The Gold Standard

[Derek]

Alright I was thinking just now, what if the US converted to gold? What would be the benefits and consequences that you can see? Go on, discuss.

[Marokai Backbeat]

A fantastic idea if you intend to destroy the United States (and world) economy.

Rapidly and frequently contracting, inflexible, horrifically prone to deflation and catching people in debt traps. It's basically the worst of all worlds. Under a gold-backed currency it becomes nigh impossibly to fashion the money supply to the economy's demands in any way, and fending off speculative attacks was a frequent thorn in the economy's side way back when we actually had to deal with it. It's an unnecessary restriction to any economic growth, and countries that ditched it during the 30s had their growth rocket up almost immediately.

There's also the little matter of there not being enough gold in the world to cover the amount of money in circulation as things stand now, meaning that the reintroduction of a gold standard would cause utterly cataclysmic deflation that would make the Great Depression look like paradise.

[Obnoxiously Slutty Girly Girl]

The gold standard was vastly superior to what we have now, but it is infeasible to "convert to gold" now.

 It is best to leave currency to the free market.

[phk]

Nope.

Money right now is better.

[k-onmmunist]

I would support it, but only if it was at a very very flexible conversion rate.

[Derek]

My original concern was pointed out above about the availability of it. What of accepting other currencies here? I know that Mexico loved me when I used American money to tip rather than pacos. However, I thought I had $5 in pacos when I got back to the states so a few months later I went to the Orland Airport and exchanged it. It was only worth $3.35 and by the time I found my car, I'd been there longer than an hour and had to pay more than that for parking.

[opebo]

My original concern was pointed out above about the availability of it. What of accepting other currencies here? I know that Mexico loved me when I used American money to tip rather than pacos. However, I thought I had $5 in pacos when I got back to the states so a few months later I went to the Orland Airport and exchanged it. It was only worth $3.35 and by the time I found my car, I'd been there longer than an hour and had to pay more than that for parking.

Amusing story, Derek.  Very racist.

[SPC]

A fantastic idea if you intend to destroy the United States (and world) economy.

Rapidly and frequently contracting, inflexible, horrifically prone to deflation and catching people in debt traps. It's basically the worst of all worlds. Under a gold-backed currency it becomes nigh impossibly to fashion the money supply to the economy's demands in any way, and fending off speculative attacks was a frequent thorn in the economy's side way back when we actually had to deal with it. It's an unnecessary restriction to any economic growth, and countries that ditched it during the 30s had their growth rocket up almost immediately.

There's also the little matter of there not being enough gold in the world to cover the amount of money in circulation as things stand now, meaning that the reintroduction of a gold standard would cause utterly cataclysmic deflation that would make the Great Depression look like paradise.

Deflation? Is that where money is worth more in the future than it is right now? That would seem to be the only system that makes any sense whatsoever, since people inherently have more desire for good right now than in the future. Next you'll be attacking positive interest rates. The 'growth' you speak of is not true growth at all, but merely an illusion that will collapse along with the rest of the house of cards. If printing money can truly grow an economy, then shouldn't counterfeiting by legalized? Also, you ought to relook at your history, since the period between the Depression or 1920 and the Great Depression was inflationary, not deflationary. It was only when the 'growth' you talk about led people to malinvestments did the Great Depression start, along with the deflation that accompanied it as a result, NOT a cause. With regard to the amount of gold in the world, obviously one cannot restore the dollar-gold link to the link it had prior to 1913. You would have to start at the current conversion ratio.

[opebo]

Deflation? Is that where money is worth more in the future than it is right now? That would seem to be the only system that makes any sense whatsoever, since people inherently have more desire for good right now than in the future. Next you'll be attacking positive interest rates. The 'growth' you speak of is not true growth at all, but merely an illusion that will collapse along with the rest of the house of cards. If printing money can truly grow an economy, then shouldn't counterfeiting by legalized? Also, you ought to relook at your history, since the period between the Depression or 1920 and the Great Depression was inflationary, not deflationary. It was only when the 'growth' you talk about led people to malinvestments did the Great Depression start, along with the deflation that accompanied it as a result, NOT a cause. With regard to the amount of gold in the world, obviously one cannot restore the dollar-gold link to the link it had prior to 1913. You would have to start at the current conversion ratio.

Actually 'malinvestments' are inherent in the capitalist system, SPC, and of course by that we can only mean an inadequacy of demand (insufficient consumption).

And certainly positive interest rates are a part of this problem, or indicative of it - concentration of 'wealth'.  In other words an inadequacy of demand.

[k-onmmunist]

Usury is theft.

[opebo]

Usury is theft.

Well, rather, ownership (and thus the ability to charge interest), is slavery.  The meaning of owning something is its power to enslave others.

[SPC]

Usury is theft.

Theft by definition is involuntary. Thus, an agreement between two people mutually agreed to by which one party borrows principal in the short term in return for paying principal and interest at some point in the future isn't theft. However, devaluing someone else's currency does constitute theft unless there is unanimous consent among the users of that currency in favor of davaluation.

[opebo]

Usury is theft.

Theft by definition is involuntary. Thus, an agreement between two people mutually agreed to by which one party borrows principal in the short term in return for paying principal and interest at some point in the future isn't theft.

You are leaving the fact that it isn't voluntary, SPC.  Force is inherent in the ownership and arrangement of the social hierarchy based upon ownership.

[True Federalist (진정한 연방 주의자)]

Deflation? Is that where money is worth more in the future than it is right now? That would seem to be the only system that makes any sense whatsoever, since people inherently have more desire for good right now than in the future.

The problem with deflation is that since it causes people to postpone purchases in expectation of lower prices in the future it causes spending and thus the economy to shrink in constant value terms of the currency of your choice.  Japan has spent two decades nw with a sick economy because of deflation.

obviously one cannot restore the dollar-gold link to the link it had prior to 1913. You would have to start at the current conversion ratio.

Actually one would need to start at a higher ratio.  If any major economy were to adopt the gold standard, it would lead to a significant increase in the demand for gold.  If the United States were for some strange reason want to go on the gold standard, for example in 2013 after Ron Paul is elected President, we'd probably have to set convertibility at some point between $2000 and $5000 per troy ounce.  That would be a ice windfall in dollar terms for people who are already holding gold, but would devastate the economy right now.

[Vepres]

No

[SPC]

Deflation? Is that where money is worth more in the future than it is right now? That would seem to be the only system that makes any sense whatsoever, since people inherently have more desire for good right now than in the future.

The problem with deflation is that since it causes people to postpone purchases in expectation of lower prices in the future it causes spending and thus the economy to shrink in constant value terms of the currency of your choice.  Japan has spent two decades nw with a sick economy because of deflation.

Again, time preference solves this problem. If this were true, everybody would be a lender and nobody would be a borrower out of expectation of more money in the future. Fortunately, people have more desire for money now than for money in the future, which raises the price of the former.

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Actually one would need to start at a higher ratio.  If any major economy were to adopt the gold standard, it would lead to a significant increase in the demand for gold.  If the United States were for some strange reason want to go on the gold standard, for example in 2013 after Ron Paul is elected President, we'd probably have to set convertibility at some point between $2000 and $5000 per troy ounce.  That would be a ice windfall in dollar terms for people who are already holding gold, but would devastate the economy right now.
[/quote]

Wouldn't the desire to own gold already be there due to the inflationary effects of fiat money? If the United States were to go on the gold standard, there would be less incentive to short the dollar since the price of the dollar in terms of gold would be constant.

[2952-0-0]

Again, time preference solves this problem. If this were true, everybody would be a lender and nobody would be a borrower out of expectation of more money in the future. Fortunately, people have more desire for money now than for money in the future, which raises the price of the former.

But this hasn't happened in the real world. And besides, a rising value of each unit of money is useless if you lose your job thanks to a sustained fall in aggregate demand.

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No. When Spain plundered the gold and silver of Mexico and and Peru, the massive and sudden increase in the Spanish money supply caused so much inflation that it wrecked any incentive to create technological innovations or a domestic industry. Only in the past decade has Spain fully returned to the European mainstream. When Ming Dynasty China experienced a massive influx of Spanish silver (in exchange for tea, porcelain, etc), the resulting inflation contributed to the peasant revolt which led to the collapse of the Ming Dynasty.

Likewise, the gold (or any limited metal) standard is simply unable to prevent massive and sudden expansions in money supply, and periodically adjusting the conversion rate makes it meaningless.

Finally, there will be a huge incentive to short the gold-backed dollar. Such a move will most likely cause high unemployment and a long recession. Congress will haul the Fed Chairman and Treasury officials for grilling every week. Eventually you'll lead to something like Argentina in 2001.

[True Federalist (진정한 연방 주의자)]

obviously one cannot restore the dollar-gold link to the link it had prior to 1913. You would have to start at the current conversion ratio.

Actually one would need to start at a higher ratio.  If any major economy were to adopt the gold standard, it would lead to a significant increase in the demand for gold.  If the United States were for some strange reason want to go on the gold standard, for example in 2013 after Ron Paul is elected President, we'd probably have to set convertibility at some point between $2000 and $5000 per troy ounce.  That would be a ice windfall in dollar terms for people who are already holding gold, but would devastate the economy right now.

Wouldn't the desire to own gold already be there due to the inflationary effects of fiat money? If the United States were to go on the gold standard, there would be less incentive to short the dollar since the price of the dollar in terms of gold would be constant.

Only if people believe that the United States has a sufficient gold reserve to prevent a run on the dollar.  At the current price of gold, the value of the gold reserves of the United States is only around $300 billion, far less than our annual deficits both fiscal and trade.  If we went on a gold standard today, there would be a run on gold, just as happens today to countries that try to maintain a peg of their currency to other currencies with insufficient reserves.  China is able to maintain a peg for the yuan because it has a positive balance of trade and large reserves.  The United States has neither and would only be able to achieve a large reserve by setting a peg significantly above the current free market price.

Even that wouldn't last unless we are able to bring our trade deficit under control.  That's what forced us to abandon the gold standard entirely during the early 1970's.

[Derek]

I like this discussion and hope to find at least some pros as well as cons. Earlier someone thought my story at the Orlando Airport was racist but didn't explain. I don't see how any single piece of evidence regarding racism can be found in my story. You have gone and found racism where racism is not in order to advance a political campaign. Now you're going to get me in trouble for posting crazy right wing comebacks and trolling.

On a more serious note, what do you all think would be the impact of using gold rather than the dollar in regards to our federal reserves? I really don't think we have enough gold to make up for the deficit, debt, wages, inflation, or anything at this point.

[SPC]

Again, time preference solves this problem. If this were true, everybody would be a lender and nobody would be a borrower out of expectation of more money in the future. Fortunately, people have more desire for money now than for money in the future, which raises the price of the former.

But this hasn't happened in the real world. And besides, a rising value of each unit of money is useless if you lose your job thanks to a sustained fall in aggregate demand.

What do you mean it hasn't happened in the real world? Are banks suddenly charging negative interest rates? To give a real life example of price deflation, consider Apple products. They tend to depreciate in price drastically over a period of a mere few months, yet their stores are always full of people ready to buy their products. They consider the reward for getting an Apple product a few months earlier to be worth the cost of buying it a few months earlier.

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No. When Spain plundered the gold and silver of Mexico and and Peru, the massive and sudden increase in the Spanish money supply caused so much inflation that it wrecked any incentive to create technological innovations or a domestic industry. Only in the past decade has Spain fully returned to the European mainstream. When Ming Dynasty China experienced a massive influx of Spanish silver (in exchange for tea, porcelain, etc), the resulting inflation contributed to the peasant revolt which led to the collapse of the Ming Dynasty.

Likewise, the gold (or any limited metal) standard is simply unable to prevent massive and sudden expansions in money supply, and periodically adjusting the conversion rate makes it meaningless.

Finally, there will be a huge incentive to short the gold-backed dollar. Such a move will most likely cause high unemployment and a long recession. Congress will haul the Fed Chairman and Treasury officials for grilling every week. Eventually you'll lead to something like Argentina in 2001.
[/quote] So because there was a discovery of massive gold deposits when the New World was discovered, we should leave control of the monetary supply in control of a central bank, which has depreciated our dollar by a factor of 20 in the past 100 years? You also neglect to mention that Spain lacked a free-market economy when it plundered the New World. The point of the gold standard is to prevent drastic expasions in the money supply, to avoid inflation and boom-bust cycles that are associated with it. Also, isn't that inconsistant to demean gold because of the price inflation and associated problems it caused historically, and then bash it for not permitting enough price inflation?

[2952-0-0]

What do you mean it hasn't happened in the real world? Are banks suddenly charging negative interest rates? To give a real life example of price deflation, consider Apple products. They tend to depreciate in price drastically over a period of a mere few months, yet their stores are always full of people ready to buy their products. They consider the reward for getting an Apple product a few months earlier to be worth the cost of buying it a few months earlier.

Technology is improving at an extremely fast pace which makes falling prices attractive, which is definitely not true for anything else. Perhaps some are willing to pay $200 more to enjoy the iWhatever for several more months in advance, but I've never heard of anyone paying $200000 more to enjoy a newly built house several months in advance, or anyone paying $50000 more to enjoy the latest BMW several months in advance. You can't compare the iWhatever to the entire economy.

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It doesn't matter if a dollar loses its value over the long term (that the amount of metal in each coin always decreases over time is something Adam Smith observed), as long as income is increasing as well, and as long as real interest rates are positive (alas, something that should have happened five years ago). As for whether Spain had a real free-market economy is beside the point: even in a free market economy the gold would have caused Spanish inflation to soar and for the gold to flood out into Europe, eventually impoverishing the country. Boom-bust cycles were much stronger when gold/silver was the basis of currency. Finally, there is no such contradiction; I'm just stating that precious metals are just another commodity and are not a foolproof way at storing value. It sure beats paper with ever-increasing digits, though.

[Gustaf]

Having a currency standard tends to increase real volatility since you have no nominal volatility to counter it with.