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Question about gold as the money supply

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Hazmatac

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If the population increases, then what will be done if there is not enough gold to go around, or is that a possibility?

There's no reason to use gold exclusively. You could use silver, platinum, copper, anything you want as long as it's price doesn't wildly fluctuate and there's a limited amount of it.

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If the population increases, then what will be done if there is not enough gold to go around, or is that a possibility?

Not enough for what? How much gold do you think would be needed? Keep in mind that value increases if demand increases relative to supply.

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There is no such thing as "not enough gold." It's not as though we will die of starvation from "lack of enough gold to go around."

As more people are born, the existing supply of gold will become spread more thinly across more people (as people trade with each other in gold). Prices will simply fall across the board as more people produce more things.

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If the population increases, then what will be done if there is not enough gold to go around, or is that a possibility?

Why do you think we need more money merely because the population increases? If the supply of money is more or less constant, but the production of wealth is increasing year after year, because of an increase of producers, then all you will see is a constant increase of wealth. This will, ceteris paribus, result in lower prices, i.e., higher real wages, i.e., a higher standard of living.

You need to study economics. Read George Reisman's Capitalism: A Treatise on Economics. Read in particular chapter 19 entitled "Gold versus Inflation". It's available for free in PDF at www.capitalism.net

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If the population increases, then what will be done if there is not enough gold to go around, or is that a possibility?

The other responses hit many essential points.

I especially, like the point that gold would never be the sole medium of exchange, i.e., gold would never be the sole form of money. Nearly any object can be “monetized” (used as money) in the short run. E.g., the use of cigarettes in prison or baseball cards to children etc.

As the supply of gold decreases its value will increase significantly, which means smaller and smaller amounts can buy more and more things, so even minuscule amounts become ever more valuable. This effectively means the usable “supply” increases, as ever smaller amounts gain in purchasing power.

The key word here being “purchase,” i.e., the gold is exchanged in return for some good or service. In other words, money is a medium of exchange, i.e., people pay their debts with it. So, if we were on a gold standard, your boss would pay you in gold, probably in the form of a gold redeemable receipt, i.e., a bank note of some kind.

Further, remember if our money is in a bank, nearly all the money in the bank is spent, i.e., invested, i.e., has been pushed back out into the economy doing some job, hopefully earning a profit, i.e., it is changing hands all the time; so there is no incentive or purpose for money to be horded, i.e., there is no reason for any form of money to be literally taken out of circulation.

Also, there is nothing inherent in the nature of a society’s population increasing, which decreases the supply of money. Money by its nature is not consumed or used up, as its purpose is for facilitating trade, i.e., its value is in its ability to make good, objective trades among people; its value is not in hording it, or taking it out of circulation as some kind of end in itself.

I think it would be helpful to research how and why gold becomes used as money. Gold has certain properties which make it a good candidate as a medium of exchange. E.g., its durability, it is cleanly dividable, can be pressed into coins etc, ease of measure, in limited supply, relatively difficult to produce more.

Note: "Philosophic Issues in Economics", Harry Binswanger's latest lecture course on economics covers this topic in essentials.

Available here: http://www.aynrandbookstore2.com/prodinfo.asp?number=DB76M

You can definitely find a great deal of information from, “The Ludwig von Mises Institute,”

http://www.mises.org/store/Best-Sellers-C72.aspx

Edited by phibetakappa
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I quote from Peter Schiff's "Crash Proof":

The modern world has never been better positioned to use gold as a medium of exchange than it is right now.

Back in the early days, if you wanted to use gold you either had to carry it around or store it with a goldsmith and obtain a receipt; for smaller transactions, you had to use lesser metals, copper as in pennies, nickel as in nickels, and silver as in dimes, quarters, half-dollars, and, optionally, dollars. You couldn't break gold down beyond a certain point.

But today, with the Internet and with debit cards, it has never been easier for the world to transact in precious metals. If gold could have been money in years past when we didn't have the technology to make it convenient, imagine how well it would work today. [...]

If governments don't want to reinstitute gold standards, private citizens will do it on their own.

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Are people really going to be concerned with handling and seeing the physical gold with every transaction? If the a gold standard (or any other metal) became used for determining the value of currency, I wouldn't care to ever actually handle it in my purchases and transactions. If paper notes, backed by gold, were the main means for transactions, why would there be concern for the supply of gold running out? Then there's electric transactions/receipts that could be more important than paper notes in the future.

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If paper notes, backed by gold, were the main means for transactions, why would there be concern for the supply of gold running out?
If paper or electronic bits are used, they still represents the real gold held in some vault. So, they're limited in the same sense as gold itself is limited.

Not that I am concerned about the consequences of a possible gold shortage; just saying that the fact that paper is used does not change that concern.

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If paper notes, backed by gold, were the main means for transactions, why would there be concern for the supply of gold running out?

If one believes the concept of "supply" means the physical quantity of stuff available, then demarcating a certain quantity of gold with a receipt does not remove their feeling that the supply is going to run out and they are not going to be able to get any.

They would still feel they lived in a “zero sum game,” type of world, where there is only a static supply of loot, and like the carcass of an animal, it has to be fought over. (Note: this is a form of the “Intrinsic theory of value.” See Ayn Rand’s first essay in “Capitalism the Unknown Ideal.”)

Supply is an economic concept, which roughly means the quantity of a good/service one is willing to exchange for some other good/service (including money). As such the supply depends on the supplier's evaluation of their context, and thus how much the given object are worth to them. (Note: see the O’ist “Objective Theory of Value” in same essay above).

In the case of a medium of exchange, such as gold, as the physical quantity available for use in transactions decreases, (meaning each person has physically less gold per person); economically the value to a person for the purpose of trade will continue to rise. Effectively, less and less gold will be accepted in exchange for more and more goods, i.e., the purchasing power of gold per ounce will increase.

However, given the nature of gold, such as its ability to be divided into small quantities, it can be redeemed in very, very small amounts, thus giving people the knowledge that they can redeem a given bank note for actual gold, no matter how small their transactions.

Thus, here is where the great value of paper money and electronic money arises, because as gold becomes more and more valuable to people, and very small quantities have greater purchasing power, the bank notes can easily & flexibly represent the tangible underlying quantity of metal, so that transactions can still be made quickly and accurately, without fear of loss.

If paper or electronic bits are used, they still represents the real gold held in some vault. So, they're limited in the same sense as gold itself is limited.

Exactly! <_<

Edited by phibetakappa
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If paper or electronic bits are used, they still represents the real gold held in some vault. So, they're limited in the same sense as gold itself is limited.

I don't disagree with you, that the supply of gold in a bank account or bank's vault, would decrease in relation to the amount of negative transactions made by the account owner or holder. I was talking about the supply of gold concerning natural resources and increase of population. My point was that as gold becomes more scarce, the use of notes will allow for transactions even though the note may represent a miniscule amount of gold. To me the author of the thread is implying that everyone will be handling transactions with the physical gold, and over time such handling would be unsustainable, which it would be.

In the case of a medium of exchange, such as gold, as the physical quantity available for use in transactions decreases, (meaning each person has physically less gold per person); economically the value to a person for the purpose of trade will continue to rise. Effectively, less and less gold will be accepted in exchange for more and more goods, i.e., the purchasing power of gold per ounce will increase.

I agree.

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If paper or electronic bits are used, they still represents the real gold held in some vault. So, they're limited in the same sense as gold itself is limited.

Not if they are backed by fractional reserves! :lol: Which is of course another thing that's been debated about quite extensively. Some people worry about there being too much money, some people worry about there not being enough money ... and while I haven't heard of anyone worrying about the consequences of there being "just enough" money, it wouldn't surprise me. :thumbsup:

Julian Simon has shown why it is the tendency of all minerals to get less scarce over time. Gold is no exception, especially since gold is hardly ever consumed, like the other minerals: it is produced in order to be accumulated. Virtually all the gold that has ever been mined is still there in somebody's possession today, and the mines are ready to increase their production if necessary, they're just waiting for the signal--the signal, of course, being a greater purchasing power of gold. Which is precisely the signal that will be given if the economy grows and "there is not enough gold" to make all the required monetary transactions.

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Virtually all the gold that has ever been mined is still there in somebody's possession today, and the mines are ready to increase their production if necessary, they're just waiting for the signal--the signal, of course, being a greater purchasing power of gold. Which is precisely the signal that will be given if the economy grows and "there is not enough gold" to make all the required monetary transactions.

During the gold bear market there was little investment in gold mines. It will take some time and will further increase the price.

What interests me is what if Ray Kurzweil is right and we will experience a technological Singularity.. What if nanotechnology makes it able to print as much gold as we want? :thumbsup:

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For the record, I have long held the idea that the ideal coin composition would be type-3N 18ct gold (the other 6 carats in type-3N are 3 silver and 3 copper), because it looks good, is much sturdier than pure 24ct gold, lowers the metal density from 18 to 15 and so makes lower-gold-content coins more practical, and is one of the popular standards for high-end gold jewellery. A customer could then toss a few coins made of that onto the jeweller's bench, who could then directly take them to his workshop and make something without having to alloy it himself.

What if nanotechnology makes it able to print as much gold as we want? :thumbsup:

In the more immediate future, I wouldn't say it isn't nanotech that's going to lead new gold extraction methods but chemistry and biotech, and off the top of my head I see two lines of development. Interestingly, as you're in Germany, you might be familiar with the history of both...

The first is an extension of what already exists. A while back, Henkel invented a chemical that markedly improved copper recovery efficiencies at a cost-effective rate through in-situ leaching and beneficiation of low-grade copper ores. I don't see why a similar process might not be developed for other ores, including gold. So, there could be more development along these lines to improve efficiencies and thereby make mines with lower grades viable, which is precisely what happened with copper.

The second is a revisiting of an old plan to extract gold from seawater. In the aftermath of WW1 and the war-reparations demands from the French, the German finance department of the day started looking into that as a means of obtaining the gold to pay off the reparations debt. It turned out that it wasn't viable, though the research did reveal that there is as much gold in seawater as there is in the ground (or thereabouts). That's a lot of gold! With the growth of biotech, especially saline algal research, perhaps one line of development is the rearing of goldphage algae or bacteria that are used to beneficiate seawater into biosludge gold ore. I happened to watch a program (Discovery Science, I think) just last week where a mining company in the Black Hills of South Dakota is using bacteria to extract gold-cyanide sludge out of the water it is using in its table mill, allowing more gold to be recovered and the water discharged be clean enough to fish in. So, this is not just pie-in-the-sky speculation.

In the further future, gold is going to come from asteroid mining. As luck would have it, the old legend of The Mother Lode is not that far from the truth. I once came across a calculation that suggested that there is enough gold in planet Earth to cover the entire surface of the planet in a layer three inches thick - the problem is where it is presently situated. The basis for the calculation was the finding that the precious-metal content of asteroids is enormously higher than crustal rock (this was the same types of calculations done that finally proved that an asteroid was the main killer of the dinosaurs, because of tell-tale iridium spikes in rocks formed back then). The difference is then explained by the simple fact that nickel and iron are lighter than gold and lead etc, and so all the heavier metals sank to the planet core back when the planet was far more molten than it is today. The gold we find today is just that stuff that either didn't sink or got transported back to the surface again by mantle plumes and other geological processes. We will likely never get the gold that is still down there, but we can eventually get the gold in the remaining asteroids. About ten-fifteen years ago it was calculated that a typical asteroid the size of a football field (of which there are zillions) had a metals content worth about $1b! The value will be much higher in today's money. Juicy!

Given that the Earth's population is projected to flatten out at around 10-12b, I don't think we're going to have medium or long-term problems of insufficient physical gold supplies. The issue is the short-term sociopolitical changes that would occur in a transition back to a gold standard, before new supplies come on stream. One of the "arguments" I saw against a return to the gold standard was that much of the world's gold is now in the hands of Indian housewives and that a return to the gold standard would see a massive transfer of wealth from the west to India. You can expect to see similar thinly-disguised racist sentiments as the call for a gold standard increases.

In fact, after that time I'd be concerned with the devaluation of gold because of supplies being constantly dropped into markets, independently of gold's market value, as a by-product of mining asteroids for iron and nickel etc. The only floor to that would be marginal transportation costs of shipping it back to Earth, which would be a low floor indeed because the few tons per shipment would be being piggy backed on the thousands of tons of other materials - the gold could be shoved in a couple of crates stacked in a corner of the loading bay and not even noticed.

In the meantime, the only real issue with the physical supply of gold is having enough gold for one respectable wedding ring per person, some for electrical circuits and other industrial use, and enough left over to be the backbone (along with silver) of the money supply. With the aid of silver, I don't see that being an issue because there's already 4.5b oz above ground today and the promise of much more to come. If we went to a gold standard and the population grew before these speculative sources bore fruit we wont have as much gold jewellery per person as we do now, but even so, anyone who wants some could get some and in a manner that wont wreck the financial system.

JJM

Edited by John McVey
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During the gold bear market there was little investment in gold mines. It will take some time and will further increase the price.

What interests me is what if Ray Kurzweil is right and we will experience a technological Singularity.. What if nanotechnology makes it able to print as much gold as we want? :thumbsup:

Singularity would probably also make gold less relevant, and there would be a complex and fast evolving system of money, with different material objects or information serving as money every day.

The problem with speculating is that we can't really imagine how future people would communicate and interact, if Singularity were to happen.

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Bastian Hayek, you don't "print" gold. You cannot create it, you can only dig it up. (Technically you can transmute something else into gold in a nuclear reactor, but that's not related to nanotech.

John McVey, the density of pure gold is 19.3, not 18. (Possibly I misunderstood and you were giving the density of 90% coinage gold?) Nevertheless, an interesting suggestion.

One detail that would have to be resolved is whether the standard should refer to pure gold or a specific alloy. For example, "$20 per ounce pure gold" vs. "$15 per ounce of 18kt 3-N gold". The first leaves the composition of the coin open--if it's 90% pure, an ounce coin would contain 0.9 ounces and would be worth $18, or a 1.1111.... ounce coin would be worth $20. The second strongly implies a preferred composition.

(Interesting linguistic note: it's spelled "karat" in North America, "carat" elsewhere. I thought the first spelling was for discussing gold purity and the second for diamond weights and was about to call you on it. Well I was right, but only for North America. Since you walk around upside down and say "G'day" habitually, it's not a mistake on your part. :smartass: )

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Given that the Earth's population is projected to flatten out at around 10-12b, I don't think we're going to have medium or long-term problems of insufficient physical gold supplies.

It's not just population growth that acts to increase the demand for money, it's also growth in per capita economic output, which can be expected to go on indefinitely in a free society. But of course, there are factors that tend to decrease the demand for money (and I could also mention a non-gold factor that tends to increase the supply of it, but I don't want to start another long debate :smartass:), so there is still no reason to be afraid that demand will outpace supply.

Specifically, the demand for money is:

M = PQ/V

Transforming this a little to distinguish between population growth and per capita growth, we get:

M = PNq/V

where N is the population and q is per capita output. So, while an increase in population or per capita production tends to make more money necessary, they can be counteracted by a decrease in the price level or an increase in the velocity of money. One of these (or both) will happen, and the world will not come to an end. Problem solved!

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John McVey, the density of pure gold is 19.3, not 18.

No, you're right. I was truncating the decimals and also working from memory, my mistake. Type 3N has a density of 15.45, according to gold.org

The second strongly implies a preferred composition.

I would say so, yes. Goldsmiths and jewellers have been doing this for centuries, and have their own gold caratage standards thoroughly in place. Since the basis for use of gold as money is that at some point it could be taken out of circulation and used as a material to make things with, the most practical thing to do is have the gold coins in the most popular standard caratage used for that purpose. I don't think industrial users would routinely do that as they'd get pure gold direct from trusted refineries in their preferred physical forms (eg rolls of very thin high-purity gold wire as used by chipmakers), so I think the market would quickly conform to what the jewellery trade works with. If so then the simplest thing to do is, as you suggest, have the money supply quoted in terms of set weights of the regionally predominant jewellery grade rather than as pure-gold-equivalents.

Note also, though, that there is no one single caratage that is globally predominant. For cultural reasons, different regions have different grades. A call for 18ct on my part is westocentric, whereas the norm is 21 in the middle-East, 22 in India, and almost-24 in the far east. Regional money supplies would reflect these differences - and that means there'd still be a small job for finance people in FX markets, though there wouldn't be the volatility nor derivatives markets etc.

The next issue then is what the other carats consists of. In relation to 18ct gold, I picked 3N because it is the one that still looks most like pure gold, whereas 2N is pale yellow, 4N is pink and 5N is red. 2N is also high in silver, and that would tend to make the value of the coin become too strongly dependent on the value of silver as well as gold. 3N also has that problem somewhat (whereas the 22ct Krugerrand, in which the other 2cts are copper, doesn't), but I think the liquidity would compensate for that. What I am sure of is that pure gold is impractical for coinage because it is so easily damaged and worn away, as well as making for smaller coins per weight because the material density is so high.

Since you walk around upside down and say "G'day" habitually, it's not a mistake on your part. :)

Well then, since you recognised that I'll unfold another campchair, point out the esky and stubbie holder collection, and chuck another prawn on the barbie for yuh!

JJM

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I point out in passing that .900 is deemed hard enough for coinage; that was what the United States used for its gold coinage, including the double eagle ($20), post 1837. So for durability any alloy less than 22Kt (91 2/3) should be usable. (BTW post 1837 the remainder was copper. Before 1837 the US used a 22Kt standard then briefly went with a bizarre .8992 standard, with the remainder being "silver and copper." My source does not specify percentages.)

I would say so, yes. Goldsmiths and jewellers have been doing this for centuries, and have their own gold caratage standards thoroughly in place. Since the basis for use of gold as money is that at some point it could be taken out of circulation and used as a material to make things with, the most practical thing to do is have the gold coins in the most popular standard caratage used for that purpose. I don't think industrial users would routinely do that as they'd get pure gold direct from trusted refineries in their preferred physical forms (eg rolls of very thin high-purity gold wire as used by chipmakers), so I think the market would quickly conform to what the jewellery trade works with. If so then the simplest thing to do is, as you suggest, have the money supply quoted in terms of set weights of the regionally predominant jewellery grade rather than as pure-gold-equivalents.

I certainly would not want to use pure gold for coinage. The Canadian Maple Leaf is pure gold (99.99% if memory serves) with larger versions even purer. (Their 100kg (~220lb), one million loonie face value manhole cover is cast, not struck, and is 99.999% pure, meaning only one gram of non-gold "crud" in the entire thing. And I do mean manhole cover; I've seen one and my eyeball estimate is that it is about half a meter across.) In any case bullion dealers here *discount* the maple leaf on repurchase on the grounds that it will almost certainly have been damaged because it is so soft. I've yet to hear what happens with the US pure gold "buffalo" bullion coin.

Note also, though, that there is no one single caratage that is globally predominant. For cultural reasons, different regions have different grades. A call for 18ct on my part is westocentric, whereas the norm is 21 in the middle-East, 22 in India, and almost-24 in the far east. Regional money supplies would reflect these differences - and that means there'd still be a small job for finance people in FX markets, though there wouldn't be the volatility nor derivatives markets etc.

Nor a whole lot of arbitrage. FX would probably work entirely off of spreads and commissions, not a lot of speculation. Unless of course the differing non-gold part of the alloy becomes significant.

And just to add to your list of examples: For some silly reason 14 kt gold (only 58 1/3% pure) is very popular here in the States for jewelry, more so than 18 kt. Personally if I were shopping right now, I'd push for 18 kt or platinum, but then I am a bit of a platinum bug.

The next issue then is what the other carats consists of. In relation to 18ct gold, I picked 3N because it is the one that still looks most like pure gold, whereas 2N is pale yellow, 4N is pink and 5N is red. 2N is also high in silver, and that would tend to make the value of the coin become too strongly dependent on the value of silver as well as gold. 3N also has that problem somewhat (whereas the 22ct Krugerrand, in which the other 2cts are copper, doesn't), but I think the liquidity would compensate for that. What I am sure of is that pure gold is impractical for coinage because it is so easily damaged and worn away, as well as making for smaller coins per weight because the material density is so high.

Actually every Krug I've ever seen looked distinctly washed out or even tan compared to the look of pure gold. I would have guessed they had a lot of silver in them. In fact, for some reason I cannot explain, they look tan compared to old US coinage which is 90/10 gold/copper. The coinage that does the best job looking like pure gold in spite of being an alloy, at least to my eye, is the American Gold Eagle (bullion coins, not to be confused with the old gold circulating coinage pre 1934), it is 22kt (91 2/3 fine), the remainder divded as follows: 3% silver and 5 1/3% copper. This is not all that different from equal parts silver and copper of 3N

Irrelevant though, really, because that's not a jewelry alloy to my knowlege.

One thing though--if the standard is defined as "X dollars in one ounce (or one gram) of 18kt 3N" or 2N or whatever, it does not matter that silver could have a disproportionate influence on the standard... since the standard is defined in terms of the whole alloy, it doesn't matter what the constituents do. Now IF the standard were in terms of PURE gold but the coinage were in an alloy containing silver, you could have a problem--a spike in the silver price could lead to the coins being worth more than face value (and hence melted). I would hazard a guess that this is what motivated the US to remove silver from its gold coins in 1837. So you've (inadvertently?) made another argument for defining the standard in terms of weight of a specific alloy, rather than the pure gold.

Well then, since you recognised that I'll unfold another campchair, point out the esky and stubbie holder collection, and chuck another prawn on the barbie for yuh!

JJM

Sounds like a plan; as I write it is snowing here.

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  • 4 weeks later...

I came across Milton Friedman's view on the gold standard very recently...

"The fundamental defect of a commodity standard, from the point of view of the society as a whole, is that it requires the use of real resources to add to the stock of money." Milton Friedman

As far as I can see the Chicago school rejects the gold standard because they say it will take up to 4% of the annual GDP to produce the gold money. I think that will not be the case with the suggested model of using electronic money measured in gold. Would it be a problem with a traditional gold standard?

"My conclusion is that an automatic commodity standard is neither a feasible nor a desirable solution to the problem of establishing monetary arrangements for a free society. It is not desirable because it would involve a large cost in the form of resources used to produce the monetary commodity. It is not feasible because the mythology and beliefs required to make it effective do not exist." Milton Friedman

How did an alleged free-market economist come to such a conclusion?

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I came across Milton Friedman's view on the gold standard very recently...

"The fundamental defect of a commodity standard, from the point of view of the society as a whole, is that it requires the use of real resources to add to the stock of money." Milton Friedman

As far as I can see the Chicago school rejects the gold standard because they say it will take up to 4% of the annual GDP to produce the gold money. I think that will not be the case with the suggested model of using electronic money measured in gold. Would it be a problem with a traditional gold standard?

"My conclusion is that an automatic commodity standard is neither a feasible nor a desirable solution to the problem of establishing monetary arrangements for a free society. It is not desirable because it would involve a large cost in the form of resources used to produce the monetary commodity. It is not feasible because the mythology and beliefs required to make it effective do not exist." Milton Friedman

How did an alleged free-market economist come to such a conclusion?

You can be a free market economist and advocate against the use of gold as money, or any other choice the free market may make. (as long as you don't advocate that the government use force to mold the market according to your opinion)

If we were to have a free market, reality would quickly decide whether the use of gold is good or bad, and the market would act accordingly.

Objectivism certainly doesn't advocate in favor or against gold, but rather for individual rights. As long as Milton Friedman is on board with that, let's not take his opinion as a political statement, but rather judge it as economic advice. Who knows, maybe he's right, I'm certainly not equipped to decide, and unfortunately without the freedom to test it, I'd have to become an economic scholar before I can decide.

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Friedman was not an advocate of freedom as a fundamental ethical issue. In the vein of Adam Smith and the "invisible hand", he thought freedom was efficient as wealth-creation. The neo-Cons have a similar philosophy. He was quite comfortable with the Fed, and with the notion that the Fed should use a fiat currency and inflate that currency at a low, fixed rate.

The monetarist school did act as a bridge to advocate Classical economics to the world of 1970/1980. However, their own unique contributions are questionable. In many ways, they're just reformed Keynesians.

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Friedman was not an advocate of freedom as a fundamental ethical issue. In the vein of Adam Smith and the "invisible hand", he thought freedom was efficient as wealth-creation. The neo-Cons have a similar philosophy. He was quite comfortable with the Fed, and with the notion that the Fed should use a fiat currency and inflate that currency at a low, fixed rate.

The monetarist school did act as a bridge to advocate Classical economics to the world of 1970/1980. However, their own unique contributions are questionable. In many ways, they're just reformed Keynesians.

That seems to be a very accurate description.

Do you have something to answer them on the 4% argument? Or is there a place where we discussed that argument?

Thanks!

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Do you have something to answer them on the 4% argument? Or is there a place where we discussed that argument?
I don't know where he comes up with the 4% figure. It is not merely the number; I'm not clear what assumption he is making. For instance, why would any % of GDP need to be spent each and every year? I just don't understand his argument well enough to comment.

I suspect that the fundamental mistake the monetarists make is to think that money is something completely separate from other values. So, for instance, they would think of the Quantity Theory of Money as describing two major components: money and other values. So, they see money "chasing" values. This works to some extent, but only as long as one thinks of this as merely a rough approximation of the real picture. A more accurate picture is that values chase values. Money is closer to being more a characteristic of certain values, with some being more money-like and others being less money-like. ["Money-like" would means that it has the attributes like fungiblity, high value-per-unit, etc. that a typical Economic text might list.]

So, when Friedman says that a commodity standard "requires the use of real resources to add to the stock of money" he is right, but that is only because money ought to represent some real value. ["Real" does not mean physical or even currently in existence; a real promise to perform can also be a value if made by someone reliable (i.e. someone of good credit).]

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