Debunking The Gold Standard: The Myth of Stability

There are concrete plans for an African Central Bank (including an African currency), an African Monetary Fund, and an African Investment Bank. Wiki is a bit outdated and my other sources are in French, but the African Union wants to move relatively fast on this (5-10 years).

Handshake,

I had heard about these initiatives a while back, had forgotten about them. Thanks for the reference. I don't think that we'll be seeing much movement towards this in a Republican administration - too focused on corporate colonialism - but in a Democratic administration you may see a push. There's not a lot of wealth to get it off of the ground, but it may help to undo one of the key problems in Africa - nations established along the lines of European colonies. As elsewhere the Europeans created nations that intentionally cut across traditional tribal groupings and cultures, so that they would have weaker political opposition. A common currency would allow common interests to form more easily across these inefficient political boundaries and to create innovation that would be less under the finger of corrupt African leaders. Hopefully.

This has nothing to do with Democrats and Republicans. They're all greedy, cheating, lying, stealing b$stards. I was having a talk with my professor following African History class [he's fairly well known in his field]. we discussed the corrupt dictatorships and ways in which tinpot dicatators stole 100's of millions from their countries and I asked him, "What can be done? Do you see any hope or good outcome?" He simply replied "Nope... it's a lost cause."

I don't know, but hopefully it would be rounded to the nearest integer.

Or nannyberry!

Mercantilism.... like the mercantalist policy of carting off all the gold and silver from New World colonies and selling back finished goods. Well yes, the Scottish Economist and I are in complete agreement there.

Which worked fairly hunky when you had relatively fixed patterns of trade. Rum to molasses to slaves, and all that. But in today's economy trading relationships are far more fluid. You can't afford to have monolithic trade relationships - nor will the global economy sustain them.

Interesting points, but I am wondering whether what you're suggesting would result in one currency for rich people and one for poor people? Also, the practical applications of this in an economic system dominated by electronic currency trading leaves me rather cold on the idea. It seems that you're just adding another parallel variable to currency management that would in the end be quite confusing and not result in tangibly better management of the economy.

panic of 1873, 1878, depression from 1893-1897. price deflation from 1865 to 1897.

Paul's position on the Fed is particularly interesting given that he appears in a number of films and other media calling for the wholesale dismemberment of the Fed.

I think you'll find that Congressman Paul has almost two positions on every issue. His position for his ideal government, and then his position that he hopes to actually accomplish.

He was on the Colbert Report about a week ago and he admitted while there are a ton of programs and agencies that he'd like to see gone, he knows that if elected President, that he will only be able to accomplish a minor transition, not a major overhaul. For example, he said that he wouldn't touch Medicare (or was it Medicaid?) because American's would not yet be ready to transition off of those programs.

I think the Fed idea gets blown out of proportion a little because there really isn't anyone else even talking about it.

He may be a libertarian at heart, but he is a realist as well.

I heard similar arguments that Bush would not govern as conservatively as his spoken words indicated he would. Why should I believe you about Mr. Paul?

Why should I believe you about Mr. Paul?

Because even if he wanted he couldn't. How many Congressmen would support him if he asked for a Federal Reserve killing bill?

I heard similar arguments that Bush would not govern as conservatively as his spoken words indicated he would. Why should I believe you about Mr. Paul?

Because Congress simply wouldn't let anything drastic happen, and Paul is obviously smart enough to know this. He has even said he would be willing to fund some of the programs that Kucinich is for if it would mean an end to the war. A realist.

And to call Bush's rule "conservative"...well I wouldn't exactly agree.

@Killfile:

That sounds like a reserve currency system to me which is generally considered pretty damn near the same thing as a gold standard.

Some economists claim that is functionally similar, but it is not the same. The term gold standard specifically applies to a currency where any unit of the currency can be exchanged for gold by any holder of the currency. To be a true gold standard, exchangability to gold needs to be standard not restricted to governments.

I think you're short changing the Price Revolution here.

Perhaps, but you have to admit that the inflation rate is dwarfed by that occurring under the present fiat system (or, for that matter, any fiat system).

Paul's position on the Fed is particularly interesting given that he appears in a number of films and other media calling for the wholesale dismemberment of the Fed.

I am fairly certain that Paul advocates a non-FRB gold standard. He also correctly sees that policy as nearly impossible to enact into law. Thus his support for a dual system.

A not insubstantial number of historians have surmised that the depression of the late 1800s (1880s? That's off the top of my head) was considerably worse than the 1930s.

The 1890s depression was preceded by a fairly sizable real estate bubble. Fortunately, thanks to modern monetary policy massive run-ups in real estate prices are avoided. Oh, wait . . .

@jblossom:

Interesting points, but I am wondering whether what you're suggesting would result in one currency for rich people and one for poor people? Also, the practical applications of this in an economic system dominated by electronic currency trading leaves me rather cold on the idea. It seems that you're just adding another parallel variable to currency management that would in the end be quite confusing and not result in tangibly better management of the economy.

Not one for rich and one for poor, but one for saving and one for consuming. Since the fiat currency will decline in value, it will be preferred for consumption and its velocity would increase. Maintaining the dual system would require greater fiscal and monetary discipline on the government's part. Certainly, the spending spree of the past decade would threaten hyperinflation if this dual system were present. Thus, the government would have to choose between sound fiscal policy or discarding the fiat currency altogether. Either way, we'd all be better off.

As for practicality, currency exchanges are made millions of times a day worldwide. A dual system would be much more manageable today that at any previous time in history.

Actually, our salaries lose value. Our bank accounts may or may not lose value at any given moment, depending on whether inflation rate exceeds the interest rate at any given moment. Bonds are the same. All contracts lose value, unless they are fitted with escalator clauses. Our tax burdens rise, as inflation forces us into higher and higher brackets with no real increase in income.

Stocks and Real Estate are immune from the direct effects, but inflation also causes malinvestment.
Please see mises.org for an intro to economics.

www.lewrockwell.com /north/north83.html

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Any commodity standard is fine, so long as it meets a few requirements. It should be compact, and easy to store, relative to it's value. Large vaults would be required, were we to use iron. It should be durable. Beef stored in banks would lose value almost as fast as fiat currency, and would smell bad in the process. It should be easily divisible. This makes an element better than a mixture of elements. It should be uniform. You don't want to have to make a chemical analysis to determine the value.

Gold is expensive partly because of it's usage for ornamental purposes. It is also valuable in electronics, and for other industrial purposes.

More Than Happy hits the economic nail on the head.

Gold has no intrinsic value. Unless somebody else wants it, Gold is completely useless. Pegging the dollar to another value index ultimately is like pegging quarters to a dime index. The confidence in the dime is as artificial as the confidence in quarters or in gold.

There was a time when gold contributed to strengthening that confidence, but the Gold standard is as artificial as the dollar just shinier and prettier.

You only have to look at any natural disaster to see what has any commercial value in the most unstable periods of commerce. Gold won't float an economy any further than the dollar, only a system of trust and sound fiscal policy will.

I find it amusing that Krugman uses that as an argument for fiat currency. He's just pointed out that financial assets inflate faster than real goods and then, in other articles, he complains about the rich getting richer and the poor getting poorer. How does he think that inequality is occurring?

Krugman's statement is correct in that if you own lots of financial assets your purchasing power has been increased by the Federal Reserve system. But that increase is only relative to those poorer Americans who are being robbed blind by this scheme.

Note that without the ability to steal money through inflation, governments would have to steal money "honestly" through taxation. If people had any idea what they lost to government they would revolt. A gold standard forces a greater level of honesty in government, an area where it is in short supply.

You are right, however, that eliminating fiat currency is only a first step. We must also (eventually) eliminate fractional reserve banking, and shrink our government so that it fits inside the Constitution.

I bet you were the one who told that to Rep. William Jefferson...

Maybe corrupt politicians do really need the gold standard.

But going with gold is like having money printing machines in a million different hands instead of a few. Again, the economy would be at the whims of somebody with a shovel.

The cost of printing a dollar bill pales by comparison to the cost of mining for gold. If you think that the supply of gold could ever expand faster than the supply of small slips of paper, you have completely taken leave of your senses.

Again you raise the specter of a sudden rise in the gold supply. How is this going to occur? Star Trek matter replicators? There is really no other way.

Ah, but would a technology such as nanoextraction only be used to extract gold? Certainly not. The use of such technology would result in a rapid increase in the availability of all sorts of substances. The inflationary effect would thus be quite minimal.

Also, a society with nanoextractors would also have nanoconstructors -- which would make paper creation fairly easy as well. Now you may be right that a society with matter manipulation technology on this level might find a different standard of value to base its currency on (probably energy), but that doesn't mean that the idea of having backed currency is poor.

The problem with fiat currency is that its value bears no necessary relationship with the value of actual goods on the market. Relative changes in the value of goods does not pose any danger to the market -- in fact the market economy is nothing but a system of relating the values of a wide variety of goods and services. However, if you force people to accept a particular means of payment (legal tender) and that means of payment has a potentially infinite supply, then only the restraint of our political leaders prevents hyperinflation. Again, there has never been a case of hyperinflation involving a backed currency.

Perhaps. The historical fact of the matter is that there have been substantive spikes in the supply of gold in recent history and those spikes do correlate to drops in the price of gold.

As one would expect. More supply means lower price. OTOH, gold is not presently money, any changes in its price could be due to supply and demand issues or it could be do to money supply changes or both. It is difficult to separate the two.

Anyway, my point is that it is hard to conceive of a scenario where the supply of gold increases or decreases at rate substantially at variance with that of other goods in the economy. In the biggest historical case of a "sudden" and "large" increase in gold relative to other goods (the Spanish conquest of the New World), the inflation rate was pathetic by modern standards.

All it takes is a single technical innovation. I'd rather not trust my currency to that.

It seems odd to support a system of currency based on the hypothetical possibility of a technological development that radically changes that currency commodity's relative scarcity. Especially since you could just switch to a different backing for your currency. Fiat currency, by contrast, has clear problems and numerous historical incidences of failure.

Nonetheless, I think the dual currency system noted above would help resolve this. If the backed currency really was dramatically unstable (relative to the fiat one) then people would begin holding their savings in the fiat currency and the backed currency would fade on its own. The reverse is far more likely, however.

Completely agreed Entelechy. Some of Neal Stephenson's books examine what life would be like in a world with nano-constructors, basically general purpose replicators, and the basis of what would be valuable would indeed radically change. However, fiat currency has the same issues in that world.

Objection: Fiat currencies are subject to inflation should very stupid or very evil people gain control of them

No my objection is that fiat currencies are subject to hyperinflation should unscrupulous people get a hold of them. Fiat currencies are almost always inflating, since the temptation to pay one's bills with something that has no prior value is too hard to resist. Under most circumstances, a government will exercise some restraint so that the currency can continue to function. However, should the debt load of that government become too great, hyperinflation becomes a real possibility.

Do you understand that because gold is subject to supply fluctuations that you can't do away with that possibility and that, as a consequence, a gold standard is just a hamstrung version of a fiat currency anyway?

Yes, the value of backed currencies can vary. There is however a fundamental difference between the two types of currency. With a fiat currency, obtaining more of the currency requires very little effort, usually far less than the currency's purchasing power (at least at first). With a backed currency, obtaining more of the currency requires an amount effort necessary to introduce more of the backing commodity.

In this way, a backed currency is always scaled properly to the real economy. Fiat currencies, by contrast, have a disruptive re-distributive effect on the economy. The people who spend the new money first get to pay prices that correspond to the price level prior to inflation, while for those who get it later in circulation, prices have already adjusted upward.

It passes a law or directs whatever oversight agency exists to simply change the price of gold to $2 per troy oz of gold.

And prices immediately double in dollar terms while remaining identical in terms of gold. The government saves no money at all unless it forces lenders to accept one new dollar for one old dollar of debt.

If you define a dollar as 1/100th of an ounce of gold, you are saying that "dollar" is a unit for measuring gold weight, just as "inch" is a unit for measuring length. If the government changed the definition of an inch, people would be annoyed, but none of their objects would change length!

As for debasement, that is where a coin looks like it is of a particular weight, when it actually isn't. Debasement is fraud, changing the convertibility ratio is just a definition change.