Money

Money is a medium of exchange - and gold certificates make much better currency than dollar bills.

Gold certificates are not currency, this term only applies to credit money, AFAIK.

Measuring the value of currency in grams is far superior to an arbitrary constant such as “dollars” or “euros.”

Do you really think that a gram of gold has intristic value? The fact that gold has value even while not being used as money doesn’t mean much by itself. So far I fail to see why gold certificates are better than credit money.

It was only once the respective governments decided to rob the population by inflating the money supply, that they tried to erase all traces or the origin of those words.

Inflation is a curse of modern monetary system, but money emission is not its greatest cause.

Gold certificates are not currency, this term only applies to credit money, AFAIK.

Money is anything which is widely accepted as a store of value. Sea shells, cigarettes, rice, and large rocks have all been used as money.

Do you really think that a gram of gold has intristic value? The fact that gold has value even while not being used as money doesn’t mean much by itself. So far I fail to see why gold certificates are better than credit money.

Nothing has intrinsic value, since all material values must be a value to someone. Precious metals are a good candidate for money because they are rare, easily divisible, and have other utility besides currency. Fiat money is a bad candidate because it is not precious, and so is easily devalued by printing more currency.

Inflation is a curse of modern monetary system, but money emission is not its greatest cause.

By definition, inflation is an increase in the money supply, created by printing more currency.

Inflation is a curse of modern monetary system, but money emission is not its greatest cause.

I’m curious what you believe the greatest cause of inflation is. (I’m using the colloquial sense here, that is, “price inflation.”)

The government has the most to gain from currency inflation: first, by spending printed money at current value; second, by decreasing the real value paid back for loans (this benefits all borrowers); third, by increasing the apparent capital gain subject to taxation; and fourth, by forcing citizens into higher tax brackets. The gov’t has a strong incentive to devalue currency, and, given the almost complete lack of understanding of the origins of price inflation, virtually no incentive to hold prices level.

As for commodities and commodity-backing; true, no commodities have intrinsic value, and it is only through general agreement as to their value that people are incented to accept currency backed by a given commodity. Ironically, currency itself does have intrinsic value, due to the efficiency gained in trade regardless of the value of the traded goods to any individual. The question that naturally follows from recognizing this is: is commodity-backing necessary to effective currency? The answer, I believe, is: no. In fact, a good argument can be made that backing currency with an (arbitrary) commodity results in an artificial shifting of the value of that commodity, such that the value no longer reflects the non-currency, or underlying, value of the commodity. Clearly the resulting reduction of open market supply of the commodity results in some level of inefficiency introduced into the economy, as valuable commodity capital is diverted into backing for exchange. Why not just agree on a currency standard and allow, gold for instance, to reach its natural price in open and free exchange?

The problem is that only fiat (that is, a gun) can force people to accept an unbacked currency, and, there is no natural way to prevent a gov’t from printing unwarranted amounts of money for its own gain. Of course, that problem exists also with (ostensibly) backed currencies, as we saw early in the last century. A potential solution is to establish an unbacked currency, by consent and mutual agreement of the citizenry, as part of the government charter, with the necessary requirement to constrain the government’s ability to print money, so that a sufficiently representative basket of commodity goods maintains a constant currency value. The basket would buffer the economy from upsets in any one commodity.

This would allow the money supply to exactly (within the fidelity of the commodity basket) track the real economic growth of the economy, and provide stability in costs to aid the economic decisions of all individuals.

The justification for gov’t’s role in currency control would be similar to that for law enforcement, military and justice: that is, the assurance of fair, voluntary exchange between free citizens. This includes protection from fraudulent private currency providers (which is hard to write with a straight face).

The problems we see today in fiat currency are common to all areas of legitimate gov’t control. They are due, in large part, to the situation in which our three branches of government are enmeshed in a conspiracy of graft, unaccountable and out of control, openly offering their services (i.e., our property) to the highest bidders.

What about these concerns about the implementation of the GS itself.

* The total amount of gold that has ever been mined has been estimated at around 142,000 tons. Assuming a gold price of US$1,000 per ounce, or $32,500 per kilogram, the total value of all the gold ever mined would be around $4 trillion. This is less than the value of circulating money in the U.S. alone, where more than $7.6 trillion is in circulation or in deposit (although international banking currently practices fractional reserves). Therefore, a return to the gold standard would result in a significant increase in the current value of gold, which may limit its use in current applications.

* Fluctuations in the amount of gold that is mined could cause inflation, if there is an increase, or deflation if there is a decrease. Some hold the view that this contributed to the Great Depression, although the US was already off the gold standard at that time. and events during it.

Zip,

With regards to your second bullet, we have indeed seen inflation when gold has suddenly become more common. When the Spaniards brought vast amounts of gold back from the recently-conquered Inka empire, there was a fair amount of inflation in Europe, in fact I’ve heard it said that the inflation is part of the reason Spain began to decline as a world power.

However the US was not “already off the gold standard” during the Great Depression. The Great Depression started in lat 1929, and we did not abandon the gold standard until 1933. Actually we technically maintained a gold standard until the 1970s. Foreign governments could convert gold to dollars and vice versa at the fixed rate of $35 for a troy ounce. We individuals, of course, were forbidden to hold gold (with some exceptions; jewelry, coins with significant numismatic value, etc). What happened in 1933 was that the government confiscated all gold coinage (minted at the rate of $20.67 per ounce) and devalued the dollar to $35 to the ounce.

Lex_Aver:

Many currencies *are* basically named after units of weight. The Pound Sterling started out as one troy pound of 0.925 pure (“sterling”) silver. The Mark was also a unit of weight (consisting of 24 Karats). Obviously it didn’t help keep those currencies from degenerating into colorful pieces of paper of no “intrinsic” value (they aren’t even absorbent enough to use for toilet paper). (In most places I would not have had to put “intrinsic” in quotes; here there is risk of confusion.)

Thanks for the answer Steve.

But wouldn’t the fact that gold was artificially held at $35/oz negate the claim to the $ having been on any sort of honest gold standard?

What about the discrepancy between the amount of currency in circulation VS the total amount of gold?

Would it be possible for other valuable commodities to be traded alongside of gold, to get around this problem, like a kind of holistic precious metals standard?

What about the discrepancy between the amount of currency in circulation VS the total amount of gold?

That’s a valid concern, regardless of whether you’re talking about massive influx of gold from a new find or the increasing need for currency in a growing economy. In either case, there is a sort of regulation that kicks in, in the form of gold consumption and production.

In a gold standard, the amount of currency would be held within the limits of the gold reserves of the issuing bank/gov’t. As the economy grows, the price of gold remains constant (by definition), but because the real value of gold increases due to its use as a trading standard, the relative cost of all other goods in terms of gold/currency goes down, resulting in downward pressure on gold consumption. This increase in the relative value of gold drives up the profitability of gold production, so old, low-production mines, new technologies, and gold exploration become profitable and expand the production of gold until the profitability falls in line with other commercial ventures. As evidence, the rise in annual gold production from 1970 to today, from 1500 tons/yr to over 2500 tons/yr, and the current cost of gold production at almost $300/oz.

If a new windfall gold source is found (either through new mines or new technologies), the relative price of gold (to all other goods) falls, production becomes less profitable, and so production falls while consumption rises.

There is a lag in this process, so you will see periods of inflation and deflation followed by corrections to a stable gold/currency value. The problem I see, however, is the added value of gold induced by its use as a trading standard will tend to divert it from more efficient uses.

Would it be possible for other valuable commodities to be traded alongside of gold, to get around this problem, like a kind of holistic precious metals standard?

It was tried in the 1900’s, when the U.S. fixed the dollar to both silver and gold. The upshot of that scheme was the commodity with the lowest market value, relative to its fixed price, was used exclusively while the other reverted to strictly commodity status. Friedman gives a good account of the details in Free to Choose. There are a few threads on this site that address other ways of using multiple commodities (search for symmetallism and bimetallism).

Fractional reserve banking provides the potential for increasing the money supply by allowing the market value of other commodities to be used as collateral for cash loans to artificially multiply the money supply from what would be possible using only gold as a currency backer. There are several threads on “fractional reserve banking” on this forum, which discuss the mechanisms and risks of fractional reserve banking.

I really don’t have a an answer for the part about the discrepancy between the amount of gold aboveground (approximately a 65 foot cube, if I recall) right now and the amount of currency in circulation, other than that of course a lot of the currency is really the result of fractional reserve banking and (if we opted to keep fractional reserve banking) it may turn out that the amount of gold is much closer to a match. If we did not opt to keep fractional reserve banking, who knows how it would work out–just remember that transitions, even to something good, are often a bitch.

True too the gold price at $35 an ounce was artificial and could not be sustained forever. That’s part of the reason private citizens were not allowed to make the trade between gold and dollars. But the (other) point is the depression had been going on for three years BEFORE the gold was confiscated and the dollar devalued.