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The Gold Standard

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Just for the record, (reference http://en.wikipedia.org/wiki/Gold_dollar ) $1 was 1/20 ounce of gold in 1856, it is now 1/2000 ounce of gold. That means that the dollar has lost value so that it is worth 1/100th what it was in 1856. In other words, due to leaving the gold standard, today's dollar is worth 1 penny in 1856 gold dollars. That's how the government steals your money with inflation on a money system that "floats against gold". Had we stayed on the gold standard all of this time, your dollars would be worth 100 times more than they are worth now!

But yes, the government always tries to dismiss its promises, especially shortly after a major war when they have usually incurred a lot of debt to fight the war. That's one reason why we need to get the government out of the currency and let them declare bankruptcy or limit their debt severely. I prefer to limit their debt, since the only way they can pay their debt is through higher taxation or just dismiss it as they normally try to do.

Dividing the currency depends on market conditions, but ordinarily, if they do go to smaller denominations, then yes they would have to recall the larger bills or notes before printing up smaller ones. As to why they ran out of silver coinage, that can happen if they do not re-size them or if silver is being used for something else or sent out of the country. I'm not saying shortages cannot happen under a gold standard, but if the banks and the merchants handled the money issuing, then they would be more responsive to market conditions and be more trustworthy than the government.

As to other countries, they can go their way and we can go our way. But in short, dollars (or bills and notes) to them would represent less gold or silver in the United States. This does not represent a problem, however, as the gold remaining here can be sub-divided as per the Island Scenario. And I think it would eventually come back here anyhow, as they would buy things from us, in the long run.That is, I don't see it presenting a problem. If we had a shortage of gold, it's value would go up in our currency, or we could have silver and copper backing up the currency as well. All of the gold is not going to disappear from a country going with the gold standard. It didn't happen that way in the past when we were on the gold standard and had gold as money.

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I've been thinking more about a gold standard and the deflation that would result as the economy grows.

In isolation, deflation is just as arbitrary as inflation. Deflation represents an automatic transfer of wealth from debtors to creditors (the opposite of inflation). There is no basis to prefer deflation than the alternative.

In fact it gets worse for deflation. Wages and prices are sticky (just look at the fact that US firms prefer to lay off workers and freeze wages rather than applying a general pay cut to the workforce). So say you are running a business under a gold standard. You would have to give your workers nominal pay cuts just to keep their pay the same as last year.Otherwise everyone would be receiving pay rises regardless of their performance. Try telling someone you are cutting their wages based on their equally good performance as last year; its quite clear that persistent deflation would be impractical because of sticky prices and wages.

Most economists prefer a small rate of inflation for this reason. I think the Fed has done a good job of keeping a low moderate rate of inflation over the past few decades. Every prediction of hyperinflation from people on the right (from the WSJ to Objectivist commentators) has consistently been proven wrong.

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In isolation, deflation is just as arbitrary as inflation. Deflation represents an automatic transfer of wealth from debtors to creditors (the opposite of inflation).
To the extent such things are predictable, they can be priced in and will not represent "wealth transfers" . [Aside: The follow up question is: what if deflation requires a negative nominal interest rate?]

Wages and prices are sticky...
This less true of non-wage prices than it is for wages. More importantly, this is a temporal social fact, not a metaphysical one. One won't get fundamental change in government policy unless there is widespread change in people's ideas. In that light, understanding the difference between a nominal and real wage is not a huge leap.

Every prediction of hyperinflation from people on the right (from the WSJ to Objectivist commentators) has consistently been proven wrong.
Inflation is not the only negative of having a fiat currency. As for hyper-inflation, it is more of a political event than an economic one. There is no good evidence that the U.S. will head for hyper-inflation. As for inflation, right now we're seeing debt-deflation in the private sector. if the new-found attitudes about deficit-reduction act as a check on further fiscal stimulus, we are more likely to see very low inflation for a while.
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You are thinking about deflation the wrong way, because it wouldn't be deflation, it would be a general lowering of prices due to production. Deflation is when the money supply is decreasing. And prices coming down doesn't mean that your wages are going up. Your wages would remain stable but you would be able to buy more with it. In other words, your boss would not be paying you more money over time, aside from raises for good performance, and yet your wages would buy more and more goods and services; his profits coming in would also but him more and more goods and services over time -- it's a win-win scenario, and nothing to be afraid of.

So far,in all of the threads on the gold standard I have been involved it, there are a lot of gold money fallacies being promoted. These are all wrong and just being used to justify not having sound money. I've already indicated that the current dollar is worth 1/100th of the dollar in 1856. What more evidence do you need to realize that fiat money or money not backed by a commodity becomes worthless over time? We don't necessarily need hyper-inflation for this to occur, but steady inflation for the past 100 years has devalued the dollar to be worth only a penny (in 1856 dollars).

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Every prediction of hyperinflation from people on the right (from the WSJ to Objectivist commentators) has consistently been proven wrong.

You did notice housing prices rising by 20% during the early 2000's right? Did you also notice that "inflation" was pretty flat during the same time? Housing prices weren't counted into CPI, even though spending on debt service represented fully 10% of GDP.

Did you notice imports from China skyrocketed in the past decade, and yet the huge influx of cheap goods did nothing to lower the price to consumers? CPI didn't count the downward pressure of cheap imports on consumer prices, and the gov't's calculation of "core CPI" excluded fuel and food, the main consumer purchases least affected by cheap imports.

Funny how that works.

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The gold standard means that it is gold-specie or a proper gold-bullion standard. The gold-exchange standard is not really a gold-standard at all. Of course, if the government is going to push something, it ought to be a real-value standard, and the rest should be up to private people to figure out. They'll will find what works best. A century ago, these private folk had basically come up with the gold-specie standard, but if they want to come up with some type of mixed-commodity standard or something else, that is fine too.

Edited by softwareNerd
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