningful monetary authority or monetary policy. Some would see this as desirable, in comparison to the present state it probably is.
However it's throwing the baby out with the bathwater.
Gold is a finite resource, the rate of increase in gold supplies is limited, as is the total amount of gold that can ever be stockpiled.
While though population growth, human capital investment, and technological progress economic growth even in developed nations can continue to proceed at relatively high rates, increases in the quantity of gold cannot possibly keep up. Even if they could, changes in the total stock of gold are more or less (I'll get to this next) unrelated to increases in aggregate output.

If the money supply is growing at a much slower rate then aggregate output, prices will fall.
Gold backed currencies will NOT result in price stability.

Secondly, using gold (for instance) as backing for currency takes gold away from industrial and other applications, and would inevitably divert resources from productive endeavors to gold mining, simply because of its largely arbitrary valuation.
The bigger issue related to mining though is that it exposes the entire economy to monetary shocks through exposure to gold production - not only present gold production but also anticipated gold production.
Gold fever hitting? people expecting a lot of gold to come onto the market? well if gold = currency, that means anticipated inflation and steep increases in interest rates.
The reverse also being true, where shortfalls in gold production would then cause deflation on top of the continuous deflation due to the inevitable differences between economic growth and increases in the stock of gold. There isn't any real way of rectifying this, because we aren't talking about money being printed, we're talking about gold being mined.

Prices falling cause just as many problems as prices rising, and unanticipated changes in deflation rates, which are more likely under a gold standard then a functioning fiat system cause the same sort of arbitrary re-distributions of wealth as inflation, but in the opposite direction.

In some ways they can be worse however, particularly as far as increases in the real value of debt are concerned since if prices and wages are falling in nominal terms it can become entirely impossible to service debts. While not an issue where relatively constant deflation/inflation rates are built into interest rates, it can be a major problem when there are shocks.

If people are really so pent up about money needing to be a store of value, they ought to support a properly administered fiat money system with a monetary authority which is charged with maintaining macroeconomic stability and targeting price stability. The US fed is pretty clearly not this - attempting to print away recessions which occur in the wake of asset bubbles bursting (the dot com bubble) is never a good idea. Monetary authorities should be ambivalent to output growth. If it's so important to play around with counter-cyclical policy let governments do it through fiscal policy (with debt being sourced privately).

[benpari]

I dont really disagree with most of what you just said, but I dont believe a fiat money supply would ever be a good idea.

The gold was the actual money, not the paper. The paper is nothing but a receipt saying you own the gold, so what you are suggesting is just continuing using receipts of nothing. You are right though, just going back to the gold standard isn't the total answer.


The argument is really just about whether you believe we should try and create a honest socialist democracy or if we should work towards a libertarian republic. The first idea would be trusting the government with the money supply, and the later would be giving them little or no control over it. I think this rift of ideologies between people will always exist.

I am actually in favor of allowing multiple currencies. For example the Liberty Dollar should have been allowed to exist. Therefor instead of arguing over what the best idea is, we could just agree to disagree or in the long run see which one works better in practice.

[Dichromate]

Private currency is one idea, yeah. If a shop owner accepts payment in gold there shouldn't be any problem with that, could get complex but I'm sure if there's money in it people will come up with cash registers displaying exchange rates or gold spot rates.

Part of the 'leave it with the government' problem is that governments have screwed this up so so badly. While there are 'independent' monetary authorities in many countries they're still generally run by people appointed by governments, often in a partisan fashion.
When that happens they do silly shit... like implementing heavily counter-cyclical monetary policy to go straight from a recession into another speculative bubble so the party in power can win the next election.

One other option would be to implement a set of inflation targeting rules.
"if annualized core CPI growth exceeds 3% over the last month, raise target interest rate by 25 basis points".

Of course for that to be useful they need to stop fucking with the CPI stats.

Even something far out like that causes difficulties.
A responsible monetary authority might want to bend rules if it's clear price increases are due to temporary cost pressures (oil prices, drought).
Even if there are relative increase in prices that just happen to show up as significant inflation, unless they become built in through wage increases it probably isn't necessary to screw with things.
The moment any leeway is there though some idiot is sure to come in and ruin it.

In some ways even the old ideas of set annual percentage increases in the money supply might not be so bad. Of course they have the same problems as gold in that they're not able to act to make even half arsed attempts at combating events like a bank collapsing or a large number of defaults. Realistically are some cases when there needs to be a mechanism to expand the money supply quickly.
I guess the extent to which that's necessary depends on whether we want to go down the road of abolishing fractional reserve banking of course, (or increasing reserve ratios to 50% or something).

[moonmeister]

And the incestuous relationship between Wall Street/Federal Reserve/Washington?

What can be done about that? I mean besides having those men publicly sex each other so that it is obvious to all what their relationship is? :)

[republic]

Gold is a finite resource, the rate of increase in gold supplies is limited, as is the total amount of gold that can ever be stockpiled.
While though population growth, human capital investment, and technological progress economic growth even in developed nations can continue to proceed at relatively high rates, increases in the quantity of gold cannot possibly keep up.

. . . . .

Secondly, using gold (for instance) as backing for currency takes gold away from industrial and other applications, and would inevitably divert resources from productive endeavors to gold mining, simply because of its largely arbitrary valuation.
The bigger issue related to mining though is that it exposes the entire economy to monetary shocks through exposure to gold production - not only present gold production but also anticipated gold production.
Gold fever hitting? people expecting a lot of gold to come onto the market? well if gold = currency, that means anticipated inflation and steep increases in interest rates.
The reverse also being true, where shortfalls in gold production would then cause deflation on top of the continuous deflation due to the inevitable differences between economic growth and increases in the stock of gold. There isn't any real way of rectifying this, because we aren't talking about money being printed, we're talking about gold being mined.




This is all a non-issue. Anything of stable value can be used as a long-term currency. Any metal, any natural resource that represents equity. If the wealth exists, you can have a 'currency' to represent it. If the wealth doesn't exist, then it doesn't exist.

Money can not be an abstract concept. If it doesn't represent a tangible wealth, it isn't compatible with a free society because a fiat currency lends itself most naturally to be controlled by a central power and forced upon people.

I say 'forced', because you can't have true commodity-backed currency exist alongside a fiat currency: the true currency will always dominate. Individuals would be increasingly hesitant to accept Federal Reserve notes if silver certificates, for example, were in wide circulation. Especially in volatile market conditions like the ones we are seeing today. This is why the government has outlawed the circulation of any other currency (with a few meaningless exceptions). This is also why NORFED was robbed by the FBI/Secret Service last November.

The only people who defend an artificially manipulable money supply, are the only people who benefit from it. Namely bankers.

Hell, even the oracle Allen Greenspan used to write papers in the 70's concluding that the gold-standard was "the only currency compatible with a free society. . ." Until he was absorbed into the machine he spoke against.



If people are really so pent up about money needing to be a store of value, they ought to support a properly administered fiat money system with a monetary authority which is charged with maintaining macroeconomic stability and targeting price stability. The US fed is pretty clearly not this - attempting to print away recessions which occur in the wake of asset bubbles bursting (the dot com bubble) is never a good idea. Monetary authorities should be ambivalent to output growth. If it's so important to play around with counter-cyclical policy let governments do it through fiscal policy (with debt being sourced privately).


No monetary authority can serve any function that the free market can't take care of on it's own.
The US economy was fine before the Fed was imposed upon us, and if the Fed were to dissolve, the economy would be exponentially stronger in the long run for several reasons, not the least of which is the fact that individuals would actually have some incentive to save their money.


I'm interested in learning more about Australia's financial history as well.

[benpari]

Private currency is one idea, yeah. If a shop owner accepts payment in gold there shouldn't be any problem with that, could get complex but I'm sure if there's money in it people will come up with cash registers displaying exchange rates or gold spot rates.


Hopefully it would lead to locally based currencies and maybe 1 or 2 national currencies (perhaps the Liberty dollar). If there were something like 30 strong national currencies it would turn into a huge mess though.

[Dichromate]

This is all a non-issue. Anything of stable value can be used as a long-term currency. Any metal, any natural resource that represents equity. If the wealth exists, you can have a 'currency' to represent it. If the wealth doesn't exist, then it doesn't exist.

Money can not be an abstract concept. If it doesn't represent a tangible wealth, it isn't compatible with a free society because a fiat currency lends itself most naturally to be controlled by a central power and forced upon people.

I say 'forced', because you can't have true commodity-backed currency exist alongside a fiat currency: the true currency will always dominate. Individuals would be increasingly hesitant to accept Federal Reserve notes if silver certificates, for example, were in wide circulation. Especially in volatile market conditions like the ones we are seeing today. This is why the government has outlawed the circulation of any other currency (with a few meaningless exceptions). This is also why NORFED was robbed by the FBI/Secret Service last November.

The only people who defend an artificially manipulable money supply, are the only people who benefit from it. Namely bankers.

Hell, even the oracle Allen Greenspan used to write papers in the 70's concluding that the gold-standard was "the only currency compatible with a free society. . ." Until he was absorbed into the machine he spoke against.


If a medium of exchange is accepted as such there isn’t a problem. If currency inherently “needed” backing in order to work the entire system would have collapsed long ago.
The problems are all with what’s been done as far as fucked up policy is concerned, not anything inherently wrong with fiat currency.

A free society and a stable society aren’t necessarily the same thing.

It irrelevant whether private currencies can exist alongside fiat currency, because if we have a gold backed official currency it’s still the government backed medium of exchange and will still be enforced as such. I agree that private currency isn’t necessarily a bad idea, but gold backed dollars are an entirely different thing to that.


As for deflationary concerns being a non issue – rubbish.
If commodities are used as currencies, the money supply, and fluctuations in such are necessarily determined by the availability of commodities. This is almost certain to be deflationary in the long term, and even if it isn’t, the rate of growth money supply is entirely unrelated to the rate of growth in output. There’s no reason whatsoever price stability will eventuate and in face every reason to think it’s much worse even then how fiat currency has worked during the late 20th century. At least during the past 50 years it’s just been inflation, admittedly at varying rates, but still just inflation. Deflation, or alternating periods of inflation and deflation occurring due to fluctuations in commodities would be far far worse.
Take a look at commodity markets for goodness sake. At the moment as far as currencies are concerned only exchange rates are vulnerable to speculation. Commodity backed currencies mean the nominal money supply itself is open for screwing with, on top of being linked to supply/demand factors for whatever commodities are used.

Allan Greenspan recently testified that he had found plot holes in his favorite Ayn Rand novels too.



No monetary authority can serve any function that the free market can't take care of on it's own.
The US economy was fine before the Fed was imposed upon us, and if the Fed were to dissolve, the economy would be exponentially stronger in the long run for several reasons, not the least of which is the fact that individuals would actually have some incentive to save their money.



I'm not defending the inflationary policies of the fed.
As far as being fine, the entire world was more or less fine, cracks in the gold standard didn't start seriously appearing until the 20th century
Check out Britain's experience trying to return to the gold standard after world war one.

[Encrypted Soldier]

Gold is finite resource... but so is everything else (that's why things have prices, to limit shortages and encourage production).

Having a free market gold-backed currency would be much more preferable to what we have now. The major problem with our economy today is that the Federal Reserve injects money into credit markets, which increases the price of capital (e.g. machines), durable goods (e.g. houses, cars), and their financial derivatives (e.g. MBS, CDS, etc.). When this money leaves the credit market and then enters the economy at large, we see rising inflation - which in turn forces some people who took loans to default since they cannot keep up with rising inflation AND their loan payments. This then spreads throughout the economy and we have a recession.

Take today's financial crisis. First, we saw a bubble, occurring mainly in the housing sector. This was caused by new money entering the credit markets via the Fed, causing interest rates to drop, and therefore the prices of housing and the like skyrocketed. This made it possible to refinance a loan you couldn't pay back, which encouraged banks to make "bad" loans. However, when this money started entering the normal economy, we saw less and less people being able to keep up with their mortgage payments. Further complicating the fact was that businesses that were formed during the low-interest rate period were laying off people as inflation forced them to cut costs. This made many banks lose money, slowing the number of loans they made, therefore slowing the amount of houses, cars, machines, etc. being bought. Now we're seeing our economy in a downwards spiral, all because of the Federal Reserve's actions (with some help from the Community Reinvestment Act and Fannie Mae & Freddie Mac).

By moving back to a free market, hard currency, we can avoid this. This is because money that is created by non-governmental agencies, like private mints, enters the economy FIRST. This prevents asset bubbles from forming, and therefore prevents any business cycles from forming. For those doubting the possibility or efficiency of free market currency, I suggest you read this (http://www.mises.org/story/3168) article by George Selgin, who carried out an empirical study of free market money in the UK.

[Dichromate]

Gold is finite resource... but so is everything else (that's why things have prices, to limit shortages and encourage production).

Having a free market gold-backed currency would be much more preferable to what we have now. The major problem with our economy today is that the Federal Reserve injects money into credit markets, which increases the price of capital (e.g. machines), durable goods (e.g. houses, cars), and their financial derivatives (e.g. MBS, CDS, etc.). When this money leaves the credit market and then enters the economy at large, we see rising inflation - which in turn forces some people who took loans to default since they cannot keep up with rising inflation AND their loan payments. This then spreads throughout the economy and we have a recession.

Take today's financial crisis. First, we saw a bubble, occurring mainly in the housing sector. This was caused by new money entering the credit markets via the Fed, causing interest rates to drop, and therefore the prices of housing and the like skyrocketed. This made it possible to refinance a loan you couldn't pay back, which encouraged banks to make "bad" loans. However, when this money started entering the normal economy, we saw less and less people being able to keep up with their mortgage payments. Further complicating the fact was that businesses that were formed during the low-interest rate period were laying off people as inflation forced them to cut costs. This made many banks lose money, slowing the number of loans they made, therefore slowing the amount of houses, cars, machines, etc. being bought. Now we're seeing our economy in a downwards spiral, all because of the Federal Reserve's actions (with some help from the Community Reinvestment Act and Fannie Mae & Freddie Mac).

By moving back to a free market, hard currency, we can avoid this. This is because money that is created by non-governmental agencies, like private mints, enters the economy FIRST. This prevents asset bubbles from forming, and therefore prevents any business cycles from forming. For those doubting the possibility or efficiency of free market currency, I suggest you read this (http://www.mises.org/story/3168) article by George Selgin, who carried out an empirical study of free market money in the UK.

You haven't addressed the problems with hard money economies.
Furthermore the US federal reserve is not the only possible fiat money system.

Poor explanation for asset bubbles - they are *fueled* by cheap credit, but speculative bubbles come up and sustain themselves until reality stops them.

Take housing.
If annual rental income is R and the interest rate is r, the value should be
R/r, which is the amount of money you'd need to have on hand to get that return.
Obviously there's risk adjustment and whatnot too.

When people start building expected capital gains into valuation for land, it becomes self sustaining, and inherently unstable.

Then it's a self sustaining cycle - people buying land in order to reap capital gains, which themselves only materialize because of people buying houses in order to reap capital gains (driving up the price).


It's rational to participate even if you get whats going on
- as long as you're not the sucker holding the bomb when it finally goes off.



When interest rates are artificially low, what's actually happening is when the demand for loanable funds is such that they'd increase, the monetary authority provides more funds in order to hold them steady at the target rate.
(interbank overnight rate in many countries is the rate that the central bank "rigs")
This is in some ways a problem with not having freely floating interest rates, but there are plenty of ways to have floating interest rates without having a gold standard.

More to the point though, the fed fucking up is a reason to get rid of the fed, however that doesn't automatically make the gold standard a good idea.

Finally, I can't help but think you're leaving out the role of the abysmal private savings rates in the US.