I’m not all that up to speed on economics, but I was wondering what the main arguments were for and against the gold standard as opposed to the fiat system and what changes it would create in out country? Also, would it be possible to go to a system where you had a combination of gold and fiat money?
The biggest problem with the gold standard is simply that there’s just not enough gold. Put more technically, the gold standard historically led to deflation, where the unavailability of sufficient money hobbles the growth of the economy.
The biggest argument against is that there just plain isn’t enough gold, by something like a factor of 10. So trying to switch over to the gold standard now would be a huge kick in the balls for the modern economy-- There’s no way it could smoothly transition through a change that big.
So far as I can tell, the biggest argument in favor of the gold standard is that Ron Paul supports it, and a lot of people like Ron Paul.
Well, the actual argument is that current money is not based on anything tangible, merely the faith that the money is good. If people lose faith – and start to think that the money is only pieces of paper – then the economy will fold up like a cheap suitcase.
There is precedent – things like hyperinflation in Weimar Germany – for this to happen, but it’s not all that likely.
Yeah, but even if you’re on the gold standard aren’t you simply placing your faith in a different thing? Sure gold is more useful than paper currency, but ultimately it only has value because we say it does, just like fiat currency.
Yes, all modern economic theory agrees that nothing has intrinsic value. Gold prices fluctuate up and down when they are allowed to, just as currency does.
But gold is hardly more useful than paper currency. Even when the gold standard existed, the U.S. government issued paper currency putatively backed by gold. That’s because paper currency is far more easily handled and transferred than gold bars. And when the country went off the gold standard nothing happened to the economy. That’s because people had the same faith in the U.S. government as they did before. They still do. A gold standard implies a lack of faith in the U.S. government’s continued existence. If people believed that, gold would be the least of our problems.
Why isn’t there enough gold? That’s a thoroughly complex question, but the simplified answer is that money is constantly created through a variety of means. (I’m saying money where I sometimes mean value and sometimes wealth, which I will slap myself on the wrist for.) If you sell your house for twice what you purchased it, you have created money. If a bank takes in $1 million in deposits and makes $5 million in loans, it has created money. If the stock market rises tomorrow, it has created money. Fiat currency is expandable without limit. Forcing money to be pegged against a fixed total value of gold puts an artificial limit on money creation. While some would argue that would have been a good thing because banks wouldn’t have been able to create all those derivatives and other devices that failed so spectacularly, the flip side is that every legitimate aspect of money creation, which is basically the entire western economy, would have to compete for an extremely limited pot. Everything would become more expensive without the increase in total wealth that an expanding economy gives us.
To answer the the OP’s other question, you can’t have two different fixed values for your money. As soon as they give out of alignment, which would be instantly, then you can exploit the differences. It actually happened once.
Lumpy and Chronos, thank you for pointing out the lack of gold as central to the argument.
What I don’t understand is why there needs to be a fixed ratio between gold and money. Seems like if the US takes the gold it has, and divides it by the cash in circulation, you just say $1.00 is worth 1/10,000th of an ounce of gold or whatever. Replace the dollar with the new! improved! gold dollar … how is there not enough gold?
Seems to me that the lack of a certain amount of gold is not an obstacle, so if you’d be so kind as to fight my ignorance … what am I missing here?
The gold standard would work IF it were always possible to get more gold for a fixed price, but it’s not. In other words, suppose the dollar was defined as 1/35 (or whatever) of a troy ounce of gold. Could you always mine, recover from shipwrecks or what have you yet another troy ounce of gold, without limit, for a cost of 35 dollars or less? Pretty much not, since recoverable deposits of gold are essentially windfalls that you cannot guarantee for any input of labor or material and which deplete to the point of diminishing returns. Even the deflation of the cost of labor and equipment wouldn’t offset the increased difficulty of obtaining more gold. The gold standard would only work if there was a more or less limitless supply of gold obtainable at an unchanging (even if high) cost.
Because the economy will continue to expand while the quantity of gold might not. Assume a gram of gold is roughly the equivalent of a meal in 1975 and remains the same in 2009. How much gold is a personal computer worth in 2009, a product that didn’t exist (or at best, existed in it most primitive form) in 1975? If the gold standard has any meaning, it’s to stabilize prices, isn’t it? How do you stabilize for innovation?
The definition of a standard is that you can always exchange the paper currency for the standard at a fixed price. If the standard isn’t fixed why have it? What meaning does it have? Why bother mining and storing and guarding all that gold? Why not just have one ounce of gold and have it vary in value every second?
Bingo. The gold standard people just refuse to believe all worth is a market fiction. They think precious metals are some sort of exception. They are wrong.
As others have said and implied, a gold standard(or any fixed standard) limits the growth of the economy. People don’t always think about the booms and busts(massive inflation and then severe deflation) that occurred in the 19th century. That’s no way to run an economy. An economy needs to expand the money supply when things are growing, and contract it when things are growing too fast. That can’t happen when you choose something fixed, like the supply of gold.
Note that if you were to declare that an oz of gold was worth $8000 or some other really high number, then people would start mining gold like crazy. This would give a very peculiar edge to countries with lots of gold mines. Do you really want South Africa and Russia to have such a huge edge in the world economy?
(And yes, all the major players would have to switch to the gold standard. If the US did it alone then the above problem would be even more horrible.)
The gold standard idea makes so little economic sense that I am astounded that anyone would take it seriously for a second. Money no longer works that way. If you like currency backed by gold, then buy gold coins and such with your paycheck. When you need to buy something, go to a coin dealer, sell some of your coins, then go shopping. Presto, instant gold standard all for your itty bitty self.
The point is that if the price of gold is not fixed in terms of, say, US dollars, then what does it mean to call it a standard. For decades the price of gold was fixed at $21/oz (Troy ounces, slightly different from common ounces). This ended in 1933, when Roosevelt fixed the price of gold at $35/oz and made possession illegal.
But once the price of gold is fixed like that, economic expansion is impossible. Or rather becomes a zero sum game (or nearly so, since there is some new mining). Since some believe that perhaps we should stop chasing economic growth, this might not be a bad idea.
I think this thread belongs in GD, since what we are getting is opinions, including mine.
To be pedantic, monetary expansion is impossible. Economic expansion is still quite possible; the economy is expanded through work, the movement of goods from lower to higher value uses. But if there isn’t a corresponding amount of gold, economic expansion would always result in deflation.
I would simply recommend the (fictional, but researched) novel “Making Money” from Terry Pratchett, which deals with the introduction of paper money in Ankh-Morpork (on the fictional discworld). The common belief there is that gold in the cellar of the bank keeps the bank “honest”; this is explored with consequences.
At one point the main protagonist, Moist von Lipwick, says “we dig the stuff (=gold) out of the ground, only to bury it somewhere else (= vaults) and for what? What are we, magpies?”
If we moved to the gold standard, the value of a country’s money would be based not only on the amount of gold a country has, but also people’s faith that the government will be able to exchange gold for cash at any given time.
It’s also worth mentioning that the current consensus is that the worldwide gold standard was a major cause of the Great Depression.
I once started a thread that asked a similar question: why do we keep gold at Fort Knox?
It’s just a random-sized collection of bricks in a warehouse. There is no gold standard, so why do we need all those bricks? And why do we need the specific number of bricks that are currently stored there? what would happen if we had twice as many bricks, or half as many?
most of the thread talked about how Ft Knox used to be important a century ago, but now it’s all psychological.
Its made a resurgence because of the insane social, economic, and political policies of a right-wing extremist popular with misanthropic conservative males on the internet: Ron Paul.
Its also easy for people who believe in conspiracy theories to latch onto. The idea of printing money scares them. They dont know how economies or money really works. Its easier to scream “big government, trilateral commision, illuminati, federal reserve!!!” and pull their hair out. These are just irrational know-nothings.
Oh, I’m no advocate for the gold standard; I was just summarizing the argument.
But gold has always been considered valuable, so even if faith in the government is lost, if you have the gold, you can use it as currency. Like most libertarian arguments, however, it’s simplistic to the extreme.