Gold

Economics
1

I was talking with a bunch of people about presidential candidates and Ron Paul came up. Somebody said, “yeah, but how can you think a guy who wants to return to the gold standard is qualified to be president?” I asked him what he thought was so bad about the gold standard, and he said that the gold standard was what bankrupted the country. We talked a little bit about fiat money, but the conversation shifted and I never found out what he was really talking about.

Regardless, I hear a lot of people with the same reaction to a gold standard – that it bankrupted the country, etc. I remember one of my economics professors talking about this, too, and I can’t remember what period he was referring to.

Does anybody know? Why is there such popular resistance to a gold standard? … people seem to have some idea of it being the cause of economic decline in the past. What part of history are they referring to? The Great Depression?

2

I was talking with a bunch of people about presidential candidates and Ron Paul came up. Somebody said, “yeah, but how can you think a guy who wants to return to the gold standard is qualified to be president?” I asked him what he thought was so bad about the gold standard, and he said that the gold standard was what bankrupted the country. We talked a little bit about fiat money, but the conversation shifted and I never found out what he was really talking about.

Regardless, I hear a lot of people with the same reaction to a gold standard – that it bankrupted the country, etc. I remember one of my economics professors talking about this, too, and I can’t remember what period he was referring to.

Does anybody know? Why is there such popular resistance to a gold standard? … people seem to have some idea of it being the cause of economic decline in the past. What part of history are they referring to? The Great Depression?

I am by no means an expert on the subject myself, but based on what my economics teacher told me, we set the value of gold at a certain dollar amount, refusing to change it for any reason. Other countries then started buying and selling gold, making huge sums of money trading in different markets because everyone else put a higher value on gold than we did. This severely depressed the value of our currency. I remember thinking when he was explaining it that we had been looking at it backwards: a dollar should be thought of as a certificate worth a certain amount of gold; an ounce of gold shouldn’t be thought of as worth a certain number of dollars. For some reason I could never fully articulate, I felt that this was the real cause of the problem. I didn’t bring any of this up in class because my teacher was an idiot, and I didn’t feel like arguing with him. In any case, I’m fairly certain that his view is representative of the opinions of those who oppose the gold standard.

3

I’ve had a few discussions on the subject. The notion that it bankrupted the country is new, however.

From my experience I’ve concluded a few things:

  1. Lots of people don’t understand the concept of money. Therefore the notion of an objective value, fiat money, no value, etc are all so much Greek to them.

  2. Gold, and silver, coins are old-fashioned. Bills, credit cards and electronic transfers are modern. Sometimes when advocating the gold standard horses and buggies are brought up as an argument against it.

  3. Scare stories. You’d be astonished, I often am, how many people are positively terrified that the government, or bankers, would issue underweight gold coins. Sure, that would inflate the currency and be very bad. But for some reason the voracious government printing presses spitting out large stacks of paper money doesn’t bother them at all; nor the fact that we’ve come to accept a yearly inflation rate as normal.

I had some success a few years back when a book called “Silver: The Way For Mexico” was published and became moderately popular (Mexico is a large silver producer). the book advocated a silver standard. From there to gold is a matter of semantics. It helps that people here still remember a time before 1976 when silver and copper coins were still in circulation (I vaguely recall the silver one peso piece, and vividly recall the copper 20 cent piece). But when the book vanished from the radar, it all went back to business as usual.

I do wonder about one thing. A few years ago gold and other precious metals experienced a huge drop in value. Now suppose country X adopted the gold standard and then gold fell like that again in the world markets. Wouldn’t that in effect devalue Country X’s currency?

4

I do wonder about one thing. A few years ago gold and other precious metals experienced a huge drop in value. Now suppose country X adopted the gold standard and then gold fell like that again in the world markets. Wouldn’t that in effect devalue Country X’s currency?

Why did they experience the drop in value? … If a gold standard were adopted for the US, I don’t see why there would still be trading of gold in the same way there is right now, which is as an inflationary hedge.

5

I do wonder about one thing. A few years ago gold and other precious metals experienced a huge drop in value. Now suppose country X adopted the gold standard and then gold fell like that again in the world markets. Wouldn’t that in effect devalue Country X’s currency?

Country X’s currency would be gold, or at least its equivalent in paper form. The devaluation of gold in terms of other currencies would therefore also devalue country X’s paper.

The advantage and the disadvantage of using gold as a country’s money lies in the comparative inelasticity of its supply. A constant quantity backing the paper limits the money supply and can thereby restrict the rate of economic growth. A new source of gold production on the other hand can suddenly increase the availability of money, encouraging inflation. I’d imagine that there would nevertheless be plenty of scope for banks and other corporations and individuals to issue bills of exchange (not backed by gold) which could be used as a substitute for money. The only legal tender would be money 100% backed by gold.

Currently we use the bill of exchange system exclusively. Anyone can issue a bill of exchange. They do so when they write a check. What the payee does with that check does or does not turn it into money. The monopoly granted by the State to the Central banks is the problem to be eliminated first.

Teresa

6

Why did they experience the drop in value? … If a gold standard were adopted for the US, I don’t see why there would still be trading of gold in the same way there is right now, which is as an inflationary hedge.

If the dollar were backed 100% by gold, then all trading in dollars would also be trading in gold. The two would be interchangeable. Other currencies may have a lesser coverage by gold, or even none at all. They might support their currency on the basis of petroleum reserves, or some other real commodity. Variations in the value of the backing would create the revaluation and devaluation of the various currencies in circulation.

Teresa

7

Does anybody know? Why is there such popular resistance to a gold standard? … people seem to have some idea of it being the cause of economic decline in the past. What part of history are they referring to? The Great Depression?

Most people were educated by public schools. That explains allot.

Most people are afraid of gold because of it’s deflationary tendencies that has been the leading cause of bank runs in the past. People use that as justification for being against it, forgetting that an inflationary system-cause by a fiat based monetary policy- also has horrible side effects of it’s own. The fallacy behind gold hostility, is derived from the Keynesian idea that fiat money will allow us to use inflation as a tool to stop all recessions during periods of economic downturns by encouraging immediate consumption to put us back on track. However as Jimmy Carter has shown so eloquently shown, fiat money ain’t quit cracked up what it’s suppose to be. It is true however that gold has deflationary tendencies since people would be allowed to use their medium of exchange for other purposes as well (especially if you’re a jeweler), but that will always be countered by the market through the issuing of credit and bank notes that promise to redeem the payer upon demand in that amount. As long as the demand for gold remains the same, gold will always find it’s own way back onto the market. The real problem behind gold critics is their belief that fiat money is infallible which anybody who has lived through the late 70’s should know that it most certainly is not. Gold may have negative consequences but so does fiat money, and fiat money is even worse because it’s inflationary tendencies gives the appearance of stability in the short run while making everything worse in the long term. Deflation has the exact opposite effect of making things appear worse in the short run until the prices of goods, and assets lowers enough in proportion to the growth domestic products rate of deflation.

Neither are good within their own vein, which is why gold should be so desirable since gold would do a better job at keeping our economy at a stable rate than any other medium of exchange would. The problem with most economists, is their belief that the untamed beast of inflation can be used for good, and want the rate of inflation to increase on a yearly basis so people can continue to consume and live beyond their means with artificially lowered interest rates at the expense of long term economic stability.

The next time you encounter another gold skeptic, I recommend you simply reply to them with two words: StagFlation.

8

A constant quantity backing the paper limits the money supply and can thereby restrict the rate of economic growth.

I think this is a bit disingenuous. It would restrict the rate of economic growth to growth due to production. What we have in our current system is false growth due to inflation and expansionary credit creation.

I do wonder about one thing. A few years ago gold and other precious metals experienced a huge drop in value. Now suppose country X adopted the gold standard and then gold fell like that again in the world markets. Wouldn’t that in effect devalue Country X’s currency?

These are not comparable scenarios. Right now we buy gold with paper dollar bills. Under a gold standard, you would buy all products with gold.

9

I think the labor standard is a much better objective measure about the value of money. Whenever I make a decision about buying something, I think about it in terms of how many hours I had to afford it.

Although I realize the difference here, yes, money should have some actual value than just being a piece of paper taped to the end of a gun.

10

I sat in on an economics lecture earlier in the term, and the lecturer said that there was a ‘macroeconomic trillema’ amongst the different types of money, which is that you can only have two of, but never all three of, the following:

  1. Fixed exchange rates

  2. The power of the government to expand the currency in times of depression and to deflate when there seems to be too much of a boom

  3. Free capital mobility (I’ve written, “Increase foreign investment alongside NO increase in domestic saving”, in my notes, but I don’t know what this means).

Now, his next point was that of Interest rates (well, he talked first about why the silver standard fell out of favour, and about Hume’s ‘specie-flow mechanism’*, which, if I understand it correctly, was basically the last nail in the coffin for the Mercantilist idea that if gold flowed out of the country, the country was necessarily weakened economically [a lesson the US and the UK would do well to learn]), which were a tool of managing the trade balance.

Since gold and silver was not literally being shipped around on boats on a regular basis (possibly practical today, but imagine what would happen if a wooden boat sunk carrying just 10% of your country’s hold inside back in the 1700s!), the central bank used the interest rate to encourage or discourage saving, relative to the value of the Gold. This was not the same as the fiat method now, where it is changed almost willy nilly - the central banks would be responding to the actual value of Gold, i.e. the economic reality of the country.

Now, one of the major problems that crops up - besides the need to avoid war** and financial panics, which might lead to inflation or an emergency suspension of the gold standard - is that of the central bank. See, it has a pretty legitimate role, even by our standards, in that what it should be doing is altering the interest rates in regard to an objective view of the reality of the economy. The problem was, it was a government institution, and if it wanted to keep interest rates low when it should really have started raising them, it could do so.***

Another problem was the fact that if a country started raising interest rates to stem its flow of production relative to the actual gold-capital it had to produce with (i.e. if its liabilities were greater than its assets and its free capital was becoming diminished), this rise in interest rates could bankrupt debtors who owed the interest-raising-bank money.

Finally, all economies needed to be strong. A weak, panicy economy in one part of the world could have very bad consequences for the rest, especially if it was one of the leading economies before it became weak and panicy (i.e. the US at the moment).

*Interestingly, the lecturer sees it in reverse to Objectivist economists: he thinks the relatively peaceful period of the 19th century was a precondition for global capitalism, not an effect of it.

** Not that a private bank issuing currency couldn’t do this, just that I think it would face a more immediate repercussion from other banks, although I’m not sure about this. Little help, any Objectoconomists?

*** One thing he pointed out struck me: he claimed that the Great Depression was caused largely by the raising of tariffs by Hoover - a mercantilist approach to the economy - which stopped the market from correcting itself through the flow of imports and exports.

11

*** One thing he pointed out struck me: he claimed that the Great Depression was caused largely by the raising of tariffs by Hoover - a mercantilist approach to the economy - which stopped the market from correcting itself through the flow of imports and exports.

I believe he also raised the income tax level on the wealthiest to 50% overnight.

12

I believe he also raised the income tax level on the wealthiest to 50% overnight.

Yeah, that seems to work with this information.

http://www.taxfoundation.org/publications/show/151.html

Additionally, just, looking at it quickly, FDR continued to increase that load on those that generated the most income.

Gold and money… Ok, I’ve just finished reading Atlas Shrugged. Certainly, over the past few years, there has been enough fluctuation in some of my personal investments, even prior to a year and a half ago, that my concerns were raised. Obviously, the value of a US dollar went down in comparision to other values, specifically, of those in some foreign markets. So, oil, as a commodity, cost more dollars. Certainly, my work, a work paid for in value of dollars, was unable to purchase the same amount of a commodity.

If the value of a unit of gold was around $19 USD at the origin of the United States. Now, well, the same unit of gold is valued at around $830+ USD.

Excellent points about the supply of gold with the example of a ship going down, or being hijacked even. But, similarly, if the US federal government increases the supply of money for an auto maker, etc., well, then can not that value change?

If one were to take money and put it in the bank, or an investment, one could gain interest based on using that opportunity for the bank to use it to generate loans, etc., companies making stuff and th like. Gold doesn’t gain “interest”, but it’s value in comparision to the “value” of cash money has certainly caught my attention.

Over ten years, I think some of my investments might have reached a point where they increased in value about 100% through nine years, which corresponds to about 8% increase in value each year. Unfortunately, it has dropped over the past year plus to where it’s only up about 45% ten years ago. Gold is up about 200% over that same period.

I am seriously considering buying some gold as a part of my investments now. Has anyone else thought about that? Certainly, one can think about storage, conversion, etc. But it just seems to have some value added options for a savvy person that’s trying to hedge the value of their own production.

13

I am seriously considering buying some gold as a part of my investments now. Has anyone else thought about that? Certainly, one can think about storage, conversion, etc. But it just seems to have some value added options for a savvy person that’s trying to hedge the value of their own production.

I think having some gold in a portfolio is almost always a good idea. However, it makes no more sense to put your entire net worth into gold than it does to put it all in a single company’s stock. Stay diversified.

14

If you want to learn about the history of the gold standard, read the last few chapters of What has the government done with our money? . You can read it on mises.org. I found it quite informative.

15

Forcibly swapped it for ornate scraps of paper, then destroyed those.

Or was that a rhetorical question?