Explaining gold standard for dummies

Is there a way to explain why gold standard is bad using a layperson’s concepts? For example, let me put my dummy hat on, and consider, today everybody’s making transaction using pieces of paper called money. What’s so bad if they use gold (or something interchangeable with gold) instead? Or, say like a credit card, but instead of USD everything is recorded and settled in grams of gold?

Some explanation mentions the international economics’ concept of the impossible trinity, but as a layperson, what the heck does that have to do with anything? Why does the free flow of capital, or governments monetary policy have to do with the denomination in which people trade?

There isn’t enough gold. The standard won’t work directly; there would be a monstrous deflation and the economy would disintegrate.

Also…it seems odd to choose a standard that favors some countries over others. It rewards South Africa, for instance, but punishes France. It’s based on geological happenstance – and haven’t we learned enough about how bad that is from Middle Eastern oil?

So instead of basing currency on confidence in one’s nation’s banking system and trade success, one should base it on the arbitrary demand for shiny rocks?

Also if a huge new source of gold appears it leads to massive inflation. This actually happened when the Spanish began plundering the Americas.

It also places complications on economic expansion. If economic output and gold supplies remain static you’re fine. But if you want the world economy to expand you better damn well find a source of gold that expands at the same rate.

The technical economic term for the above is ‘fucked’.

Say that you are an inventor. You have just figured out a way to implement cold fusion. The solution has been published in Nature. It’s been reviewed by everyone who understands the physics on the planet and they all agree that it’s a slam dunk. So you go to the bank to ask for a loan, to build the mechanism.

Unfortunately, humans had completed digging up all gold the week previous. Sorry, we understand that all the money from several industries would eventually be freed up by your discovery, so as to finance new technologies like this one. But since those industries are still in place and there’s no more gold to dig up, we’re going to have to ask you to wait until we discover new gold somewhere in outer space.

The goal of gold standardists is, basically, just this. They want to cap the total amount of money, so that governments can’t just infinitely go into debt. But the way that markets work is that they expect that debts today are paid off by gains in efficiency tomorrow. We finance something that allows us to produce double the amount of food with half the labor, freeing up resources to work on new things. The original loan is paid off by profit from the new technology, and the world is a better place. Improved technology and efficiency are, at the end of the day, the whole purpose of the free market.

The timing of money being asked for and paid back probably fluctuates based on major scientific (or other) discoveries. Shortly after such a discovery, a lot of debt will be created, and this will be followed by a period of paying off those debts. In general, as can be seen by inflation, we’re expanding technology faster than we can profit from them, so the central bank goes into the hole faster than we can fill it, so there probably are no points in time where we’re actually paying money back faster than we’re borrowing it, but there almost certainly are cycles of greater and lesser rates of debt growth.

Any one of these bursts of borrowing is going to be linked to human expectation that the new discoveries will bring great gains. Besides the companies borrowing from banks, they also get investment money from individuals. The individuals and the banks, who are lending out money, expect returns on their investment at some level of probability.

Now when suddenly this whole market for the new technology is capped out by the gold system, it throws everything into a spin. We want to do it. We’ve run the math on the odds of success of any one venture, the potential benefits of the technology to society. We’re planning out new cities with this technology in mind. And suddenly the Earth just flips us the bird going, “Nope. If you wanted that, you should have dug more gold last week.”

Basically, it’s an arbitrary cap that has no relation to the actual market position or health at any given moment. And it tends to throw the market into a spin - causing recessions and depressions - when people forget to take into account that this arbitrary limit will jump up and block the future of the world, against all reason. And the only argument for it is to stop the government - which is a small part of the economy - from overrunning its debts.

Certainly, there are times when the government and when investors and bankers should have the brakes put on them. They plan poorly, speculate to wildly, too often, or what have you. But adding the gold standard doesn’t really help any of that. The blockade stops everything, at random times, with no link to how wise or unwise it was.

As others have implied, economies don’t seem to respond well to being run on standards that are inflexible.

You need flexibility in whatever commodity you decide to base your “this is what a dollar is worth” upon. Nothing bad about gold as opposed to other arbitrary choices.

But time has shown that basing your value upon some fixed standard doesn’t work.

Nitpick : it’s really silver that did them in, not gold.

Personally I gave up trying to understand how international banking works at a global level a long time ago. I got the vague notion that it’s basically a giant shell game, only one that’s played with pretend shells, nothing underneath them, constantly amended rules, and that can only work and be played as long as people who don’t even play the game believe it exists.

And that’s enough for me to get on with my life.

This should be clear enough.

It’s been a while since I read anything on Rational Wiki. Looks like it’s been hit with a case of the dumb (or I forgot why I never read any of it).

Imagine a gold bar being subdivided, as the economy grows, into smaller and smaller segments of an oz.

1 gold oz was 20 segments in 1800’s. Now it’s equal to 1200 segments, Each segment equaling 1 dollar/pound/lira/ruble/euro…tentatively.

As new gold is found the price doesn’t drop. Your gold is worth what ever the market price is at the moment.

Anyway, there are many things to base your dollar on, the worst would be gold all by itself.

In comparison, renewables and transient commodities make an economy more stable.

Not as cool as a pile of freaking…GOLD BARS. (sticks inverted pink into corner of mouth)

I used to have this conversation with people; but now I just say we used to have a gold standard; and it sucked that’s why we changed it, so things would suck less - you think it sucks now? If we were on the gold standard it would be way worse just read some history for the love of god.

“but they can print money out of thin air . . .”:smack:

Anyone else remember when those brothers from Texas tried to corner silver and had to be bailed out by the fed? Good times.

There’s a fixed supply of gold in the world. Which means you’d have a fixed supply of currency if you had a gold standard. Which would put you in the bizarre situation of having a money shortage.

This would strangle the economy. Why would people invest? The best “investment” if you have money is to just hold on to it. It’ll increase in value just by sitting there. Nobody would invest in real economic growth like helping to fund new businesses or new products. With possession of money being the best investment, you’d also depress spending so existing businesses would be hurt as well.

The gold standard is just a holdover from old mercantilist economics - it was the belief that there was only so much wealth in the world and you had to accumulate as big a portion as possible. In mercantilist economics, every economic transaction supposedly involved one person getting richer and the other person getting poorer - economics was seen as a zero-sum game. Capitalism replaced mercantilism - people figured out you can increase the amount of wealth in the world. Two people can participate in an economic transaction and both of them can end up richer than when they started.

I hadn’t thought of those guys in ages. I see that Wikipedia has a page on “Silver Thursday” for the curious.

Speaking of which, would a silver standard work? NOT bimetallism, which is what failed in the 19th century, but a silver-only standard.

Same problems. It isn’t that you base your economy on gold in specific, but that you base it on any one finite commodity.

The supply of gold cannot be controlled, and there is a very limited amount of it. So when rich people hoard the gold and don’t spend it, economies can stagnate for hundreds of years. A money supply that bankers control, like the US dollar, has the advantage that the bankers don’t want it to fluctuate in value in either direction, so their best minds are put in positions of trust to manipulate the supply and interest rates to keep it stable. It is a brilliant system that has led to steady economic growth since it was adopted and it will last as long as bankers take steps to keep the value stable and Congress cooperates.

If Bill Gates and Warren Buffet and 10 others like them decide they need to hoard as much gold as they can, they could bring a gold based dollar civilization to an end just preparing for the worst. With banker based money, all the smartest economists in the federal reserve would have to go stark raving mad for that to happen, they can prevent hoarding by making money easier to acquire.

Has it? Remember the USA once had a gold standard. We had it for over a century. And by all accounts it certainly seemed to work. The economy grew quite a bit. In fact we became the richest nation in world history. Inflation was tamed. It doesn’t sound that bad.

Is it a good thing to have a government that can simply print paper money and go as deep into debt as it wants? It can certainly cause problems. Just ask someone from Germany or Austria circa 1922, or someone in Argentina right now.

Now I acknowledge that giving our economy as it is right now, returning to the gold standard would be much more difficult than Ron Paul and his friends think. But I’m not convinced categorically that it “doesn’t work”.

IIRC, the problem with the Hunt Bros (yes, the ketchup people) trying to corner the silver market was a bunch (that’s the technical term) of formerly economically unprofitable silver mines suddenly became profitable at the inflated price they commanded.
Unlike gold, there WAS an easy way to expand supply.