Question about Gold Standard and Tariffs

[supery00n]

Once, the gold standard and high tariffs were firmly within mainstream American monetary and trade policy. Why were gold standards and high tariffs good policies then (or were they ever), and why are they considered outside the mainstream or fringe today? Was there a fundamental economic shift that made these once good ideas no longer so?

Nobody talks about raising tariff barriers except the so-called paleoconservatives, and the gold standard is viewed as some archaic policy, for example.

Also, how is the “free silver” bimetallism debate relevant to today’s economy, if at all?

[UltraVires]

I can answer the first question. The basic, simple, simple, watered down answer as to why the gold standard is anachronistic:

1. Understand how the gold standard came about. It’s better explained in other threads. Early civilization had a barter system. If you had a surplus of chickens and a need for wine, you had to find a man who had a surplus of wine and a deficit in chickens. Very bad for transactions, so a standard was needed.

Over time, people found that gold and silver were good standards…then found that you didn’t need to carry the gold, just IOUs for gold. We are at the gold standard.

2. Then, we found that these IOUs didn’t really need to be exchanged for gold. If the government that issued these IOUs crumbled or got in a pinch, then they would just ignore your IOU’s and not give you the gold. The IOUs were really only backed by the faith and credit of the government that issued them. As long as the government that issued them would be responsible, limited, and judicious in printing them, then there would be no need for gold supplies to back them.

3. Once we reached step 2, we realized the folly of the need for a gold standard. We can go back on such a standard if we wish, but if the government gets in a pinch, they can tell you to fuck off with your gold demands.

IOW, we can go back to issuing a 10 dollar bill that guarantees you a certain amount of gold payable on demand. But if the government runs into economic trouble and can’t pay out, then you are just as out of luck as you are in the present day situation where your 10 dollar bill is backed by the full faith and credit of the government. Since this is true, why tie our hands with a limited supply of a metal?

[Hellestal]

The argument against tariffs is based on the idea of comparative advantage, which is extremely hard to argue with. There are people who bring up legitimate criticisms around the edges, but the core idea is solid, and would have been just as valid in the 19th century as it is today. The idea of strong protective tariffs is fringe today because relatively more people understand the economics of trade.

Unfortunately, relatively few people, even today, understand the economics of money.

Gold is a fringe idea now – and rightly so – but the argument against gold in history is not so good, especially as you go further back in time. There was a time when precious metals served as a good anchor, and the economic system was, most of the time, well-served by that anchor. Fiat currency was difficult because no one had figured out a way to make it work consistently. However, things changed as time went on. Money became more and more based on underlying trust rather than actual possession of a heavy, hard-to-transport metal. Eventually people became so accustomed to working with money as an idea, as a ledger entry in a book rather than as a heavy object in a vault, that the metal backing was holding things back instead of helping us out. At that point, it was time to let go of the golden fetters. Recovery from the Great Depression began in earnest only after the gold peg was dropped. That last vestiges were removed in the 1970s, and gold is simply silly today. There is no help it can provide anymore because going back to it would require trust that we would stick with the system, but our current system is already based on the same kind of trust. Going back to gold doesn’t offer any extra backup of trust anymore.

The “free silver” debate in the late 19th century was a reaction against the deflation of the time. Deflation hurts debtors. You borrow 100 dollars, and you have to pay the debt back with 100 dollars that are worth more – that is, 100 dollars that are harder to get – than the original money you borrowed. Plus, there’s the interest payments on top of that. The populist movement of the time wanted silver because they wanted more money, more inflation, which would ease the burden of their debts. If a transition to silver had been done not long after the Civil War, it might’ve worked fairly well. But by the time the Free Silver movement really got its steam, silver was worth comparatively much less than gold and the inflation from going back to the old 16:1 ratio would’ve been intolerably high.

That doesn’t have a lot of direct translation to today, except in the sense that sometimes more money is good and sometimes less money is good. The 1970s? Too much money. Now? Too little, like in the late 19th century panics. In today’s situation, we have a big problematic private debt overhang. If money were to move more quickly – if the total value of the dollars that changed hands every year were to return closer to its previous trend line – then economic recovery would be much more swift. Money can both cause, and ease, economic downturns. It’s a strange thing.

[Little_Nemo]

The problem with a gold standard is that it creates an artificial scarcity in the middle of your economy. You have a finite fixed amount of money to circulate instead of having an amount of money that’s based on the size of your economy. Yes, inflation and hyperinflation are real problems caused by having too much money floating around. But a money scarcity is also a problem and will hurt your economy just as badly as too much money will.

The problem with tariffs is that it raises prices. Pretty obvious really. If you put a tariff on foreign products, the prices of those products go up. Domestic producers see this and they raise the price on their products as well and make more profits. So there are benefits because the government collects income without direct taxation on its citizens and domestic producers make more money. But the cost is that consumers end up paying more for the good they buy.

[supery00n]

@jtgain

I can answer the first question. The basic, simple, simple, watered down answer as to why the gold standard is anachronistic:

1. Understand how the gold standard came about. It’s better explained in other threads. Early civilization had a barter system. If you had a surplus of chickens and a need for wine, you had to find a man who had a surplus of wine and a deficit in chickens. Very bad for transactions, so a standard was needed.

Over time, people found that gold and silver were good standards…then found that you didn’t need to carry the gold, just IOUs for gold. We are at the gold standard.

2. Then, we found that these IOUs didn’t really need to be exchanged for gold. If the government that issued these IOUs crumbled or got in a pinch, then they would just ignore your IOU’s and not give you the gold. The IOUs were really only backed by the faith and credit of the government that issued them. As long as the government that issued them would be responsible, limited, and judicious in printing them, then there would be no need for gold supplies to back them.

3. Once we reached step 2, we realized the folly of the need for a gold standard. We can go back on such a standard if we wish, but if the government gets in a pinch, they can tell you to fuck off with your gold demands.

IOW, we can go back to issuing a 10 dollar bill that guarantees you a certain amount of gold payable on demand. But if the government runs into economic trouble and can’t pay out, then you are just as out of luck as you are in the present day situation where your 10 dollar bill is backed by the full faith and credit of the government. Since this is true, why tie our hands with a limited supply of a metal?

I see. But what about inflation? Isn’t it true that inflation was less when the gold standard was in place? For example, the value of a dollar from 1870 to 1910 didn’t change very much compared to from 1970-2010. Isn’t a gold standard, in some way, something that keeps governments and national banks honest?

[supery00n]

@Hellestal

The argument against tariffs is based on the idea of comparative advantage, which is extremely hard to argue with. There are people who bring up legitimate criticisms around the edges, but the core idea is solid, and would have been just as valid in the 19th century as it is today. The idea of strong protective tariffs is fringe today because relatively more people understand the economics of trade.

Unfortunately, relatively few people, even today, understand the economics of money.

Gold is a fringe idea now – and rightly so – but the argument against gold in history is not so good, especially as you go further back in time. There was a time when precious metals served as a good anchor, and the economic system was, most of the time, well-served by that anchor. Fiat currency was difficult because no one had figured out a way to make it work consistently. However, things changed as time went on. Money became more and more based on underlying trust rather than actual possession of a heavy, hard-to-transport metal. Eventually people became so accustomed to working with money as an idea, as a ledger entry in a book rather than as a heavy object in a vault, that the metal backing was holding things back instead of helping us out. At that point, it was time to let go of the golden fetters. Recovery from the Great Depression began in earnest only after the gold peg was dropped. That last vestiges were removed in the 1970s, and gold is simply silly today. There is no help it can provide anymore because going back to it would require trust that we would stick with the system, but our current system is already based on the same kind of trust. Going back to gold doesn’t offer any extra backup of trust anymore.

The “free silver” debate in the late 19th century was a reaction against the deflation of the time. Deflation hurts debtors. You borrow 100 dollars, and you have to pay the debt back with 100 dollars that are worth more – that is, 100 dollars that are harder to get – than the original money you borrowed. Plus, there’s the interest payments on top of that. The populist movement of the time wanted silver because they wanted more money, more inflation, which would ease the burden of their debts. If a transition to silver had been done not long after the Civil War, it might’ve worked fairly well. But by the time the Free Silver movement really got its steam, silver was worth comparatively much less than gold and the inflation from going back to the old 16:1 ratio would’ve been intolerably high.

That doesn’t have a lot of direct translation to today, except in the sense that sometimes more money is good and sometimes less money is good. The 1970s? Too much money. Now? Too little, like in the late 19th century panics. In today’s situation, we have a big problematic private debt overhang. If money were to move more quickly – if the total value of the dollars that changed hands every year were to return closer to its previous trend line – then economic recovery would be much more swift. Money can both cause, and ease, economic downturns. It’s a strange thing.

Awesome, that explained it quite well.

A follow-up question: If people begin to lose their trust in “fiat money,” is gold standard an option even today? Or is fiat money pretty much “the new gold standard,” something that will always be here from now on no matter its cost-benefit is relative to the gold standard? I can’t help but feel that if the present monetary system was working unambiguously better than the gold standard, nobody would even be talking about a gold standard…

[supery00n]

@jtgain

I can answer the first question. The basic, simple, simple, watered down answer as to why the gold standard is anachronistic:

1. Understand how the gold standard came about. It’s better explained in other threads. Early civilization had a barter system. If you had a surplus of chickens and a need for wine, you had to find a man who had a surplus of wine and a deficit in chickens. Very bad for transactions, so a standard was needed.

Over time, people found that gold and silver were good standards…then found that you didn’t need to carry the gold, just IOUs for gold. We are at the gold standard.

2. Then, we found that these IOUs didn’t really need to be exchanged for gold. If the government that issued these IOUs crumbled or got in a pinch, then they would just ignore your IOU’s and not give you the gold. The IOUs were really only backed by the faith and credit of the government that issued them. As long as the government that issued them would be responsible, limited, and judicious in printing them, then there would be no need for gold supplies to back them.

3. Once we reached step 2, we realized the folly of the need for a gold standard. We can go back on such a standard if we wish, but if the government gets in a pinch, they can tell you to fuck off with your gold demands.

IOW, we can go back to issuing a 10 dollar bill that guarantees you a certain amount of gold payable on demand. But if the government runs into economic trouble and can’t pay out, then you are just as out of luck as you are in the present day situation where your 10 dollar bill is backed by the full faith and credit of the government. Since this is true, why tie our hands with a limited supply of a metal?

With regard to the last point, couldn’t the government mandate waiting periods, with penalties for immediate exchange beyond a certain minimum request, just like certificates of deposit and other financial securities today which have similar penalties and waiting periods?

[JustinC]

Protectionist policies within an economy - developed or developing - was discussed in great length in economist Ha-Joon Chang’s book, Bad Samaritans. He believes that encouraging ‘open’ economies (that are still developing) will hinder those economies from becoming as wealthy as the ‘old money’. That the western nations are rich stems from their industries being protected from outside competition in their childhoods. Now that these industries are fully-formed any barriers to taking advantage of younger economies is disadvantageous. Basically it’s better to be setting the rules than having to follow them, if you’re powerful enough.

[Little_Nemo]

@supery00n

I see. But what about inflation? Isn’t it true that inflation was less when the gold standard was in place? For example, the value of a dollar from 1870 to 1910 didn’t change very much compared to from 1970-2010. Isn’t a gold standard, in some way, something that keeps governments and national banks honest?

Yes, a gold standard does prevent inflation. But it’s a very costly way to prevent it. It’s the equivalent of deciding that you spend too much time watching TV, so you have the electricity turned off to your house. It’s an overkill solution.

[Little_Nemo]

@supery00n

I can’t help but feel that if the present monetary system was working unambiguously better than the gold standard, nobody would even be talking about a gold standard…

Some people prefer simple answers to complicated answers even if the complicated answer is more correct than the simple answer.

[Little_Nemo]

@supery00n

With regard to the last point, couldn’t the government mandate waiting periods, with penalties for immediate exchange beyond a certain minimum request, just like certificates of deposit and other financial securities today which have similar penalties and waiting periods?

The problem is that it’s almost impossible to only go half-way on this. To go on a gold standard you’re supposed to have an amount of gold equal in value to the amount of money in circulation (in a hardcore gold standard, you use gold coinage and the amount of gold literally is the amount of money). If you do this, you’re going to run into the problem of a money scarcity.

So suppose you try to avoid this scarcity by having a “sort of” gold standard. You print, for example, a hundred billion dollars in currency but only have a gold reserve worth ten billion dollars. The problem with this is that everyone can see that there’s not enough gold to go around. So everyone will try to convert their money to gold before the gold runs out.

[UltraVires]

Another way of stating this is that the “money” or the things that are in society which store value is far in excess of the amount of gold or silver that can be mined. For example, coal has intrinsic value. If we are on a gold/silver standard, why not go ahead and issue notes payable in coal? And then add steel, iron, brass, copper, platinum, oil, gasoline, natural gas, kilowatt hours of electricity, etc. All of those have stores of value and could equally be accepted as IOU currency.

But, as I stated above, once you trust that the government is stable and economically sufficient enough, the IOUs themselves have enough intrinsic value that there is no need to back them with certain commodities.

It makes near zero sense to artificially create a shortage of money simply to adhere to a standard used thousands of years ago?

Is it more stable and less inflationary? Yes, and TOO much so. A little bit of inflation keeps money moving around because you don’t want to hide it under your mattress and lose a little each year due to inflation. You at least put it in a savings account so some other guy can buy a home with part of it, and pay you back over time.

[Dewey_Finn]

Wikipedia on the NCAA death penalty. One editorial I read said that the NCAA’s rules only allow the death penalty in the case of schools that violate rules while already on probation.

[Little_Nemo]

@Dewey_Finn

Wikipedia on the NCAA death penalty. One editorial I read said that the NCAA’s rules only allow the death penalty in the case of schools that violate rules while already on probation.

Well, that certainly clears up a lot of confusion.

[Dewey_Finn]

Sorry. Wrong thread (obviously).

[ultrafilter]

@supery00n

I can’t help but feel that if the present monetary system was working unambiguously better than the gold standard, nobody would even be talking about a gold standard…

With apologies to Mencken, nobody ever went broke underestimating the knowledge of the general public on economic matters.

[mmmbeer]

@jtgain

I can answer the first question. The basic, simple, simple, watered down answer as to why the gold standard is anachronistic:

1. Understand how the gold standard came about. It’s better explained in other threads. Early civilization had a barter system. If you had a surplus of chickens and a need for wine, you had to find a man who had a surplus of wine and a deficit in chickens. Very bad for transactions, so a standard was needed.

Actually a money was needed.

Over time, people found that gold and silver were good standards…then found that you didn’t need to carry the gold, just IOUs for gold. We are at the gold standard.

Gold and silver were good money. There are characteristics of good money widely recognized:

1. Acceptability - Everyone must accept it to purchase goods and services
2. Durability - It should last a long time
3. Portability - Easy to carry around
4. Scarcity - Scarce enough to be valuable, not common such as sand or pebbles on a beach
5. Divisibility - Can be divided into small units

Extra gold was deposited at goldsmiths because they had security and you paid them to keep your gold and you were given a receipt to reclaim your gold. Then, people traded these receipts as money.

There are more as well, these are the basic
2) Then, we found that these IOUs didn’t really need to be exchanged for gold. If the government that issued these IOUs crumbled or got in a pinch, then they would just ignore your IOU’s and not give you the gold. The IOUs were really only backed by the faith and credit of the government that issued them. As long as the government that issued them would be responsible, limited, and judicious in printing them, then there would be no need for gold supplies to back them.

The government didn’t issue these IOUs, the goldsmiths did. Then the independent banks did when banks got started. The government’s only legitimate role is the establishment of the weights and standards and make sure that the correct amount of metal is in the coins as it is supposed to be. Fraud prevention.

3. Once we reached step 2, we realized the folly of the need for a gold standard. We can go back on such a standard if we wish, but if the government gets in a pinch, they can tell you to fuck off with your gold demands.

The need for a gold standard isn’t folly. It is the best defense the people have from the government systematically stealing their wealth. The real folly is that we got off the gold standard. You are correct in that a robber can take what is yours, that doesn’t make having it a bad idea. What kind of logic is that?

IOW, we can go back to issuing a 10 dollar bill that guarantees you a certain amount of gold payable on demand. But if the government runs into economic trouble and can’t pay out, then you are just as out of luck as you are in the present day situation where your 10 dollar bill is backed by the full faith and credit of the government. Since this is true, why tie our hands with a limited supply of a metal?

I have read that as a measure of inflation, during the time we were on the gold standard, from colonial times an ounce of gold would buy a decent man’s suit. It still will. As a comparison, on the federal reserve note, 1 dollar in 1930 is roughly 13 today. This means the government has stolen 12/13ths of the purchasing power of the people’s wealth through inflation.
The government isn’t authorized by the constitution to be in the banking business, so your whole “if the government runs into economic trouble” is based on it being involved in whole slew of things that they have no authority to be in to start with, which is a whole different conversation.

There is an even greater need to get the government’s hands out of the money business than ever.

[foolsguinea]

What do you think a constitution is?

[mmmbeer]

@Hellestal

The argument against tariffs is based on the idea of comparative advantage, which is extremely hard to argue with. There are people who bring up legitimate criticisms around the edges, but the core idea is solid, and would have been just as valid in the 19th century as it is today. The idea of strong protective tariffs is fringe today because relatively more people understand the economics of trade.

Unfortunately, relatively few people, even today, understand the economics of money.

Gold is a fringe idea now – and rightly so – but the argument against gold in history is not so good, especially as you go further back in time. There was a time when precious metals served as a good anchor, and the economic system was, most of the time, well-served by that anchor. Fiat currency was difficult because no one had figured out a way to make it work consistently. However, things changed as time went on. Money became more and more based on underlying trust rather than actual possession of a heavy, hard-to-transport metal. Eventually people became so accustomed to working with money as an idea, as a ledger entry in a book rather than as a heavy object in a vault, that the metal backing was holding things back instead of helping us out. At that point, it was time to let go of the golden fetters. Recovery from the Great Depression began in earnest only after the gold peg was dropped. That last vestiges were removed in the 1970s, and gold is simply silly today. There is no help it can provide anymore because going back to it would require trust that we would stick with the system, but our current system is already based on the same kind of trust. Going back to gold doesn’t offer any extra backup of trust anymore.

Fringe just means loser of popularity contest. Gold isn’t a fringe idea, it really exists in reality, not in idea land.
“Money became based on trust”??? I didn’t’ see that as one of the good characteristics of a money. One doesn’t have to trust gold. It is there. It exists. With FIAT MONEY one must trust the government which is why it isn’t a good money.
So, people becoming accustomed to an idea of a ledger entry made the thing, which gave reality to the idea, a hindrance? We didn’t let go a golden fetters, the was stolen from the people by law at a great bargain for the government, which then sold it’s ill gotten gains for even more money, which still wasn’t enough as you can see by it’s credit card statement. And this is who you advocate we should TRUST?

The “free silver” debate in the late 19th century was a reaction against the deflation of the time. Deflation hurts debtors. You borrow 100 dollars, and you have to pay the debt back with 100 dollars that are worth more – that is, 100 dollars that are harder to get – than the original money you borrowed. Plus, there’s the interest payments on top of that. The populist movement of the time wanted silver because they wanted more money, more inflation, which would ease the burden of their debts. If a transition to silver had been done not long after the Civil War, it might’ve worked fairly well. But by the time the Free Silver movement really got its steam, silver was worth comparatively much less than gold and the inflation from going back to the old 16:1 ratio would’ve been intolerably high.

The populist movement of the time wanted silver because they wanted more money, more inflation, which would ease the burden of their debts.
It is this DEMOCRATIC idea, magnified many times,that has driven our great REPUBLIC into the ground. Just because a group wants to change something because they have numbers doesn’t mean that they have the right to do so. There are certain underlying principles that can’t be violated if the country is to go on. This one for example, changing the value of the money so what I pay back is worth less than what I borrowed. It isn’t the place of the government to steal from everyone to pay back the debts of some, even a majority.

That doesn’t have a lot of direct translation to today, except in the sense that sometimes more money is good and sometimes less money is good. The 1970s? Too much money. Now? Too little, like in the late 19th century panics. In today’s situation, we have a big problematic private debt overhang. If money were to move more quickly – if the total value of the dollars that changed hands every year were to return closer to its previous trend line – then economic recovery would be much more swift. Money can both cause, and ease, economic downturns. It’s a strange thing.

There is no more and less today, it is always more, more, more. You think there isn’t enough money today? How do you explain inflation, if there is not enough money? How can everyone be in debt up to their eyeballs on credit cards, and buying houses they can’t afford and so on and so on, if there is not enough money to spend?

[mmmbeer]

@foolsguinea

What do you think a constitution is?

A constitution is a document whereby a people delegate some of their natural sovereignty to create a government to do certain limited, and in our case, enumerated things for them.