I figured I’d put this in GD. Although I feel it’s a GQ question, and I expect to basically get one answer, I imagine it could be a debate. Secondly I would put it in IMHO, but then, it’s more of an academic topic that would be debated on than anything, so Mods, if you feel it needs to be moved, please do so.
So essentially Ron Paul wants to get rid of the Fed and get on the gold standard. He doesn’t mention it in this bill of his:
But I have read before that is what he would like to do. I was reading on digg about how, “The Fed has been screwing over the American People” “The gold standard would fix out problems” “The Iraq war was about selling oil in Euros instead of Petrodollars”
Now I am pretty sure, that at some point I understood the reason for why all of these things are false. Could you guys please enlighten me why this stuff isn’t true, and why the Gold standard is a bad idea? It seems to be the position of most economists that it’s a bad idea. I’d just like to remember why.
The simplest answer is that there just isn’t enough gold, at current prices. And if they changed the price of gold enough that there was enough, that abrupt change in the price would wreak havok on the economy in its own way.
The more complicated answer is that, even when there was enough gold, it just doesn’t matter what you base a currency on. Gold doesn’t have any inherent value (or rather, very little, less than many other substances); the only reason that gold is valuable is that people think it’s valuable, and know that other people think so, as well. But the same is true of dollars, currently. I don’t have any problem accepting a payment in dollars, because I know that others will accept it when I pay them with dollars. Why not just cut out the middleman?
The advantage of the Fed is that it can regulate the money supply. It can (kinda) fight inflation and recessions by increasing or decreasing the amount of money available to the public. The Fed is one of the most important tools (if not the only tool) that the government has in macroeconomic planning. It’s the best way to make sure that things go smoothly.
We can’t regulate the money supply nearly as well if we are on the gold standard, for fairly clear reasons - we would need to collect the gold necessary to back up new currency.
Another way to express it might be that gold is just another commodity in the market place with its own cycles of rising and falling demand; a gold standard would be an attempt at price control.
Not quite true; perception does play a role but gold is also valuable because it actually is rare. Rare things are more valueable than common things, obviously. Any substance more common than gold but still relatively rare (like silver) probably would have too many other uses in the economy to be suited as a metallic standard.
Why exactly does gold==money? Answer, gold isn’t money. Gold is a good that can be used as money. Only cranks believe that gold==money and money==gold.
I suppose I could understand the gold standard people back in the 70s and early 80s when inflation was rampaging and it seemed as if any fiat currency would inevitably be inflated to worthlessness. But we’ve had more than 20 years since double-digit inflation, and so the idea that without the gold standard our money would soon be worthless is disproven. We went through a period of inflation and recovered from it, not from restoring the gold standard, but from implementing sensible monetary policies.
So sure, fiat currency is vulnerable to political manipulation. But so is gold-standard currency. The first thing that happens during a crisis is that governments freeze converting paper money to gold. So whats the difference between a piece of paper that the government promises is worth X amount of gold, and a piece of paper that the government promises is worth X amount, when either promise can be broken on a whim?
The only solution is to do away with paper money entirely and rely on gold and silver coins.
Not obvious at all. Andean condor guano is very rare indeed, but nobody ever suggests using it as a basis for a monetary system. It’s probably not of any value to anyone except possibly conservationists and biologists studying the birds, and I doubt that even they would pay $655 an ounce for it.
But of course, there are many other reasons that condor guano isn’t used - it could be manufactured, it’s not as easy to divide, it’s smelly… You get the picture. We did a thread on this not too long ago, when someone asked why gold is used as a basis for currency. There are some pretty good reasons beyond just perception and rarity. Thread here
To be fair, gold is pretty useful. It is fantastic for decorating and jewelry, as it’s esthetically pleasing, very easy to work, and doesn’t tarnish. It is also a good electrical conductor, particularly great for electrical contacts and other places where oxidation would be a problem, but a good enough conductor to use for general purposes, too. It’s not used more for electrical work only because it is so expensive.
He might stand to gain a fair bit, as he owns quite a few mining shares in mining companies.
This isn’t any great secret, all the candidates are required to list their assets and investments. The problem with gold historically is that quite a few countries with interests that did not coincide with the West had a lot of it, but there isn’t near enough of it overall to go around. The total, known above ground supply is maybe 100 billion? Not small change, but only a drop in the bucket globally.
But just to be absolutely clear here, Gold is considered important because there’s a fixed amount of it? However, an austere Fed could do just as well while remaining flexible, right? That’s the way I’ve always thought of it, The fed is a bunch of hyper-nerds controlling the money supply (M3 is it?) and from there the economy. I don’t get why people think the Fed is screwing them over.
I am not an economist, but in theory a managed monetary system should be “better” because money can be extinguished as well, something not possible with a tangible money supply? Huge gold and silver discoveries in the ancient world disrupted economies then too. Gold is considered important because its value is quasi-independent of any government or financial institution. Or used to be anyway - mining stocks and gold seem more correlated with other equities than in years past. You’re right though - relatively low interest rate loans have allowed millions to own their own home, something that wouldn’t be possible in “the good old days”. I can sit at my computer and pay bills, buy stock, and move my electronic $$ around and buy stuff instantly, without writing checks, withdrawing currency or lugging gold bricks around. What’s not to like?
But the trouble is that the stock of gold ISN’T fixed. More gold enters the supply all the time, that’s what gold mines do. So a gold strikes causes inflation as gold loses value.
And the other problem is that the stock of non-gold goods and services isn’t fixed either. If the stock of goods and services increases faster than the stock of gold then we get severe deflation, which is what happened frequently during American history. We’re so used to the idea of the dangers of inflation nowadays that nobody seems to have even heard of deflation, let alone the bad things it does to the economy.