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The Gold Standard

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Why is gold an objective value? Isn't gold a subjective value just like every other currency?

Because gold has real value on the market that is very steady. Since you can't just print gold up, it retains its value, and thus the integrity of money is maintained.

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But isn't gold only valuable as long as people think its valuable, and doesn't that make it a subjective value?
It depends what one means by "objective value". If the world turned vegetarian, would steak have objective value, even though nobody found it to be valuable? Do beautiful clothes sold by some designer have more objective value than plain clothes, even if they use the same amount and quality of raw-ingredients and cover the same body parts?
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Well isn't an objective value only one that furthers human life? For instance, isn't food an objective value? Since gold doesn't directly further our lives, I wouldn't consider it to be an objective value. But to answer your questions, softwarenerd, I wouldn't consider steak an objective value in a vegitarian society. And nicer clothes would only be more valuable in a society opulent enough to recognize them as such. In a society of barbarians that only need clothing for warmth, their value would be equal to the regular clothes. So I guess that that means that gold can only have an objective value in a society of opulence with a need for objective values. But doesn't that mean that gold itself value differs on the society? And doesn't that then make gold a subjective value? I think I'm only confusing myself haha, I need to think this through more.

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Gold has real value to life as a unit of exchange, because the supply is very limited, it is durable, enduring and easily divisible. The value is objective, in that for the purposes specified it works better than anything else. Gold does have other very practical uses, such as in electronics, but we're here referring to it as a unit of exchange.

Also, historically gold has always naturally risen to a position of dominance as a unit of currency where governments have not stood in the way, starting with ancient China. I recommend the book "Gold and Liberty" by Richard Salsman if you are really interested in this topic.

Other metals would work. For example, silver is another good unit of exhange, but gold trumps it.

Edited by Thales
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But isn't gold only valuable as long as people think its valuable, and doesn't that make it a subjective value?

Given the fact that value is, by definition relative (meaning that something can only be of value to a person at a time, not to "people" in general-for instance a bucket of ice is of objective value to me, because my buddy just walked in wearing shorts and carrying beer, but it would not be of value to someone at the South Pole) , I would change what the meaning of subjective is (or rather how one should correctly apply its established meaning, to this subject), just a little:

If a person thinks that something is not of value, and that would suddenly make it not of value to them, that would be a subjective value: for instance some dirt someone carries around from the place they were born in. This does not apply to gold: just because you decide tomorrow that gold is no longer of value to you, it will still be of value to you, because it is an objective value.

But value in general, whether objective or not, is relative: even if gold is objectively valuable to you (meaning it's not subjective), it doesn't matter whether you think it's valuable or not, it does not affect its value. However, the identity of the person to whom the gold is supposed to be of value does matter, because value in general is relative to one specific individual. For instance to person X, who happens to be stranded on a desert island, gold is not valuable. Its value to him is still objective, it won't all of a sudden change because he decides so, but relative to him the value of gold is, objectively, zero.

Edited by Jake_Ellison
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Other metals would work. For example, silver is another good unit of exhange, but gold trumps it.

Silver will always have a role, small change if nothing else. Copper for even smaller change.

"Newer" metals (in terms of when we discovered them) like platinum, rhodium, etc, are actually be worth more than gold but are not instantly recognizable.

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I'd like to point out that gold isn't only used because it is pretty and is valued by every civilized culture and region on this earth. It's also quite valuable as a utility for the economy because it lasts for-freakin'-ever. The wealth will continue to be represented by the same physical amount of the gold, so it doesn't devalue or disappear over time.

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Why is gold an objective value? Isn't gold a subjective value just like every other currency?
You've got answers to this, but I wanted to add an aside: the important principle is that money should be something of real value, not a fiction like fiat money. Gold is one concrete implementation of this principle, and arguably the best possible implementation. Still, in a free economy, it is not up to the government to specify what is used as money. If the free-market decides on the use of gold, so be it. If it uses a mix of things -- as would be most likely in a modern economy -- that would be fine too. In essence, money is not something completely distinct from all other valuable goods; rather, it is a valuable good that has certain characteristics and is used in a certain way. Edited by softwareNerd
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... I understood way paper currency was bad, ...
Just to clarify, the problem is not that it is paper, but that it is only paper, with nothing behind it, not even the supposed "promise to pay" some objective value. Fiat money is the problem. Edited by softwareNerd
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  • 2 years later...

*** Mod's note: Merged from this topic on "Occupy Wall St." - sN ***

If they devalue now, let people know why they're devaluing, put in place safeguards against future bubbles (like, oh, I don't know... a full-reserve, audited gold standard?), then everyone takes their lumps and we rebuild what is still a vital, intact economy.

Having a gold standard would be an absolute disaster. Take a look at this chart which shows that during the depression you could predict a country's recovery based on when they left the gold standard:

http://en.wikipedia....ssion_Graph.svg

The reason for this is because currencies need to freely float against eachother (ie devalue & revalue) based on market activity, not be artificially fixed against a commodity which is a recipe for rigidity and stagnation. You can see this in the Euro today which is basically a modern day gold standard in most substantial respects.

And a full reserve gold standard?! Well that would mean a drastic cut to the amount of credit in the economy as banks would have to keep more reserves. If private & government players both deleverage at the same time as you advocate, then peoples incomes will fall drastically since one person's spending = another persons income. This would NOT be good policy.

Edited by softwareNerd
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Ice, that graph really doesn't show what you're claiming it does very convincingly. Yeah, for the US the point comes in conveniently at the depth of the crisis, but several other countries did it before their worst crash, or once things had already gotten better. Besides, there are so many reasons as for why a depression can be prolonged that saying based on this that it was obviously the gold standard's fault is ludicrous, to be honest. There's a million different government policies and economic facts that come into play there. I'd be very interested in seeing how much of the drop in income is explained by the gold standard; I'm willing to bet it is a very small % (when you do statistical analysis on it).

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Having a gold standard would be an absolute disaster... The reason for this is because currencies need to freely float against each other ... not be artificially fixed against a commodity which is a recipe for rigidity and stagnation... And a full reserve gold standard?! Well that would mean a drastic cut to the amount of credit in the economy as banks would have to keep more reserves.... This would NOT be good policy.

Wrong. Having a gold standard does not necessarily mean that the price of gold against a currency should be fixed as it was in America at one time at $35 per ounce. The price of gold in Dollar terms should be allowed to freely fluctuate since there is not enough gold in the world to match all economic activity. Currency is NOT money. Gold and silver is the real money. Currency is just worthless pieces of paper. Any govt that over prints its currency will be put in check because it will lose value and people will stop accepting it and insist on gold/silver. The govt will then be forced to also pay its bills using gold/silver. But in any case, printing currency should be given back to the banks and not left to a govt monopoly (Fed). Banks will never cause inflation by overprinting because of the risk of depositors pulling out their money.

Real money has three functions. A medium of exchange, a unit of account and a store of value. Fiat currency satisfies the first two but fails on the third function because govts have power to just print, thereby indirectly taxing citizens, most of whom are too dumb to know what is happening. The price of most commodities in gold/silver terms has been more or less constant (if not reducing) for hundreds of years whereas I cannot think of any fiat currency that maintains its purchasing power over 50 years (today's Dollar is worth less than four cents what it was in 1913 when the Fed was created).

Thomas makes excellent points I fully agree with.

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I think you misunderstand the nature of gold as money, because a gold standard or gold as money does mean that there would be a fixed amount of gold that would be available for each dollar. You are thinking about it being two separate systems -- money and gold -- but what money as gold means is that the gold in weights would be the unit of exchange, and the bills would simply be a convenient way of carrying your gold. That is, notes would be issued that say this note is redeemable in a certain amount of gold, and you could carry that note to your bank and exchange it for that amount of gold. This was the monetary system in the United States until the Federal Reserve stole all of the gold and gave out greenbacks instead and made it the legal tender of the land. So don't think of the bills as being the money, the money would be the gold, and the notes or bills would be like a check pre-written for a certain amount of gold. Actually, to make it less confusing and more difficult to manipulate, prices would be in terms of weights of gold, not dollars and cents. So a car, for example, would cost so many ounces of gold, not $20K. Likewise you would buy things at the grocery store for specified weights of gold, not dollars.

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Ice, that graph really doesn't show what you're claiming it does very convincingly. Yeah, for the US the point comes in conveniently at the depth of the crisis, but several other countries did it before their worst crash, or once things had already gotten better. Besides, there are so many reasons as for why a depression can be prolonged that saying based on this that it was obviously the gold standard's fault is ludicrous, to be honest. There's a million different government policies and economic facts that come into play there. I'd be very interested in seeing how much of the drop in income is explained by the gold standard; I'm willing to bet it is a very small % (when you do statistical analysis on it).

It is pretty much universally accepted amongst respected economists across the political spectrum, from Milton Friedman to Keynes, that leaving the gold standard helped America's recovery. The graph is pretty clear for America and Britain, less clear for other countries granted.

Having a gold standard does not necessarily mean that the price of gold against a currency should be fixed as it was in America at one time at $35 per ounce. The price of gold in Dollar terms should be allowed to freely fluctuate since there is not enough gold in the world to match all economic activity.

I think this shows where you guys are unclear - your first sentence is exactly what a gold standard is defined as. Your second sentence is exactly the system we have TODAY ie no gold standard with the price of gold in dollars freely fluctuates. You have the exact opposite definition of the two regimes.

I think you misunderstand the nature of gold as money, because a gold standard or gold as money does mean that there would be a fixed amount of gold that would be available for each dollar.

You make the same mistake; that is exactly what a gold standard is.

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Your quotes and replies don't make any sense from my reading. If we get a gold standard, it does mean that each dollar would be representative of a certain fixed amount of gold. If we did it today, "one dollar = 1/2000 ounce of gold." This would be a definition of what "one dollar" means, not a ratio of dollars to gold, or how much gold a dollar could purchase. In other words, for a one dollar bill, instead of saying it is backed by the good faith and credit of the United States, it would say redeemable for 1/2000 ounce of gold. And the government would not be printing dollar bills. The Federal Reserve would be ended, and the function of money would be turned over to private banks who would issue gold coins and / or gold notes for the gold reserves they had on hand from deposits. Printing more nominal bills than gold available at the bank would be illegal, as this would be fraud,since each dollar issued by the bank would be a draw on its gold reserves. So, if they had 1,000 ounces of gold on hand from deposits, the total nominal bills could not exceed 1,000 ounces of gold.

By the way, there is a lot of misinformation out there about gold as money, such as the previous person stating that there isn't enough gold to go around to run an economy. There is plenty of gold out there, if the government would not have confiscated it and gave us greenbacks. All that gold in Fort Knox actually belongs to the American people,and would have to be returned to the American people for a gold as money system to be established; otherwise, I think you are right that there isn't enough gold to go around out there.

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By the way, we would have a functional gold standard, even if they didn't call it that, if the Federal Reserve would stop printing money or trying to create bills out of thin air. That's all they have to do is to stop printing dollars and other currency notes, then the dollar would once again be worth a fixed amount of gold, even if it didn't say that on the bill itself. But the Federal Reserve system was intentionally set up to manipulate money under the government's decree, and now we have the dollar at 1/2000 ounce of gold instead of a much more valuable amount of gold. Back when I wrote an essay on the same subject, gold was at $300 per ounce, so just a decade or so ago, the dollar was worth 1/300 ounce of gold.

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It is pretty much universally accepted amongst respected economists across the political spectrum, from Milton Friedman to Keynes, that leaving the gold standard helped America's recovery.
It is true that the Monetarists are also bad on the theory of fighting depressions, like their Keynesian brethren. They want monetary stimulus, while the Keynesians want fiscal stimulus. It is a mistake to think of the Monetarists and Keynesians as spanning a large spectrum of economics. They typically do span the political spectrum, but not the Economics one. In basic ("positive") economics, they're actually very similar.

I think this shows where you guys are unclear - your first sentence is exactly what a gold standard is defined as.
Not "you guys". While Lethalmiko does not understand the gold standard, Thomas correctly clarified that the gold-standard implies that gold is money, with a dollar just another name for a particular quantity of gold. I suspect you simply mis-read or misunderstood what Thomas wrote.

Finally, on your graph. As Maarten said, it is pretty weak. It is not just that the upwards trends don't particularly jump out at one, but also because many other variables were at play. However, there is a more fundamental problem with it: even if the post-gold upturn in GDP did happen, it does not imply that the gold standard is bad. Imagine a patient with a heart-attack, given a powerful drug to get him going again. One would not use this to claim that everyone should take that drug all the time.

To attack the gold standard, one cannot use the example within the depression. Rather, one has to attack it by showing that it did not work well across the centuries (or at least the modern decades of those centuries) when it was in place. You did mention that it causes deflation, etc. Though this is not true, it is the correct way to argue against the gold standard, rather than using the example from the depression.

Essentially. a credit boom is solved either by the passage of time or by the recognition of loss. There are all sorts of structural factors that slow the recognition of losses. The pre WW-1 notion of "liquidate labor and capital" simply meant: force everyone to take the losses as soon as possible. The recession of 1921 is a good example where capital was liquidated really fast, by bankers, and we came out of that little recession without much fuss, and without government stimulus. Going off the gold standard is simply one way to -- overnight -- force some people in society (especially creditors) to take a loss. To hell with fairness and justice: they'll take the loss and it's too bad for them! Still, despite the injustice, once losses are recognized, it does have a positive impact in the medium term. However, in the long run, by setting a precedent by which the government can throw out private contracts, it hands ever more power to government and essentially brings us to where we are today. Keynesians and Monetarists love to look at the credit-booms and recoveries they engineer, but refuse to take responsibility for the busts that come down the line. After all, in the long run, said Keynes, we're dead.

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I am aware that Dollar Bills originally were representations of the gold and silver you have in the bank, but under the current system where the Dollar has been divorced from gold by Richard Nixon, it may not be easy to go back just like that, short of introducing a new currency since there are more Dollars than gold. It is possible to have Dollars printed and used as money without necessarily being tied to gold as long as it is left to private banks. Dollars can compete against and work alongside gold.

Currently, about 165,000 metric tons of gold have ever been mined, valued at US$9.2 trillion (at US$1900/oz). Unless I am mistaken, there is more money in circulation just in the USA alone. Even if we mined all the gold in the world to add to the current stock, there is simply no way it can cover all transactions in the entire world without drastically increasing its purchasing power. Even if it is true there is enough now, what about 50 years from now?

Its value would therefore keep endlessly increasing since people would need it to do any transactions. What is more practical is to allow many other things to be used for money such as platinum, diamonds or emeralds.

Edited by lethalmiko
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In other words, for a one dollar bill, instead of saying it is backed by the good faith and credit of the United States, it would say redeemable for 1/2000 ounce of gold. And the government would not be printing dollar bills.

You are essentially saying that the government should stop issuing dollar bills and that private issuers should make their own bills at a rate of convertibility of their choosing.

Printing more nominal bills than gold available at the bank would be illegal, as this would be fraud,since each dollar issued by the bank would be a draw on its gold reserves.

If I have got your argument right above, then there is nothing to stop a private issuer from not having 100% gold reserves. You say it would be illegal and fraud to have fractional reserve banking, but I don't see any basis for why that would be fraud. If the issuer freely chooses to have 10% reserves and everyone who uses those bills is happy, there is no problem. As long as the reserve level is advertised faithfully then it is not fraud.

Which then leads to the following problem with privately issued currencies - the issuer would simply print extra bills to a small % of the total number of bills each year and deposit them in its own bank accountsee note 1 below. They would quickly become the richest corporation ever while causing only a small amount of inflation.

You may argue that people would switch to other competing bills, but I don't see that happening. Currency has a strong network effect; everyone will switch to the same bill because that's what everyone else is using. Can you imagine a world in which every item in the supermarket has 20 different prices on it, one for each brand of dollar bill? That in itself is not desirable.

=============================

Note 1 - That is essentially what the government does today. With quantitative easing it prints money and buys govt bonds with the money. This is essentially the government printing money for itself to spend. The difference with the government is that it is democratically accountable to the people. If a private issuer ever did this then they can spend the printed cash on whatever they want and are not democratically accountable.

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Yes, I would be for ending the Federal Reserve and the nationalized monetary system run by the government. Let banks and merchants decide what they will accept as deposits and payments. This is the system we had in America for the first hundred years and it did not lead to a lot of confusions, primarily because gold and / or silver was accepted everywhere. By ending the Fed, we will no longer have to worry about the government printing itself money out of thin air, thereby causing inflation. And get rid of the legal tender laws. Right now we are stuck with the dollar per the Federal Reserve because it is illegal to use anything else as money, leaving them free to manipulate the dollar at will. In other words, take the power to print money away from the government and return it to private banks and merchants. As to your issue that they could just print at will, remember each note would be a draw on their reserves, so if they printed too many bills then they would go out of business as people came in to convert their bills into gold or silver -- that is, if word got out that they were just printing money out of thin air, then depositors would come to get their gold or silver post haste.

As to fractional reserve banking. I don't think that would be illegal per se. That is, the bank could loan out whatever fraction of their deposits they wanted to, but their customers and depositors would no long have ready access to their money deposited there. What I'm really against is the bank printing up currency to more than what they can account for in their reserves. Let's say they have 1,000 ounces of gold on reserve or as deposited and they print out money to 2,000 ounces of gold. How are they going to cover those bills? They put a claim on themselves for 2,000 ounces of gold, and they only have access to 1,000 ounces of gold. So, I think banks wouldn't do this as this would be a quick way of going out of business. But it should also be illegal, because I think it would be fraudulent.

But I don't think we have to work out the details, and should let banks and merchants decided what to accept as currency, then the best system would win. However, a quick solution to the problem with our current currency is to end the Federal Reserve and make it illegal to print more dollars. In this way, the ratio of gold to dollars would stabilize and then we could transition to returning the gold in Fort Knox to the people, exchanging dollars for that gold at a set ratio dependent upon market conditions.

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As a further analogy, if you have a checking account, what is to prevent you from writing checks for more than what you have in your account, something you say banks and private merchants would do if they printed their own bills or notes? What prevents that from happening is that your check would go back to your bank and they would see if you had money to cover the check, if you did not, then the check would not clear. Actual money notes works the same way. Each bill or note they print would be a draw on their overall deposits from their customers. If they print out too many bills or notes, their account would be overdrawn, and as people came to get their gold or silver, then the bank would run out of money. I think you are forgetting that the bills and notes would not actually be the money, but rather the deposits in terms of commodities would be the money. Bills and notes are simply like checks pre-written for a set amount (for that commodity).

Edited by Thomas M. Miovas Jr.
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