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Gold Standard in Currency

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I would like to better understand what would happen if a gold standard was reinstated. As I understand it, the only way to truly turn our economy away from disaster is to find some way to bring back gold. I have a few questions:

1. What would be the biggest reason people would be against going back to a gold standard? (besides the obvious fact that economists would like to continue to hide the devaluing of the dollar) Is the economy too far gone to peacfully transition back to a standard bank-note-for-gold system?

2. Would there be enough gold to make the dollar worth anything in such a way that the economy would not take a stake-to-the-heart and not have to "reboot" per se?

3. How would we push it? Could it be done without a revolution on the economic front? Also, would the time frame of a transition, if possible, be within the means of my generation?

Any comments here would greatly be appreciated.

The biggest reason I want to do this is because I would like to have a bumper-sticker or something that says "Bring Back Gold." And I would like to be able to answer the question, "How?" Which, right now, I am having problems addressing.

Thanks All!!!

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I was thinking and one of the problems with this is, 'Who would get the money?'

Would they just print a gold standard note and it would be exchangable at some rate to the current dollar? As a way to transition perhaps. Or would it be a type of 'refund' on inflation commensurate with income?

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As I understand it, the only way to truly turn our economy away from disaster is to find some way to bring back gold.
While this is not the main thrust of your post, I question this assumption. I do not think the U.S. economy is necessarily headed for disaster, even if gold never comes back as the basis for money.
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The reason I say that is if one considers the consequences of deficit financing as it is done today (as far as I know) continued ad infinum, the thought of value as it relates to the dollar would all but disappear.

Where does inflation stop? How would the dollar stabilize and maintain any useful value if the government can just print more on the credit of the 'greatness' of the American Dollar

Edited by Proverb
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I have an idea.

All governments meet and pay all their public debt back with all the gold they have. This is in fact, devaluating the dollar in comparison to gold, but the good thing would be that we would finally get the governments out of the financial markets where they have nothing to do in the first place.

This may also end the rise in world wide unemployment which is so eloquently blamed on globalization. If the only way to invest capital (more precisely: to receive interest from it) is to give it to a company, you can no longer erode the capitalist system by destroying capital (by consuming it via public debt). I mean, there is no way all the public debt in the world can be paid back. This must inevitably result in a big financial crash that may let Black Friday look like a joke unless it's paid back with this neat trick. Of course, doing this, the governments would have screwed us again, but it would be better than a worldwide financial crisis. As long as the governments meddle with anything you can always only choose the lesser evil.

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If you are thinking in terms of government policy, there is no need to “bring back” anything. The government should simply end the coercive monopoly on currency it now holds. This would consist solely of making the phrase “this note is legal tender for all debts, public and private” you see on every U.S. bill legally void, allowing citizens to choose what form of currency they accept. This will open up the currency market to private money, which will quickly drive out all fiat currencies. Without its coercive powers, the Fed will either be privatized on a hard money basis or eliminated by competition.

Edited by GreedyCapitalist
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Already there's something going on, the Liberty Dollar. The Liberty Mint is very tied in with the Libertarian movement, and probably holds more appeal (in principle) as a non-US-Gov't currency than as an objective tool of trade.

There are some valid points. If enough small businesses start using the currency, and issuing silver Notes as change, eventually the fractional reserve system can be replaced without causing a massive nationwide economic imbalance (at the very least). It's totally legal - Federal law treats exchanging gold/silver for goods and services as a barter. In the unlikely event that the bankers (who profit highly from the current system) mend their wayward practices (and disavow their secret society cabals :dough:), a Mint for gold and silver coinage is already built.

Of course, there are some annoying practical issues:

1. Convenience: Only Liberty Dollar associates accept the silver coins and notes. If these were independent local grocers and gas stations, it might work out. But most of the associates seem like businesses that don't have huge economic impacts on their local economies (certainly not national economics). Try dropping a silver piece at Best Buy ... it took a nationally embarrasing incident for them to learn the two dollar bill was legal tender.

2. Efficacy: The coins are expensive, costing twice their "print value", i.e. $20 for one $10 coin. You think gas prices are high now ...

3. Principle: Anyone unaware of how money really works has to withstand a crash course in the evils of fractional reserve banking, and why silver/gold is better, and then pay $20 for $10 of money. Trying to explain this to people is like pushing molasses up a sandy hill. (There are times I have to describe it all to myself again, just to make sure I'm getting it right. Dammit, Jim ... I'm a musician, not an economist.)

4. Circulation: Many people who buy these silver coins don't actually spend them; they collect them, along with Sacajawea dollars and $2 bills. Many of the tesimonials on the Lib.$ site tell the same story: a free man (FREE!) pays for like a happy-meal or something with a Lib.$, tells the befuddled clerk about it all (or gives him a pamphlet ... sheesh); the clerk pockets the coins, then pays for it with his own money. (I can imagine the beanstalk-Jack conversations these clerks get into after they go home ...)

Trust me, I'd love a return to the gold standard, but I'm wary of these libertarians (I have seen the light!). Then again, maybe there's nothing wrong with it all, and I just haven't found an airtight argument for what the Lib.$ folks are doing.

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...but I'm wary of these libertarians (I have seen the light!). Then again, maybe there's nothing wrong with it all, and I just haven't found an airtight argument for what the Lib.$ folks are doing.

Libertarian or not, just consider the business proposition:

You send them US $107 and what do they send you?

1) 4 silver coins (1 oz. each)

2) Documents that they promise to redeem for a total of 4 oz. more of silver

3) The "electronic L $" equivalent to 2 oz of silver

At the top of their web page, they say that today's rate for silver is $7/ounce. They claim to be giving you 10 oz. (real ounces and promises of future oz.). So, they're charging (107/10=) $10.70 per ounce.

Not to be sceptical, but could you find a clear link on their site that says "Bought Lib$ that you want to redeem? Click here!"

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  • 4 weeks later...

[Mod's note: Merged with an earlier thread. - sN]

In a recent article on CapMag, Don Luskin suggests that the Fed should index currency to the gold, such that the gold/$ exchange rate (a.k.a. the dollar price of gold) remains constant. The Fed, he suggests should increase or decrease the money supply in order to maintain a constant gold-price.

(Thanks to the Self-Uncensored Blog for the reference.)

Indexing to gold has certain merits.

  1. It is an objective criteria. The current system relies on the "judgment" of the Fed governors
  2. This particular objective criteria has merit because the supply of gold is unlikely to increase rapidly, and therefore it will result in the money supply not increasing rapidly either.

However, while it is better than the existing system, it seems overly complicated. Why not have a simpler scheme: just keep the money supply constant?

No, I'm not suggesting a gold-backed/gold-convertible currency is not the ideal. The article does not suggest that either. Rather, I do believe indexing to gold is neither a good equivalent to convertibility nor even a good first-step. Indexing to gold achieves nothing that could not be achieved by simpler means: fixing a pre-decided rate of increase in the money supply (even if that rate were to be zero!)

Indexing to gold has no additional merit of making the currency any less of a fiat currency. It has the demerit of being less predictable than the "fixed rate of change" method.

Thoughts?

Edited by softwareNerd
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The question is: what would the government do in order to try to keep the dollar price of gold constant? And whatever it was, would they really stay with it?

When we had gold convertibility of the dollar, in effect that meant that the government kept the dollar price of it constant. So before 1971, when Nixon ended the last vestiges of gold convertibility, the government stood ready to buy or sell gold at $35 an ounce. (Or it may have been $38 or a little more - I know they raised it by trivial amounts a few times.)

What this meant in practice is that from sometime in the late 1940's up to 1971, the government was constantly selling gold in order to keep the price at $35. So much so that during this time period, they ended up selling about half of the gold they once had. That policy can obviously only go on until the government's gold runs out. (Of course, they could also have put the brakes on the money supply so that people would not have had all these dollars they wanted to exchange for gold, but obviously they were not willing to do this.)

Another way to try to keep the gold price constant would be for the government to limit the growth of the money supply. I suppose that would work. But if they announced this policy, I for one would not believe that they'd stick with it. Keeping the gold price constant would take discipline, of the kind that our leaders have repeatedly shown they do not have. They could say they were going to try to keep the price of gold constant. But as soon as they had some reason to inflate the money supply, they'd go back on their word and inflate it. (Reason's to inflate the money supply?? Oh, maybe to provide people on medicare welfare with free drugs, or to rebuild un-insured houses in a disaster, or maybe to prevent a large financial institution from collapsing. There are always incentives for politicians in a mixed economy to inflate the money supply so they can subsidize some constituency or another.)

(Or the government might decree that the reason the gold price is going up is because of "greedy speculators". They'd just pass a law that interfered with the ability of people to freely buy and sell gold, so that they wouldn't have to worry about the price. Of course, there'd be markets and a price outside of the US.... which might make things interesting.)

It comes down to being a moral issue. Does the government take the integrity of our money seriously, or not? Do they consider keeping its value stable to be some kind of moral imperative? Or is the value of every man's savings to instead be sacrificed for various altruistic schemes?

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  • 1 year later...
What are your opinions on Gold or Silver Standards versus fiat currency? How should the money system work in a capitalist country?

I guess it's obvious from my SN what type of currency I favor. :) I recommend looking up some of Richard Salsman's many articles on the Gold Standard, and the elimination of Central Banking. He goes into lots of detail about how it would work out, from an economist's perspective. I'm not an expert on economics, but all of the articles and lectures that I've read or heard by him have made a lot of sense to me.

Edited by Bold Standard
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  • 3 months later...

Here is something that has nagged at me for a while in regards to the gold standard. If the purpose is to maintain a constant supply of money by pegging it to a metal whose supply remains relatively constant, then would this not be a problem for a growing economy? Money is a tool of exchange. The more exchange there is, the more tool to facilitate that exchange will be needed. But a money supply that grew with demand would have to be man-made, hence susceptible to all of the problems that the use of gold is meant to curtail. What is the answer to this dilemma?

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Would the supply of money have to increase? I think you could get the same effect by lowering prices when the economy expands.

Yeah I was just thinking that deflation would be the natural result of a fixed supply of currency in a growing economy. This would be advantageous to savers since their savings would be worth more over time. Debtors on the other hand could be in trouble as their debts remained constant relative to their declining ability to pay them off. I am not an economist and feel ill-equipped to comment further on the effects of deflation, but welcome others' opinions on this important topic. Thanks for your answer!

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Yeah I was just thinking that deflation would be the natural result of a fixed supply of currency in a growing economy. This would be advantageous to savers since their savings would be worth more over time. Debtors on the other hand could be in trouble as their debts remained constant relative to their declining ability to pay them off. I am not an economist and feel ill-equipped to comment further on the effects of deflation, but welcome others' opinions on this important topic. Thanks for your answer!

As far as I know deflation is bad. If you want to purchase a good, then under deflation it makes sense to wait a little bit longer until the price of it has dropped. While you are waiting for the price to drop you can put your money into a savings account and earn very good real returns under deflation. When everyone does this (waits for goods prices to drop and puts their money into savings), the price drops even further due to dampened demand. Now it makes even more sense to wait for further price decreases before purchasing. ===> Spiral effect ensues causing a recession.

I think the system we have now (independent central banks) is a pretty good system. GreedyCapitalist mentioned having competing currencies, and I think this is a great idea in order to protect yourself in case the Fed messes up, however I don't think any of these competing currencies would be fixed against gold. Rather I think they would operate in exactly the same way as the Fed, but make better (or worse) interest rate decisions than the Fed.

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I1. What would be the biggest reason people would be against going back to a gold standard? (besides the obvious fact that economists would like to continue to hide the devaluing of the dollar) Is the economy too far gone to peacfully transition back to a standard bank-note-for-gold system?

The US has no gold to back a gold standard-- there is a reason they have not done an annual gold audit of Fort Knox since the 1930s. Remember why the merchants beheaded the French king when they demanded their gold and found the king's treasury empty? Most of the gold supply belongs to centralized private banks and private owner/investers.

2. Would there be enough gold to make the dollar worth anything in such a way that the economy would not take a stake-to-the-heart and not have to "reboot" per se?

No.

3. How would we push it? Could it be done without a revolution on the economic front? Also, would the time frame of a transition, if possible, be within the means of my generation?</span>

The best way to do it is not to standardize it on anything. No gold backing, and most importantly, NOT issued by the fed. The US government has the ability to coin its own debt-free currency without the fed. But since we get it from the fed, they create it and hold us to pay it back at interest via the federal income tax. The dollars we create today are a debt-based currency. If the government, not the fed, issued its own bills, such as Lincoln did with his debt-free Greenbacks, then one could freely trade without running the country into debt to the fed. What is the value of fiat currency? Whatever you make of it. The market decides. Sort of like the dollar today, anyways. It's valueless and people give it value nonetheless. The fact that it loses value, is not because it is fiat, but because it is being inflated by government loans/spending. The more dollars in the economy, the less their value.

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When I argue for a gold standard, I only argue against a coercive government monopoly on money. The problems with any government monopoly are numerous, and the problems with a state monopoly on money are well documented. It is false to say that “independent central banks” are possible, much less beneficial. There is no such thing as an “independent” central bank – there are just degrees of corruption and coercion. It’s like arguing for an “independent” socialist healthcare system or “independent” welfare system. These are political entities whose existence depends on continual coercion and the consequent arbitrary constituent-driven policy. I refer you to “Gold and Economic Freedom” in “Capitalism, The Unknown Ideal” and the Austrian Business Cycle Theory. The Fed has been creating boom-bust cycles since its creation, including the dot-com boom/crash and the current inflationary boom.

When I argue for a gold standard, I only advocate voluntary money, not any particular standard or system. Gold-backed banking is just one candidate system I think is practical. I may be wrong – it’s up to the market to decide. If the growth in the supply of gold turns out to be drastically different from economic growth (which I very much doubt), then a free market will settle on another or additional standard. Gold just happens to be the standard civilized people have found suitable throughout history.

GreedyCapitalist mentioned having competing currencies, and I think this is a great idea in order to protect yourself in case the Fed messes up, however I don't think any of these competing currencies would be fixed against gold. Rather I think they would operate in exactly the same way as the Fed, but make better (or worse) interest rate decisions than the Fed.

Unless these banks force you to exclusively accept their money at gunpoint, that would be impossible. All socialist money policies ultimately rely on a coercive a monopoly on “legal tender.”

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  • 9 months later...
  • 3 months later...

Can a government initiate a monetary expansion (or a credit expansion) if it is on a gold standard beyond embarking on publically funded gold expeditions?

I recognize that there are different kinds of gold standards, I am just trying to get a better understanding as to why a gold standard will ensure objective currency.

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Can a government initiate a monetary expansion (or a credit expansion) if it is on a gold standard beyond embarking on publicly funded gold expeditions?

I recognize that there are different kinds of gold standards, I am just trying to get a better understanding as to why a gold standard will ensure objective currency.

Well, the government ought not to be involved in currency, except insofar as it is rooting out fraud -- i.e. a bank note says it is worth 1 troy ounce, but the bank only gives .95 troy ounce for the note.

Keep in mind that the currency in a proper system would be the total amount of gold that is in circulation as money -- actual gold coins or notes transferable into gold coins (just to keep it simple). There are basically two ways of increasing the money supply under this system: 1) find more gold, or 2) convert items made of gold into currency. The fraudulent means of increasing the money supply (gold coinage backed notes) is to print out more notes than there is currency -- i.e. let's say there are 100 gold coins out there, but there are 110 gold notes that say it is worth one gold coin, which means someone printed out ten extra bank notes.

Theoretically, if a government had gold holdings that were not in circulation, and they minted that gold into currency, they could create inflation of the monetary supply; so theoretically they could do either 1 or 2 above, without directly committing fraud. But for our government to be doing what it is now, increasing the money supply -- i.e. more notes or extra dollars put into electronic transfers -- without it being backed by anything is an attempt to create money out of nothing, and the result is the falling value of the dollar.The easiest way of seeing this is by comparing gold to dollars. Assuming the total amount of gold remains stable for extended periods of time, a dollar 30 years ago ought to buy roughly the amount of gold that it does today (in weight of gold). But what we see is that over a 30 year period of time, the value of the dollar in terms of gold has fallen to less than 1/10 of what it was 30 years ago.

The widespread market fluctuations hinging on the value of the dollar and higher prices due to inflation is how the books get balanced in the long run. At one time, gold was $35-$70 per ounce, now it is over $1000 per ounce. This came about because the amount of currency has increased over time.

Under a true gold standard, or better yet gold as money, this could not happen, unless someone minted a very large amount of gold into coins, gold that had previously either been in the ground or made into something other than currency.

And it would be considered fraud for someone to turn an electronic entry into more nominal dollars without more gold being there to back it up.

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And it would be considered fraud for someone to turn an electronic entry into more nominal dollars without more gold being there to back it up.

So even with a gold standard, it still sounds like fractional reserve banking could still lead to credit expansion, especially if the federal government still offers federal deposit insurance to large commercial banks.

Nevertheless, thank you for your response.

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