This is nonsense. There is no real history of fiat currency-based economies. The idea that governments should have a legal monopoly on the issue of legal tender is itself a relatively recent one.
Claiming that no fiat-based currency has lasted longer than 40 years is like saying no car has lasted for a hundred years. Fiat money has only existed in the context of modern, stable economies since 1971.
Jumping into the discussion without having read any of it, but…
The real point of fiat money is floating exchange rates. They make huge, logical sense, balancing what goes into a country with what goes out. Floating exchange rates are the correct answer to objections like, “they took our jobs!” etc. You can’t get rid of them… (and the Euro, which effectively did, was a huge mistake).
This really belongs in GD.
The major problem with precious metal standards is that they are as much fiat money as anything else. I’m sure everyone will agree that the best media of exchange are things that are inherently worthless, infinitely divisible, and perfectly fungible (each piece is exactly the same as each other piece of the same value). Most disagreement is on whether it should be readily available for anyone willing to put in work to extract it. That the last part is not generally true for precious metals is why some people like them as a medium of exchange, and why others feel the exact opposite. It’s a question of whether it’s good for the money supply to be arbitrarily enlarged through market forces, whether government officials or private investors. Some of this is truly a matter of debate; although there are clear cases where a policy obviously caused some negative fallout, it’s in general impossible to say whether a certain policy is what led to prosperity as it’s always possible to claim that some other policy could have lead to more prosperity, or would have alleviated recessions better, or would have been “more fair” (whatever that means).
I seriously don’t see this as being able to be decided as a straight yes/no question. The Austrian school and the mainstream views on the causes of events are so different that they might as well both be right.
I don’t understand how the gold standard could jack up the price of gold relative to other goods and services. Gold is money. The piece of paper in your hand that says ‘20 dollars equals one ounce of gold’ is fixed. It never changes. How can that jack up the price of gold relative to other goods and services? Those goods and services are priced in weight of gold.
Here is some more data on the price of oil relative to the price of gold. It has stayed relatively constant over the last 40 years. If we tied our currency to a gold standard, all that means is that the $$ price would have stayed roughly the same, since the amount of gold required to buy a barrel of oil has stayed roughly the same.
As I’ve posted above, the price of oil in ounces of gold has stayed relatively constant. Therefore, gold is demonstrably a good store of value over time, in relation to the other necessities for which it can be exchanged.
I don’t understand your first sentence. What is ‘normal inflation’? That sounds like a circular definition. So because of normal inflation, we’ve had inflation?
Inflation is a way to steal from those using the currency as a store of value, and for those who are last in line to receive signals that the money supply has been artificially increased. It’s a hidden tax. There is nothing ‘normal’ about it. There is no reason for inflation to exist at all.
The fact that dollar can buy about 2% of what it could when the Fed was first established should be enough evidence on its face that a fiat currency is a waste.
It’s enough evidence on its face that you cannot use the currency as a store of value, period. Therefore, the normal tradeoffs that one makes between investment, savings and consumption will always be distorted.
That’s a fundamental principle that doesn’t even require reading history, understanding economics, or arguing about FDR’s role in the Great Depression.
:rolleyes: Didn’t cherry pick that price comparison, did you?
Pick another one if you would like. It’s one of the fundamental, bedrock inputs into the economy…which is why I picked it.
I’m guessing here, of course, but I would guess that other goods have actually decreased in ounces of gold over the past several decades, due to normal increases in worker productivity that lower the price of value-added activities.
Since oil is close to the bottom rail in terms of commodities, I would expect that compression to be less. But feel free to find other data and post it…I’m sure it would be interesting.
Obviously the government could declare that as of Sept 25, 2009, they would exchange $300 (or whatever) for one ounce of gold. But the problem is that they don’t very much gold on hand. So whenever the market demand for gold for non-monetary uses increased, people would line up at the government exchange demanding gold. And where would the government get the gold? They’d have to buy it, wouldn’t they?
How much gold should the government have on hand to give out on demand before we can say that there’s a real gold standard currency? If we don’t have any actual gold, and just declare that a dollar is worth 1/1000th of an ounce of gold, well, that’s not a gold standard is it? Because unless you can get an ounce of gold for those $1000, then it’s a lie. And therefore the government is obligated to hand over gold at that price, or we might as well declare we’re on a unicorn standard–each dollar is worth one unicorn.
So we have to have a pile of gold, and we have to be willing to actually hand over the gold. But how much do we need? If we run out, then we’re back at fiat currency, right? So we have to have enough so we never run out, and whenever we come close to running out we have to get more gold. Since I suppose revaluation of the currency is out of the question, we have to pay gold producers more than $1000 for every ounce of gold. And so the gold producers get a huge windfall, because now the feds are buying up gold like crazy, no matter what the price, because we don’t dare fall short.
And so the price of gold in 2009 fiat dollars is going to rise through the roof. I’ve seen estimates that we’d have to declare that gold is worth $30,000 an ounce to keep our current money supply. And that means a gigantic windfall for the Russkis, as we’d be forced to hand over a significant fraction of our GDP just to have enough gold to keep the economy going.
Thing is, the only reason to tie money to a particular good is to take the value of money out of the hands of the government. But if a unit of currency is tied to a particular good, all that means is that the value of the currency is subject to market forces. Every increase in gold production makes everyone’s bank accounts worth less. Every demand for gold for electronics makes everyone’s bank account worth more. You think the value of the dollar is unstable with fiat currency? Wait till you see what happens when the dollar is pegged to gold.
Notice over the years how the value of gold has risen and fallen? How’d you like that to happen to your bank account? Your debts? And of course, since governments don’t like it when this happens, they’d have to essentially take total control over the gold market–it wasn’t too long ago when it was illegal for Americans to buy and sell gold. Remember those days?
People would give up denominating their transactions in dollars, and switch to some other currency, pegged to some other basket of goods. And pretty soon they’d realize that the fixed price of the basket of goods was unneccesary. And then we’re back to fiat currency.
Fiat currencies will work as long as governments are trustworthy. Eventually all fiat currencies will collapse, because every work of man is temporary. But fiat currencies won’t cause the collapse of governments, rather the opposite.
IdahoMauleMan and others have claimed that there is no such thing as a “gold shortage”- you just divide up however much gold you have to cover the outstanding amount of circulating money. I think the flaw with that is that may work fine at the time you divide up the gold, but then what? Let’s say that as the third world develops the total world Gross Domestic Product multiplies by five times. Five times more goods being bought and sold, at least five times (and probably more) swaps and trading of intangibles like stocks and derivatives, etc. And nearly the same amount of gold, with either the gold trading directly or with redeemable paper fixed to the gold supply. The result is a vast price deflation as gold (and the money based on it) becomes scarcer relative to the amount of economic activity. Or if you will, the demand for gold skyrockets while the supply only increases by trickles. That’s the flaw: the gold supply can’t keep up with a rapidly expanding economy. Or if you try to say that every so many years you just redivide the gold, then that destroys the stored value of any notes or goods you may have had far more severely than simple inflation. To sum it up in one sentence: The money supply needs to expand at the same rate as the economy as a whole. Gold can’t do that.
glowacks said
Which is why in the hypotheticals I posted earlier I imagined a gold supply which was effectively limitless, but had a high fixed cost of extraction. Sort of like if you had dollar bills that due to anti-counterfeiting features cost nearly a dollar each to print.
I utterly, completely, totally disagree. The money supply does not need to expand at the same rate as the economy. Why do you think that must be?
If there are 100 grams of gold, and you and I produce 20 bushels of wheat, a bushel of wheat will sell for 5 grams. If we become more productive next year, and produce 25 bushels of wheat, a bushel of wheat will sell for 4 grams. So what?
Prices deflating is not a problem. In the personal computing industry, prices have continually deflated by orders of magnitude, on a continuous basis, almost since its inception. A nice handheld calculator sold for well north of $200 back in the early 1970s. Now you can practically buy a laptop with about a billion times more computing power, for about the same price. Has price deflation somehow constrained that particular segment of the economy? Of course not.
what happens down the economic chain when you run into a trade that hasn’t seen a change in production and prices?
i produce 20 bushels of wheat, get 5 grams of gold for them, but have to spend 4 grams in expenses (fertilizers, machines, labor). so i profit 1
now i produce 25 bushels of wheat. oops. my (unit) expenses are (still) at least 4 grams, if not more because i produced more. so i don’t think i’m going to be producing 25 bushels. i’ll just stop my economic growth and continue to output 20 bushels.
You are correct!
Except try it from the other way around…the value of the dollar does not change. Try not to use ‘price of gold’. The dollar is measured in weight of gold, and nothing else.
That’s why I haven’t bothered responding to a bunch of other posts above about how the price of gold ‘fluctuates’. By definition, the price cannot fluctuate if the dollar is fixed to weight of gold.
How could you produce 25 bushels of wheat, if by your own example you needed 100 grams of expenses to produce them? Did you borrow the money? Was it extracted from savings?
No that’s my point. I don’t produce them because it’s not a profitable situation.
But say I have the money laying around from years of 1 gold profit after producing 20 bushels at 5 a bushel…
Then you extracted it from savings. You had a store of wealth, from which you drew down, to produce 25 bushels. You used that store of wealth to buy fertilizer and the other things in your example above.
Fine. So what was your point again?
Why would I use my stored wealth to produce something at 0 profit.
When I produce 20 bushels, i get 5 bucks per
When I produce 25 bushels, i get 4 bucks per
my expenses for production of bushels is identical, say 4 bucks
so in one example, i’m making money, in the other i’m not
Of course the value of a dollar can change on the gold standard, because the value of gold fluctuates.
Look, there’s nothing magical about gold that makes it really money. Gold is a good that can be used as money, but it isn’t money any more than cacao beans are money. And the value of gold can fluctuate against other goods, correct? Therefore the value of a gold-standard dollar will fluctuate depending on the spot value of gold. Another way of expressing this is that the value of all other goods will fluctuate while the value of gold stays the same, but of course what’s really happening is that the value of gold is changing.
We can easily see that the value of a fiat dollar can fluctuate depending on all sorts of things. But the value of a gold standard dollar will do exactly the same thing, because it’s at the mercy of the market value of one good–gold.
I have no idea why you would do it. It seems like an extremely poor business decision.
What does that have to do with the gold standard?
Actuallty its even MORE fundimental then that. Comedity backing with redemption of the said comedity, on demand by any holder takes the value of money out of the hands of net consumers and gives the value of money to net producers. Fiat money does the opposite as it takes money from net producers and gives it to net consumers. Unfortunatly rewarding net consumers gives people the incentive to be net consumers, but rewarding production gives a clear incentive to be productive.
Government officials and those who vote politicians in on the basis of rising welfare payments, have control of the currency in a FIAT money system. Since net consumers typically have negitive savings, its to their intrests to steal from the savings of others, in a way that does not provoke a defensive response. Inflation is just merely thevery by stealth. Money backed by metals that cannot rot or degrade makes the welfare state as we know it very hard to maintain. That is precicely why we SHOULD have money backed by metal.
Net producers on the otherhand tend to have lots of savings. They need enough savings for themselfs/other relationships and they need enough to pay off the theives and politicians who make demands upon their good works. Precious metals backing allows the Net producer to hide their savings from what ever legal or illegal thug comes to collect form them. Net producers theirfor will only have as much government as they feel they need to pay for and not one flake of gold or sivler more.
So your for or against a gold standard… first ask yourself if your a net producer of wealth or a net consumer of wealth. If your a government official, actor, recive more in government services over any 20 year period then you pay in taxes over the same period, or are in any profession that is authroized to use force on other persons… then your likely a net consumer. As a net consumers you depend on the inablity of net producers to defend themselfs from your theift.
So your for a gold standard… Well your likely a person who is a net producer. Your unlikely to be working for the government or in a job that is created to solve problems governments create. Your likey to be working the land, working in a factory or planning complex production activities. As a net producer you depend only on a free market to trade the goods you created from your effort and you essecioally depend on nobody because people WANT to pay money for your goods
I don’t know what it is about this topic that brings out the looniness. Maybe I should be thankful that the misinformation presented here isn’t on the level of say, Creationism, but it’s still pretty damn bad.
It’s now worth bringing up the equation of exchange: MV = PY, where M is the money supply, V is the velocity of money, P is the general price level (the change of which is inflation/deflation), and Y is real economic output. If V and Y are taken to be fixed, then any increase in M, the money supply, will have as a result a corresponding increase in the general price level P. This is the most significant relationship in the equation most of the time, but even so, the other variables are not fixed. Economies grow over time, and the velocity of money (a function of people’s demand for cash reserves) can drop rapidly in a recession, which is exactly what we’ve seen for the current downturn. With that established, it’s now worth moving on to the misinformation in this thread.
At this point, it’s clear that IdahoMauleMan hasn’t the slightest clue what he’s talking about and hasn’t the slightest desire to learn, but for the sake of GQ accuracy, it’s still worth cleaning up after him as when walking a dog in the city.
This is irrelevant.
The prices of goods and services change relative to the price of money all the time. It’s called inflation and deflation.
This is wrong.
Goods and services aren’t priced by weight in gold. They’re priced in fiat dollars. In attempting to convert to the gold standard, there would be an enormous spike in gold demand, as the US government scrambled to collect the gold reserves to back up all those dollars that have been issued. An increase in demand would cause an increase in the price of gold, as Lemur866 has already explained.
Although ‘20 dollars equals one ounce of gold’ is fixed, how many goods and services that one ounce of gold could buy would not be fixed. This incredible spike in gold demand would increase the price of gold, which is to say, increase the value of gold relative to goods and services. The result would be massive deflation, as one ounce of gold would be able to purchase many more goods. In its effort to secure the reserves necessary to back the currency in gold, the US government would be rewarding all the wannabe Auric Goldfingers around the world, whose private hordes would increase in value dramatically.
This is wrong.
Deflation increases people’s willingness to hold cash reserves, which lowers the velocity of money. What’s more, prices (especially in wages) tend to be sticky and refuse to move downward, which means that any decrease in velocity would result not in a fully corresponding decrease in prices but instead a decrease in economic output–this is how a deflationary trap can push an economy into recession, or push a recession into a depression.
The benefits of inflation are an important topic in economics. There are costs associated with inflating the currency, of course, but there are also advantadges, especially considering the costs associated with deflation.
This is absurd.
The Fed was established in 1913. The gold peg wasn’t loosed until 1933. And it wasn’t even the Fed that dropped the peg–it was FDR and Congress. And again in 1972, it wasn’t the Fed that finally dropped the gold standard completely–it was President Nixon.
But beyond that: being a store of value is only one use of money, and not always the most important. Money is first and foremost the medium of exchange, the stock of assets that’s most readily usable in exchange. This gives it an extraordinary power over short-term output levels. A stable currency is a nice thing, but to rank the value of the currency over the value of the real economy itself is to treasure money more than the living human beings who use the money. This is beyond absurd. It’s unconscionable.
It was the right move to devalue the currency in 1933. As Exapno already pointed out, the countries that abandoned their gold standards quickest were the quickest to recover. There are times when the velocity of money is too low and prices are too sticky for markets to clear at lower values–deflationary pressure often works by not only lowering prices, but by lowering the economy itself. During these times, devaluing the currency can restart the real economy, and the real economy is what we as people are ultimately concerned about.
Judging the success of a currency based sole on its ability to endure in value over 96 years is shortsighted to the point of idiocy. Stability is good and proper, but money has many other important uses.
This is wrong.
Gold has a (relatively) fixed supply given to us by the universe and the limitations of our mining technology. This limited supply will mean that gold is always a good store of value. But fiat currency can also preserve much of its value over time using a relatively simple financial innovation called “the savings account”. And in point of fact, gold does preserve its value, but historically it tends to barely beat inflation. There are other, wiser long-term investment strategies.
This is wrong.
There are no “normal” tradeoffs between investment, savings, and consumption that can be preserved with a gold standard. We’d simply be dealing with deflation instead of inflation, and deflation has its own set of well-demonstrated distortions.
It’s been known for decades to professional economists all across the political spectrum, from libertarian to liberal, from Milton Friedman to Paul Krugman, that deflation can be a serious problem. The great libertarian himself argued that the government should increase the money supply to keep pace with economic growth. He actually blamed the Fed for the Depression for failing to maintain the money supply.
Deflation can be truly terrible for the real economy. It’s serious business, not something to be flippantly dismissed.
This is wrong.
A drop in price levels in one or two industries is not deflation. Deflation is a general decrease in prices. Individual industries have always had their oddities, especially industries that are decreasing their costs because of technological breakthroughs. The entire point of measuring the general price level is to remove those oddities, which tend to be distracting to myopic and ignorant observers, and instead focus on the overall situation.
This is wrong
I’ve dealt with this before, as has Lemur, but the egregiousness of this factual error means it’s worth taking a pooper-scooper to it one more time. A gold standard would fix the price of a dollar to a certain weight of gold. It absolutely would not fix the weight of gold to a certain amount of goods and services. Any attempt to implement the gold standard would result in an incredible increase in the demand for gold as the government sought out the precious metal to build its reserves to safe levels, and this increase in demand would result in an increase in the price of gold relative to other goods–since the dollar itself would be pegged to gold, this increase in the value of gold would result in deflation.
This is just supply and demand. It’s a little bit complicated since the nominal price of gold is fixed, but it’s still fairly basic stuff.