Patterico's Pontifications

5/5/2014

Why Not the Gold Standard?

Filed under: General — Patterico @ 7:59 am

Nothing gets you derided as a crank faster than talking about the gold standard. In the past, I have associated such arguments with lunatics.

But I recently read Murray Rothbard’s “What Has the Government Done to Our Money?” (available for free here), and it makes a lot of sense. I want to throw it open to the readership, then: why not the gold standard?

Clearly, we’re talking theory here, just like we are when we talk secession. Nobody is going back onto the gold standard when the government has most of the gold and has zero intention of cuffing its own hands and preventing runaway inflation — the very thing government will be forced to resort to when all other attempts to deal with the debt have failed.

We’re talking theory.

The traditional argument against the gold standard, I think, is summed up in two arguments, one theoretical and one historical. The theoretical one is that, due to the ever-growing population and thus ever-growing economy, we need a medium of exchange that will keep up with that growth. Otherwise we go into a deflationary spiral. Historically, people argue that countries’ going off the gold standard coincided with their getting out of the Great Depression: those that were never on it were fine, and those that were on it, suffered until they got off. The traditional view is encapsulated in this Planet Money podcast, and depends on the idea that it was scary to have a gold standard because when times got bad, everyone wanted to cash in their money for gold, and there wasn’t enough gold to go around.

Rothbard’s argument is too detailed to sum up in a single blog post, but I think it reveals the fallacy of the historical perspective: after World War I, countries weren’t really on the gold standard anyway. They were on a modified and fraudulent gold standard — one that, like fractional reserve banking itself, relied on the idea that people with pieces of paper representing gold (or deposits) weren’t actually going to cash them in. Rothbard points out that, if you don’t have the gold needed to redeem someone’s piece of paper, it was fraudulent to issue those pieces of paper to begin with.

When we had something much closer to a non-fraudulent gold standard, in the 1800s, we actually did pretty well.

As for the theoretical argument, I’m no economist, but I’m not as scared by deflation as some. Deflation happens in the home computer market, for example — prices are always decreasing for better goods — and somehow we all live. Deflation might be worrisome in a hampered market economy, where unions see to it that wages are fixed and can’t fall below a certain level, and other forms of regulation interfere with the natural operation of the market. But in our theoretical unhampered market economy, deflation doesn’t sound that scary to me; prices and wages might nominally be lower, but purchasing power is likely to be strong, and the economy will adjust.

Collectively, you folks know way more than I do. Today seems like a slow news day, so let’s talk about this. What are your thoughts?

86 Responses to “Why Not the Gold Standard?”

  1. I love goooooooold!!!

    Johann Van Der Smut (dda60e)

  2. I kind of agree. I think our problems today can be traced to our abandonment of the Bretton Woods “semi” gold standard in 1971. On the other hand, Milton Friedman gave me the impression that he blamed our strict adherence to the “real” gold standard (or at least a similarly tight monetary policy) for the Great Depression. On the third hand, currency valued by a nation’s productiviity is an uncertain, ephemeral standard, even though it is much loved by free market internationalists. If I had to pick, I’d go back to the Bretton Woods standard, with all its complexities, regulations, and damping of international trade.

    nk (dbc370)

  3. I think the real problem is that no currency is really worth more than a nation’s productivity, even a “hard currency” backed by a valuable commodity because there are limits to both the possession of the commodity and to its demand. Gold, silver, oil, really only set a little bit higher floor for the crash when a nation suffers an economic downturn.

    nk (dbc370)

  4. Maybe our government doesn’t have all the gold. Anybody check Ft Knox lately?

    Otto Maddox (990b3b)

  5. We haven’t for a long time, Otto. That’s what Nixon was faced with when Switzerland and others started cashing in ther gold certificates and essentially forced us to go off the gold standard entirely (or conquer South Africa, I suppose).

    nk (dbc370)

  6. Deflation depresses economic growth.

    In a deflationary economy, you would rather not buy today, because your money will buy more tomorrow. So you defer spending as long as you possibly can.

    But this means there is lower demand for goods and services, which means that there are fewer jobs for people to produce those goods and services, which in turn causes lower demand because the not-employed people can’t buy stuff with money they aren’t earning, etc.

    aphrael (db1491)

  7. “When we had something much closer to a non-fraudulent gold standard, in the 1800s, we actually did pretty well.”

    No, not really.
    Things were mostly stable when we had the national bank, but then Jackson killed it and we promptly went into a depression.
    Even when the bank was gone and the Civil War passed, the last third of the 19th century was a thorough mess with bank failures a regular occurrence. (Over 50% failed during the “Free Banking Era” IIRC.) Naturally that will be blamed on the banks issuing paper money, but that evades the core problem of a bullion currency which is, as you mentioned, flexibility – the lack of enough bullion in circulation to meet demand.
    This was aggravated by the U.S. flitting back and forth between the gold standard and the bi-metallic standard (the Free Silver Movement).
    And of course that doesn’t even cover how bad things were before 1800 when the U.S. was struggling to get a currency after decades of abusive British monetary policy.

    Fundamentally, the problem comes down to using a direct commodity, which is subject to supply and demand for purposes other than use as currency, as a currency.
    As long as people want gold for anything other than money, the government setting a price/value for gold is going to ultimately be as successful as every other attempt at price fixing. Sooner or later the market price is going to be sufficiently different from the face value of the coinage and your currency will be hoarded, exported, or dumped on the market, causing all the expected effects. This will be further aggravated by the appearance of new sources, the exhaustion of old sources, and market manipulations.

    As for overall supply in relation to market growth, simply looking at deflation is just scraping the surface. With a government limited, though not fully finite, money supply, economic interaction very much becomes a zero-sum game. If you have an ounce of gold someone else does not have that ounce of gold. If your 100 bushels of wheat goes from being 1 ounce of gold on the market to 1 ounce of silver on the market because of that deflation, you are very much on the losing end of the economy.
    This is why fractional reserve banking came about in the first place – to increase the money supply. Before then you had to just adulterate your currency – putting half the gold in a gold coin than you had before and expecting to get away with it.
    It is also why Mercantilism came to be an economic policy in the first place – every country wanted to keep their gold at home and so instituted protectionist tariffs to keep it from going away.
    This is also why overall economic activity did not explode until we moved from a limited currency to an unlimited currency. It was not enough to simply have more raw materials and finished products on the market as the same money supply had to be divided up between them. Only when the money supply could grow with the increased supply of both raw and finished products could overall wealth grow as well.

    That last leads into examining just how you could go back to a gold standard if the government were willing to do so.
    How much is each bit of gold going to be worth?
    Do we have enough gold at the current cost to cover the amount of dollars we have out there?
    If we do, do people realize how big that would make each gold coin? (Hint: A few grains.)
    Where does that leave the economy with all the gold-bugs as the new billionaires and everyone else scrambling?
    Or do we go back to the value of gold before we left the gold standard and everyone who owns gold now is dispossessed?

    So in theory:
    Gold is not the economic panacea Rothbard and others like to portray it as. It is subject to government manipulations and general inflation just like any fiat currency, and value swings like any other commodity.
    Even if we did decide to take on all the problems of a gold standard, implementation would be a disaster on the scale of Obamacare. You would have to pick major winners and losers, and you would turn much of the economy into the zero-sum game the Marxists like to use as a club against free market capitalism specifically and free government in general.

    Sam (e8f1ad)

  8. That’s what the advertising industry is for, aphrael! ;) Not to mention the natural gluttony of the American consumer that Google, Amazon, and Apple owe their very existence to.

    nk (dbc370)

  9. What is “money” anyway, but a medium of exchange for assigning the wealth of a society? For the value of money to be stable, it has to be pinned to that wealth. Very generally, when money increases faster than the wealth, you have inflation and the other imbalance gives deflation.

    There are other factors, of course, such as popular perception: if people believe that their money is becoming worthless, they will attempt to spend it on wealth quicker than normal and that will also cause imbalance.

    The problem with gold is that its increase is generally unrelated to the wealth of society. The same for any other commodity. Further, gold isn’t even useful for wealth creation and has little to do with modern ideas of wealth. We are long past the time when land, gold and serfs was the set of all wealth.

    A barrel of light crude would be a better choice in today’s world than an ounce of gold. Or perhaps a kilowatt-hour of electricity. These at least have some relation to wealth creation.

    Kevin M (b357ee)

  10. In a deflationary economy, you would rather not buy today, because your money will buy more tomorrow. So you defer spending as long as you possibly can.

    In an inflationary economy, you would rather not sell today, because your goods will bring more money tomorrow. This can cause positive feedback if the goods are critical to the economy (e.g. do you pump your crude oil now, or wait?).

    Although if either change is slow enough, it won’t affect your behavior (you buy because you want the goods NOW, not later; you sell because you can put the money to use NOW, not later).

    Kevin M (b357ee)

  11. I would say the reason to not go on the gold standard is because it makes no difference. Gold isn’t actually worth anything either…meaning, the value of both gold and paper money is in the trust that someone will honor an exchange for it. Sure, the gold will hold up better to that trust, so it does have a stabilizing value…but only to the sense that you have a real gold standard.

    The real issue with our currency resides in the falling trust we have in it. Until we repair that, a gold standard won’t matter. (This is why the Feds hate BitCoin, it’s vastly more credible than the government issued currency and it freaks them out because they can’t track transactions)

    Now, the real problem with the US economy is the level of debt everyone carries. People work to pay off debts these days. We’ve had a government that encourages people to take up some indentured servitude (To pay off mortgages or student loans).

    DejectedHead (a094a6)

  12. I think BitCoin is the more promising alternative. Decentralized, relatively inflation-proof, and (importantly) suited to online transaction. Basically, I agree with DejectedHead.

    Leviticus (1aca67)

  13. They’ll never go for BitCoin because they want to track every transaction. They view it as essential to track the money supply and all your transactions. They’ve tied it to taxing authority and used the dollar to enforce bans (such as drug bans). The money supply is more a weapon/tool to the US Government.

    As an interesting aside, Bill Gates is working on a digital currency that the US can track using technology similar to BitCoin. That may be the direction they’re going to head.

    (Combine that with the Common Core push also by Gates and the biometric data they collect on students…they could be setting up a new monetary system tied to individuals. Kind of worrisome what they could do with a system they control that is like that.)

    DejectedHead (a094a6)

  14. Sigh.

    nk (dbc370)

  15. I think you answered your own question right here:

    after World War I, countries weren’t really on the gold standard anyway. They were on a modified and fraudulent gold standard — one that, like fractional reserve banking itself, relied on the idea that people with pieces of paper representing gold (or deposits) weren’t actually going to cash them in.

    It boils down to self-control of those printing the bank notes. Economic failures are failures of societies to be honest with themselves about what things are actually worth. Any society on any standard can lie to itself about the nature of reality to the point that a correction will occur. The longer the lie, the deeper the hole and thus the longer the correction.

    Plus, what would happen if some breakthrough in nano-technology essentially enables alchemy?

    WTP (d553bf)

  16. At one time silver was the real money. Gold was also considered money. You had the gold standard because gold is rare and more valuable, and more difficult to debase because will pay money to check it, and because bimetallism is not stable, because the ratio of the value of silver to gold is not stable.

    But it is equally true that gold has no permanent stable value.

    Nowadays, gold is not considered money by anyone except maybe in the Arabian peninsula.

    There some people made a mistake in keeping their savings in gold, because Saddam Hussein stole it in 1991. Land is somewhat better, but governments can confiscate it.

    Milton Friedman said you might a well make the standard pork bellies (which by the way now, have practically ceased to trade)

    That’s one issue.

    Another issue is, maintaining the stable value of money best for most people, or even non-disastrous. In 1931, nations found they could not maintain the gold standard – they just could not.

    Sammy Finkelman (d22d64)

  17. WTP @15: Nano-technology would not be the place I would look for the creation of gold. Try a supernova. However, Maxwell’s Demons, an end point for nano, would be quite handy in extracting gold from other media … like sea water. Grab yourself about 10**23 atoms of Au, and you’d have enough for a small coin.

    Meantime, Italy and Germany are wondering what happened to the bullion they left with us for safe keepng during the Cold War. It seems to have been “loaned” to someone who doesn’t have to return it any time soon. The bars no longer exist in the vaults where it was supposed to have been stored … for safe keeping.

    The Constitution called for a gold- and silver based currency with an exchange ratio of 15 to 1, as I recall. We have been blessed with five or six generations of genius progressives who have nearly undone everything our Founding Fathers created for mankind, and fiat currency is just one example of the modern folly. Notice that the Fed is still buying large quantities of Federal debt. This is done by creating currency. So far, the banks haven’t loaned much of this stash, but when they start, Katy bar the door. It is interesting to speculate on what the market clearing interest rate would be for Federal debt absent the Federal Reserve’s manipulations. Krugman not withstanding, it’s pretty clear that giving enormous wealth to the upper class via these interventions doesn’t trickle down for everyone else’s benefit. For five years middle Americans in retirement have been cashing in their principal to compensate for artificially low interest rates. And the progressives pretend to wonder what’s happened to the middle class. lol!

    bobathome (c0c2b5)

  18. Rothbard points out that, if you don’t have the gold needed to redeem someone’s piece of paper, it was fraudulent to issue those pieces of paper to begin with.

    When we had something much closer to a non-fraudulent gold standard, in the 1800s, we actually did pretty well.

    No, actually there was a terrible depression that started in 1893, which only really came to the end with the discovery of gold in the Transvaal (in the Boer Republic) and in Alaska in 1898. That’s why William Jennings Bryan didn’t run on the issue of free silver again in the year 1900, as he had in 1896, but on the issue of imperialism.

    Today the New York Times has a story about a shipwreck in 1857, whose loss may have caused the Panic of 1857.

    X Still Marks Sunken Spot, and Gold Awaits

    When it sank, the Central America was steaming toward New York with a cargo meant to strengthen the city’s banks. The 280-foot vessel was carrying so much gold — commercial and personal riches from the California fields estimated at three tons, as well as a rumored secret federal shipment of 15 tons — that its loss contributed to the Panic of 1857, considered the first global financial crisis.

    There was no way to replace that gold. As for not having fractional reserves, that’s not going to happen. And why not then use the gold itself? Because paper is more convenient? Will you stop people from making loans?

    They called them Panics because of how it worked in the financial markets – at that time many loans could be “called” on short notice – but they were really what later were called depressions – even at the time, and after 1937, recessions..

    In the United States we had the Panic of 1837 (caused by Andre Jackson suddenly demanding specie for the purchase of land – that is, “hard money” that is the gold or silver standard) the panic of 1857, the panic of 1873 (believed by many to caused by Congress going more toward hard money) the panic of 1893, and the Panic of 1907
    (where a depression was averted by the actions of J. P. Morgan)

    Any reduction in the money supply is bad – of course one way to avoid it is not to expand it , or not to have a bubble in the first place.

    Sammy Finkelman (d22d64)

  19. Nano-technology would not be the place I would look for the creation of gold. Try a supernova.

    Yes, well those are a bit hard to control in the laboratory, let alone setting up a production line. The point is we are looking for a god to control our impulses by trying to find a finite resource to bind ourselves to. But we can then simply change the law that binds us. The problem lies not within our laws but withing ourselves, Brutus.

    WTP (d553bf)

  20. “Meantime, Italy and Germany are wondering what happened to the bullion they left with us for safe keepng during the Cold War.”

    bobathome – Germany decided it wanted to keep its gold reserves at home and began repatriating them. Anonymous sources began spreading rumors that the U.S. no longer held the physical quantities of German gold reserves they said they did. People like Glenn Beck and Zero Hedge began reporting those anonymous rumors as fact, giving them credence.

    Has any shortfall actually been uncovered or is this just another loony conspiracy theory at this point?

    daleyrocks (bf33e9)

  21. The big problem with gold is we don’t own any.

    Yes, we owe others, e.g., Germany, hundreds of tons but our creditors have it and we don’t.

    gary gulrud (e2cef3)

  22. 20. “The absence of evidence, is not evidence of absence.”

    It does help to be looking, when one utters cautions implying lunacy.

    Due diligence creates an air of credibility.

    China has taken delivery of 2500 tons of gold since the trouble in 2008. That we know of.

    gary gulrud (e2cef3)

  23. “Yes, we owe others, e.g., Germany, hundreds of tons but our creditors have it and we don’t.”

    gary – You are saying we pledged German gold as collateral elsewhere? You know this how?

    daleyrocks (bf33e9)

  24. 23. Yahoo/Google/Bing might be your friend, but reluctantly.

    http://www.silverdoctors.com/german-calls-for-gold-repatriation-intensify-as-fed-refuses-to-allow-inspection/

    Of the 1500 tons that repatriated to date is 5%. The Fed says they will comply over a period of time, not to predate 2020.

    Finland has leased the US its gold.

    http://www.zerohedge.com/news/2013-01-16/all-aboard-gold-repatriation-train-first-germany-next-netherlands

    The tack in play until recently was for the BIS to bid down the paper price of gold, undermining the price of the physical metal.

    Over the last couple of years gold has appeared on JPMorgan’s accounts of unallocated stock and been briskly snapped up. The JPM bank is literally across the street from the NY Fed.

    gary gulrud (e2cef3)

  25. Another intrigue that bubbled into view recently is that Turkey has secretly been the mediator of gold for oil payments to Iran.

    I’ll try to find the dirt on that but may be not immediately.

    gary gulrud (e2cef3)

  26. The Chinese hoard, of course, includes other metals besides gold.

    Notably iron, copper, aluminum and rare earths. No doubt I’ve neglected others of importance.

    gary gulrud (e2cef3)

  27. Last time I checked the German gold reserves story, which was several months ago, I saw nothing from the German government indicating that the U.S. would not give the gold back and nothing from the U.S. government indicating they would not give it back. Every source was outside the government or if inside the government anonymous, which is why it sounds like complete, unadulterated BS.

    daleyrocks (bf33e9)

  28. 26. A significant player in the Chinese yuan crash is that its copper stocks were pledged as collateral.

    The sinking of the global economy, of Chinese real estate, the turn down, now into its fourth month of Chinese PMI have depressed commodities.

    Thus the collateral has lost value, rendering the bonds and loans financed on the back of copper higher risk and not tradable.

    gary gulrud (e2cef3)

  29. 27. Yeah, the truth is inaccessible. Naturally, when that happens people are agitated and easily aroused to panic. But I would never feed the panic.

    Not me.

    gary gulrud (e2cef3)

  30. Why gold? Because it is portable and you can stuff in in your closet? Why not some other fungible commodity? Anything you choose will limit money to the amount of the commodity. Whether it increases rapidly, is static or fluctuates madly, there are problems.

    Why not base it on some abstract collection of wealth, like home mortgages? Oh, you say they tried that?

    Why not kilowatt-hours? Let’s say that a dollar entitles the holder to 10 kilowatt-hours of energy. Problem here is that you WANT the production cost of energy to go down, so this is planned devaluation and/or planned expansion of the money supply. I suspect this won’t work well, but it is at least possible it will track wealth better than gold.

    Alternatively you could use an actually useful commodity like crude oil, but you’d be burning your money.

    Kevin M (b357ee)

  31. “Yeah, the truth is inaccessible.”

    gary – What truth. The only reason that the Fed does not allow people to inspect their gold is because it is not there? Try again.

    daleyrocks (bf33e9)

  32. gary – Maybe Germany could ship all that gold back from New York at one time on an armored train on the intercontinental railroad? Whaddya think?

    daleyrocks (bf33e9)

  33. 27, 30. The Chinese and Indian lust for gold predates the history of civilization.

    But the hoarding of commodities, especially oil, in the practice of cotango, arbitrage of futures prices is very, very big business.

    With the Baltic Dry Index near a all time low, supertanker rents are historically low and many sit in the Indian Ocean outside the shipping lanes, full to the brim with an Indian security officer or three just waiting out the quarter.

    People with big money play long games, e.g., Buffett.

    gary gulrud (e2cef3)

  34. 32. They’re not allowed to build battleships, are they?

    As to your point, which I carefully avoided, no I don’t have any evidence that China cut off pinkies and threatened to dump $1.75 Trillion of US Treasuries onto the market coercing hundreds of tons of gold out of DC.

    But something’s going down.

    gary gulrud (e2cef3)

  35. gary – Buffet does play long games, but I was not aware he did it in commodities and metals.

    daleyrocks (bf33e9)

  36. 31. Sorry, that’s a two way street.

    “Everything is well!!!” needs undergirding just as surely.

    gary gulrud (e2cef3)

  37. “As to your point, which I carefully avoided”

    gary – Yes, yes you did. It appears to be Fed policy to prevent physical inspection of gold inventory by owners. No conspiracy. Next, who determined gold repatriation schedule? Members of German parliament are complaining, but according to your link which parrots what I originally read, Bundesbank is not.

    How much gold is prudent to risk in a single shipment back to Germany and could they obtain insurance coverage for it? I think those questions explain the elongated repatriation schedule better than an unsubstantiated missing gold theory.

    daleyrocks (bf33e9)

  38. 35. Why can’t we haz a Keystone Pipeline?

    http://www.valuewalk.com/2014/05/berkshires-34b-bnsf-railroad-investment/

    Betcha Warren has an idea.

    gary gulrud (e2cef3)

  39. 37. A process of deduction, m’boy.

    http://en.wikipedia.org/wiki/File:World_Gold_Production.png

    Despite the efforts of the BIS in gutting the ETF market for gold, somebody has a powerful habit.

    China is the worlds largest producer.

    Now why would the West be blowing billions and selling all its ‘unallocated’ physical gold in an effort at keeping the price down?

    Possibly to buy it back when the price is relatively cheap? Obviously that much is certain. But how far does it go to explain the behavior?

    gary gulrud (e2cef3)

  40. All “stores of value” are ridiculous since they act as claims on future worker productivity. The second the workers decide not to accept it — it becomes worthless.

    Gold standard is bunk since the store of value has no practical value. Can’t eat gold. Can’t live in gold. Gold does not cure disease. Might as well have “the wood standard.” At least wood has purpose that a consumer may be willing to work for to obtain.

    But instead of esoteric economic mumbo jumbo — how about we export more, import less and stop spending so much as a nation. Maybe we can incent savers to save instead of constantly expecting this nation to “consume itself” back to “wealth” while ignoring pro-supply policies entirely.

    Any oxymoron if one ever existed but one plenty of imbeciles left and right think exists. Like Food Stamps create wealth — lol. Or broken windows stimulate wealth creation.

    Sitting around storing gold does not make macroeconomic sense at all.

    But whatever,,,,,

    Rodney King's Spirit (ca9e04)

  41. If one looks to the history of gold, and the U.S., one finds that through the first 142 years of the United States, the price of Gold was maintained at $20/oz, and the economy went through the normal ‘business cycles’ of boom and bust, but the currency was stable.
    Since the government began spending much more than it was taking in, with very little prospect of ever reducing that debt since the net debt always increased and only rarely (if ever) decreased, the currency has not been stable.
    Some would say – and have said – that it would be better for prosperity to emphasize a strong, stable currency, than to flood the country with printed money in an attempt to maintain prosperity at all costs – The Fools!

    askeptic (8ecc78)

  42. Gold standard is bunk since the store of value has no practical value. Can’t eat gold. Can’t live in gold. Gold does not cure disease.

    Exactly. Which is why if you invested in twinkies and bullets a few years back (if I only followed my own advice) and sold at the peak of both a year or so ago, you’d be in the pink. Ask “pink what?” and we’re back to square one.

    WTP (4090b3)

  43. Buying stocks the price of which is 40 times their earnings also seems idiotic. But the expectation is the value will rise and can be sold before it falls.

    Once upon a time, China could trade the hundreds of billions of dollars it got in return for toys, and tools, and formaldehyde foam insulation, and gypsum dry wall for US Treasuries that had a plausible ROI.

    That play has not existed for years.

    gary gulrud (e2cef3)

  44. Buying stocks the price of which is 40 times their earnings also seems idiotic.

    Yeah, said that about Amazon during the dotcom bubble. No way was it worth 300 times earnings. 15 years later, I’m still wrong.

    WTP (d553bf)

  45. A complication in attempting to have the Federal Government live within our means….

    askeptic (8ecc78)

  46. A number of comments have asked “why gold?” As RKS pointed out you can’t eat it.

    The best reason I can come up with is that it is very hard to counterfeit. With a density almost twice that of lead or silver, one cannot easily make a fake gold coin. A little tub of water, a scale, and the density can be determined. If it’s around 10 times that of water, avoid it. If its 17 to 19 times that of water, it will be worth something even if it isn’t gold. (Osmium, iridium and platinum come to mind. Avoid the first by all means as it is poisonous.) And gold has other physical properties that facilitate ready identification. Compare this to the U. S. $100 bill. Try as they might, the N. Koreans seem to be very adept at duplicating our best efforts. The lastest version has some kind of strip in the middle … it’s all hopeless. Oh, and on RKS’s point, gold can be “salvaged” even if you need to eat it.

    bobathome (c0c2b5)

  47. It’ not true that gold–or any commodity currency–is proof against inflation. When Spain and Portugal imported gold from the New World prices rose, and kept rising because they kept doing it. More gold and silver was chasing the same amount of goods. The saying in the 16th century was, “In Spain everything but gold is expensive”.

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

    Nowadays we are far more likely to have the deflationary problem. If your economy grows by 5% this year, so had better the output of your mines. If your economy grows at 4% per year for 17 years, you will need to double the total gold in circulation. It simply cannot be dug out fast enough. Such quantities do not exist.

    Gabriel Hanna (5afcf7)

  48. “A process of deduction, m’boy.”

    gary – Exactly! Pay attention. Nobody directly involved in the gold repatriation process is claiming the reserves are missing or that the U.S. will not give them back on a timely basis, hence it is just another half baked conspiracy theory bought into by people not inclined to do any fact checking.

    daleyrocks (bf33e9)

  49. Gold standards carry their own baggage. I’d go with Milton Friedman’s recommendation that we replace the Fed with a computer that has been programed to increase the money supply at a constant, predetermined, publicly acknowledged rate.

    As Friedman once commented: “The Fed has had very few periods of relatively good performance. . . For most of its history, it’s been a loose cannon on the deck, and not a source of stability.”

    ThOR (130453)

  50. Thor, that sounds good but then the computer will be our god. Who gets to program the computer? Or run it? I’m not trying to be facetious (actually it comes quite easily so I don’t have to try) but ultimately some one has to be responsible. Or design some form of checks-and-balances on the money supply as we do with federal government power. Where to start with that I have no idea.

    WTP (24fa3a)

  51. Despite all the flaws of the fed, I’d rather have it run my monetary policy than the Anglo American Mining Corporation.

    matt d (7b78f2)

  52. On average the total amount of mined gold increases by about 1% per year. Nearly all the gold ever mined is still being used. It’s simply impossible to keep up with and average economic growth of 3% per year, which is what we’ve had the last century.

    In that time the value of goods and services produced has multiplied eightfold in real dollars, but the total amount of mined gold has only doubled. If the dollars had been gold this simply could not have kept up.

    Gabriel Hanna (5afcf7)

  53. Gary Gulrud,

    How much gold are you hiding in your underground bunker ?
    Also, do you own a 1911 Honus Wagner baseball card ?

    Elephant Stone (6a6f37)

  54. It boils down to self-control of those printing the bank notes.

    Or, fear of the electorate, should the printing of excess bank notes cause runaway inflation. (Everyone knows the Chairman is political.) We have benefited from inflation for the last century and from going off the gold standard. The trick is to control it, which as of now we are not. We are trading stability for gee gaws and, of course, votes for soulless pols. I agree with Friedman: a computer would be much better.

    Seems to me that once you stop simple bartering, it gets really complicated. From what Sam says, our unlimited currency is sort of a return to bartering, but on an international level.

    Patricia (be0117)

  55. Creditor nations want a strong national currency backed by a tangible asset such as gold reserves. Debtor nations on the other hand require a fiat currency, which can be devalued if necessary on a whim. The deflationary spiral of the Great Depression was not caused by the gold standard. The primary proximate causes were credit drying up after the ’29 crash and then increased import tariffs by the Hoover Admin. and Congress. Given that in our descent into Idiocracy we’ve become not only a debtor nation but a broke debtor nation unfortunately we need a fiat currency unencumbered by hard asset backing. At this stage of our circling the drain there is no other viable solution. Going back on the gold standard now easily could result in a debt service laden collapse.

    Lawrence Westlake (4fc30a)

  56. Hi all,

    I happned to stop in and thought I’d comment.

    Read this essay to understand why some sort of monetary standard ‘linking’ the idea of money with the reality of goods and services makes sense and then why gold is likely the best option.

    http://www.polyconomics.com/index.php?option=com_content&view=article&id=1277:a-gold-polaris&catid=32:essays

    As for Friedman and his “steady growth of the monetary supply of 3% a year”. We tried that and failed (as did Thatcher, until the 80s). The reason why is the supply of money in the economy should reflect the demand for money, which is dependant on economic activity and opportunity and will change. Therefore unchecked growth of the money supply at some pre-determined rate means there will be times where there is too much money (leading to inflation) and times when there is too much (leading to deflation).

    If the demand for money is dynamic, the supply should be as well. This is why some monetary anchor (or in Wanniski’s version – the “Polaris”) is necessary. The PRICE SIGNAL of the product determines the market’s view of whether there is too much or too little liquidity, generating price changes in the Gold price, informing regulators whether to sell or buy gold, thereby increasing or decreasing money in the system.

    The key here is it really doesn’t matter how much gold there is, nor how much you own, although owning some probably helps with the psychology of the market. The fact that it is the US Treasury buying or selling is what counts. The market will not fight the Treasury.

    Anyway, read Wanniski. Really an unsung hero of the supply side movement. (And he’d argue, along with being acussed of other controversial positions, that supply side and demand side function together. Rightly so IMO.)

    BPGinNYC (cfb116)

  57. 48. “Pay attention”?

    Said without a trace of self-awareness. Are you aware, for example, that several bars of bullion within the NY Federal Reserve stash have turned out on delivery to be Tungsten, or Wolfram. An element of very similar density, merely having a much higher melting point of 4000 degrees F.

    Your assumption is that our government is competent and honest until proven otherwise. You, frankly, are a not a model of sagacity.

    gary gulrud (e2cef3)

  58. 53. Actually, none to speak of, Resident Evil is a Winter, platinum, silver and a little white gold.

    I suppose our debts are close to equivalent with our assets, maybe we’re in the black.

    gary gulrud (e2cef3)

  59. 56. Thanx for your contribution, we do not have a lot of financial expertise around here, and no doubt I’m proof of that.

    It is my impression, and I routinely site as fact, that the notional debt floating about the world economy is backed by collateral in the single digit percentiles.

    Some believe that in China, e.g., that the shadow banking system accounts for 50% of credit and that the bonds and loans extended by the sector may approach 30% in danger of default.

    The Central Bank, the PBOC, will back up the official banks, but the locale governments are in far worse shape than ours. The cascade of failures to pay causing others in turn has begun and will pick up steam.

    The same will occur in every corner of the world.

    gary gulrud (e2cef3)

  60. As I said, best we go on the “Wood” standard.

    At least wood is useful and something anyone is willing to work for in exchange for his/her goods and services. Or pork bellies standard too. Folks like bacon.

    That way at least money supply goes up with actual product volume and inventory.

    Rodney King's Spirit (ca9e04)

  61. “The Constitution called for a gold- and silver based currency with an exchange ratio of 15 to 1, as I recall. ”

    No ratio. But it does give Congress the power to set the value of money.

    “As for the theoretical argument, I’m no economist, but I’m not as scared by deflation as some.”

    There’s a lot of people out there that own homes and have 30 year mortgages. With deflation, the real price of their mortgage payments go up. While the price of their asset that backs up that mortgage goes down.

    Take a look at the gold price over the last few years. Inverse those fluctuations and that’s how much inflation / deflation you would have had under a gold standard.

    cbuund (2cc14c)

  62. Deflation is a big deal.

    It makes Savers into chumps and Spenders into heros.

    The antithesis of building wealth.

    Rodney King's Spirit (ca9e04)

  63. Ahhhhh Sam more incorrectness from you.

    When we were on the Gold standard, and right when the Fed was created- and before it had much power- there was a small recession. It was around 1919. Why have you never heard of the Great Depression of 1919? Because the Fed did nothing, the economy came back like it does, and life moved on. Now, the Fed gets involved and makes things worse.

    Patrick Henry, the 2nd (ea3541)

  64. Deflation depresses economic growth.

    In a deflationary economy, you would rather not buy today, because your money will buy more tomorrow. So you defer spending as long as you possibly can.

    This is the “deflationary spiral” argument I mentioned in the post. It’s why nobody buys computers; as the price is always dropping and the quality increasing, everyone waits and no computers are ever bought.

    Except they are. People don’t want to wait forever to buy goods. I want an apple today, not a month from now. I want an iPad now, not in five years. Yes, there is a certain attitude where some say “wait for improvements” — but it doesn’t kill the industry.

    Improved quality and reduced prices seem like a good thing to me.

    Patterico (9c670f)

  65. Except the price keeps going down after you buy it.

    cbuund (2cc14c)

  66. The problem with a gold standard is that it is just as much a delusion as “Fiat” money. Why is gold worth so much? It’s reasonably pretty, it’s some use in electronics, and otherwise it’s just habit, as far as I can see. The Spanish conquered the “New World”, brought back lots of gold, and the value of that gold dropped as fast as the value of any other commodity of which there is a sudden new supply.

    Money is an abstract, it’s value determined by consensus (“The Marketplace”). Like most things, when the State starts monkeying with that market the results aren’t pretty.

    Governments are not good at subtle. Therefore Governments should stay out of economics where at all possible.

    What does this say about money? Hell, I don’t know. If we can get the government back under restraint, the money will be worth something. If we can’t, the largess of the State will be worthless.

    C. S. P. Schofield (e8b801)

  67. The government’s interest in money is its skim, and it’s a very powerful one interest. It used to be called seigneurage, I think we call it the Fed rate. It’s what the gvernment “sells” currency for above its production costs and it is still a very important source of income, an across the board tax, if done properly.

    nk (dbc370)

  68. *and it’s a very powerful one interest*

    nk (dbc370)

  69. Many here are asking: “Why gold?”

    I try to answer that in a new post, called, um: “Why Gold?”

    (It also tries to answer “why the gold standard?” But the answer starts with: “why gold?”)

    Patterico (9c670f)

  70. The problem with a gold standard is that it is just as much a delusion as “Fiat” money. Why is gold worth so much? It’s reasonably pretty, it’s some use in electronics, and otherwise it’s just habit, as far as I can see. The Spanish conquered the “New World”, brought back lots of gold, and the value of that gold dropped as fast as the value of any other commodity of which there is a sudden new supply.

    Yeah, we had that one incident of a large increase in supply, and some other smaller ones — but there ain’t no increase in supply in gold that can match Janet Yellen (OK, one of her lackies) pressing a button on a computer keyboard and creating billions of dollars out of thin air.

    You really can’t compare the two.

    Patterico (9c670f)

  71. “You really can’t compare the two.”

    Except the difference is that it can be decided how much money is created. But not how much gold is mined.

    cbuund (2cc14c)

  72. I didn’t say you can’t contrast them!

    Patterico (9c670f)

  73. Yeah, said that about Amazon during the dotcom bubble. No way was it worth 300 times earnings. 15 years later, I’m still wrong.

    What’s with that?! What I mean is what’s with the funny money, or what to me seems like a gigantic Ponzi scheme. Or a game of musical chairs, where a person will do okay just as long as he isn’t the schlub who ends up chairless, with his butt falling flat on the ground.

    I don’t know if the value of a bar of gold has any more of a stabilizing effect on the value of the US dollar than the human psychology behind people believing that a share of stock in Amazon, much less Facebook or Twitter, is worth as much as it currently is. All I do know is something seems terribly off-kilter.

    Mark (99b8fd)

  74. 63.Ahhhhh Sam more incorrectness from you.

    When we were on the Gold standard, and right when the Fed was created- and before it had much power- there was a small recession. It was around 1919. Why have you never heard of the Great Depression of 1919? Because the Fed did nothing, the economy came back like it does, and life moved on. Now, the Fed gets involved and makes things worse.

    Ummmm . . . so?
    That in no way establishes anything I wrote as incorrect because it in no way addresses anything I wrote.

    Yes, there was a small recession in 1919 due to the economic dislocations with the end of WWI.

    That in no way proves there were no recessions, including the 5-1/2 Long Depression from 1873-1879 when we also had the gold standard and no national bank.

    Now it is true that excessive interference by the Fed (and by extension by the government itself) will make a recession profoundly worse as shown by both the Great Depression (when we had the gold standard) and the current Great Recession and non-recovery (when we didn’t have the gold standard), but that has to do with someone trying to micromanage the economy rather than the existence or lack of a gold standard.

    Sam (e8f1ad)

  75. The Spanish conquered the “New World”, brought back lots of gold, and the value of that gold dropped as fast as the value of any other commodity of which there is a sudden new supply.

    Not exactly. If Spain had sat on the gold, kept it in fortress in Madrid or something, the price would have been perfectly stable.

    But Spain didn’t do that. They had borrowed and borrowed against future gold and the moment the ship tied up at the dock, the gold was off to pay creditors. At some point, whether it is gold or diamonds or federal reserve notes, the market becomes saturated. None of those objects are at fault.

    Kevin M (b357ee)

  76. Let’s say that the US has a double-top-secret supply of gold, enough to pay off half the national debt. How does this help?

    Kevin M (b357ee)

  77. Thank you, Mr. P., for having the temerity to inquire — let alone talk in a public forum — about so important an issue.

    Kinda makes a little sense, doesn’t it?

    J.P. (bd0246)

  78. Monetary history shows that the gold(and silver) standards are not a perfect defense against the monarchs,politicians, dictators etc who mismanage the currency. By the end of the reign of Henry VIII, the English schilling was so debased(less silver) that it was almost unacceptable. During the Napoleonic wars, gold in Britain was largely unavailable, government bonds had declined to half their value, and the pound Stirling was worth less than $5.00 US. In the absence of paper money, governments just decrease the amount of metal in the coins. A gold standard should work, but politicians need adult supervision to avoid disaster. Good luck with that.

    Bar Sinister (b48c12)

  79. 73.I didn’t say you can’t contrast them!

    Oh but you did. To compare something with something else is to note its parallels and its contrasts. Thus “compare and contrast” is an exercise in redundancy.

    Signed,

    A Horrible, Pedantic Little Man
    (also a redundancy, on so many levels)

    JP (66ce26)

  80. Comment by Patrick Henry, the 2nd (ea3541) — 5/5/2014 @ 5:34 pm

    That economic dislocation following the conclusion of WW-1 amounted to less than a big deal because the Harding Administration cut spending drastically and retrenched, not bleeding funds out of the private economy through taxation.
    It was just the opposite of what Hoover did in reaction to the crash in 1929.

    askeptic (8ecc78)

  81. Imaginary exercise query:

    A country like Portugal leaving the eurozone and adopting a gold indexed monetary recollection based on its reserves, towards an actual implementation of its present constitution.

    Alor (2ebadf)

  82. When we had something much closer to a non-fraudulent gold standard, in the 1800s, we actually did pretty well.

    1) We didn’t have a truly unified currency, either. While there was a national currency, it wasn’t the only option people had — plenty of banks made their own notes.

    2) The government wasn’t the answer to all problems then that it is now, leading to endless spending. You can argue cart-horse order there, but I don’t think the two are directly connected — one enabled the other but not the other way around.

    3) The Panic of 1907. That’s what had people scared enough that they created the Federal Reserve, when the federal government itself almost went under and had to get bailed out by J.P. Morgan. Note that this ties to when the fed started trying to be far more than it was ever intended to be by the founders, mind you, under Teddy.

    Smock Puppet, "Si tacuisses, philosophus mansisses." (225d0d)

  83. the first major downturn, after the Fed was instituted, they ‘chose poorly’ Chairman Strong, comes off better than say Greenspan, because he had ‘ceased to be’ before the Crash,

    narciso (3fec35)

  84. THAT SAID — the real problem with the idea of a gold standard isn’t the “The theoretical one is that, due to the ever-growing population and thus ever-growing economy, we need a medium of exchange that will keep up with that growth.”

    It’s the problem of tracking an infinite value quantity using a finite medium.

    Even if there is still a lot of gold to be “found” (i.e., even if we’ve mined out the obvious veins, there’s still plenty of gold dissolved in the ocean, etc., just waiting for some Bright Boy to figure out an efficient way to collect it), the actual amount is still pretty finite — there’s a strict upper limit to how much of it we’ll have in any near-term future (excluding the unlikely development of cheap transmutation, of course, which blows away its use as a standard anyway).

    WEALTH, on the other hand is not just a steadily increasing quantity, it’s an almost geometrically increasing one, even more so as we move into an IP & Services economy where IDEAS and MEMES become the basis for the creation of new wealth.

    This notion is not something I’ve ever seen any economist tackle in anything resembling a layman’s piece, and I’d expect to have encountered it by now if anyone was really, really Getting It, which I don’t think they are yet.

    IP is to “property” as “Ice” is to “water”. It’s property, just like real property — goods, land, food — but there’s a phase change of difference between them, and if you attempt to handle steam or ice with the same rules you apply to handling water, you’ll get scalded or frostbitten. IP is the same as Real Property, but it’s very, very different, as well. And I’ve seen little sign that economists have really done anything that shows they grasp this.

    You can anticipate that the society and cultural institutions that develop out of an economy based in IP & Services will be as radically different from the one we know as modern society, based on Manufactured Goods is from Agrarian society based on food and land. Just as the ultimate organizational principle of Agrarian society was the Feudal Enclave, with its Lords and Ladies differed from Industrial society with its organizational principle of Corporate entities with CEOs and Presidents, so, too, can you expect a radical new entity to arise to organize IP & Services, with new roles for the main players.

    The Wealth principle gets stood on its head, too, since the nature of IP is that all the expenses are front-loaded — the only really expensive unit involved in the creation of IP units is that VERY FIRST one. All subsequent ones are expensed in the fractions of a penny. This is one of your phase change areas — the factory, the transport costs, all the rest, which are inherent with both food and goods are gone. So how much is something virtually infinitely reproducible at zero cost worth to the creator? And to society?

    Trying to lock that value in to the price of Gold is a ludicrous idea right on the surface — not least because it can change virtually overnight.

    Knowing how to make an anti-radiation medication is worth a certain amount today. It’s worth a hell of a lot more a month from now after a hot war between Russia and China occurs.

    An Elvis collectible may be worth a LOT today, but when it gets revealed next week that all the tabloids have been right, he really IS alive… what’s it worth then? More or less…?

    And KNOWLEDGE is fraught with such things.

    Gold Just Won’t Cut It.

    Smock Puppet, "Si tacuisses, philosophus mansisses." (225d0d)

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