With a gold standard, the value of gold will go up and a lot of people will spend a lot of unnecessary and uneconomic time and energy trying to find the stuff.
Without a gold standard, central bankers can adjust the money supply to help the economy. Which is good as long as they don’t go hog wild – a danger that a gold standard would prevent.
Because the government stole it. FDR claimed the people were “hoarding” gold. You see, when the government keeps several thousand tons at Fort Knox, that isn’t hoarding. It is kind of silly to dig up gold from the ground or rivers, melt it down into bars and then bury it again. As an aside it’s been posited that Fort Knox is more or less empty, or nearly so. No audit since the 1950s. More fodder for the tin-foil crowd.
The original legislation authorizing the Eagle coin program specified “Newly mined domestic bullion” or similar iirc. Don’t know if that is still the case. Knox was the repository for “coin gold” bars confiscated from the depression era public, 90 per cent fineness bars which aren’t really useful on world markets as standardized “good delivery” bars (at .999 fineness.)
But… that’s just when you need the wheels on the wagon - to haul around huge wads of nearly-worthless currency!
FDR taking the U.S. off the gold standard made good economic sense at the time, and it still does. The American economy is now far, far greater in value than our holdings of gold, and perhaps has no practical upper limit, given our productivity, innovation, social clout, military power and the strength of the dollar worldwide. Does this guarantee that we’ll never have a severe economic downturn? Of course not. But going back on the gold standard would be the surest way to cause one.
Clearly, the Libs think something is broken, and changing to a gold standard will fix it. But in all the threads we’ve had on the subject, including this one, I still don’t know what that is, exactly. The long posts in this thread do an excellent job explaining why this is a stupid idea, but I’m still at a loss to understand what the Libs hope to accomplish with this, and what they perceive as being a problem that requires such a drastic change. As near as I can tell, it’s a totally irrational policy rooted in a nebulous anxiety that “the money isn’t tied to anything, man!” with no more concrete foundation than that.
My first thought was that an ounce of gold would have to represent a lot more dollars. The price of gold would have to go way up. In practice I think it would turn out just like now. The value of gold, in dollars, would fluctuated based on the need for the money required to maintain commerce.
In short, the “gold standard” would be a fiction.
I’m an ass for posting in this thread, because I’ll be subjected to a ten-on-one pile-on, and I don’t even support the gold standard. But I’ll take you question as sincere and try to explain what libertarians don’t like about fiat currency.
The value of fiat currency is controlled by government and government only, and two thousand years of human experience has shown that governments can’t always be trusted to issue currency that retains its value. The United States Consumer Price Index was 51 in 1800, 41 in 1932 when we went off of a specie standard, and 615 today. This is what some people believe is broken and needs fixing.
During the 1970’s, the United States experienced severe, chronic, and unpredictable inlfation (5% to 13% per year over a 15-year period) which played havoc with the value of financial assets. If you owned stocks or (especially) bonds or even interest-regulated bank deposits at the time, you lost a substantial fraction of your net worth due to the government mismanaging the currency. This hasn’t happened over the last 25 years, but some fear that it could happen again.
Other countries have seen their fiat currencies depreciate to a far greater extent than the United States. Some have adopted currency boards which anchor their currency to dollars or euros instead of silver or gold–taking the power to inflate their money supply away from their own government and entrusting it to another government that they trust more. A specie standard takes the power out of government altogether and hands it to commodity markets.
I’m well aware of the drawbacks of this. You don’t have to point them out to me, because I already know them. But, there are also drawbacks to fiat currency, and you asked what they are, so I’m trying to explain.
Libertarians people got upset when the US went off the gold standard. The trouble is that the economy of the 70s and early 80s convinced them they were right, never mind the late 80s, the 90s, and the 00s. We used to have rampant inflation, massive unemployment, cities rotting from within, and going off the gold standard was supposed to be the root cause of all this economic malaise. And it was only a matter of time before we hit Weimar Germany style hyperinflation, economic collapse, communists and/or fascists taking over, and cannibalism as the cities starved. And the only answer was GOLD. Gold would solve these problems.
This is very helpful. Thanks very much.
That’s a really interesting chart of the CPI. I had no idea we had so many severe deflationary periods in our history. Just look at WWI: inflation went from nearly 18% to two years of deflation in the space of five years!
Not piling on, but do these gold standard advocates believe that deflation is a good thing?
I agree that gold would make inflation very difficult. But it would make any other form of economic growth equally difficult. It’s the equivalent of cutting off your kid’s legs so he won’t play in traffic - a solution that technically works but is massively overdone. (I also realize from your post that you already know this.)
And the inflation of the 1970s was mostly due to OPEC. Their unilateral decision to consolidate and raise oil prices drove inflation to record levels all over the world. A gold standard wouldn’t have prevented it. The only difference would have been all our gold would have left this country as we used it to buy oil.
But if someone finds a substantial new source of gold or silver, currency backed by precious metals can lose its value, too, as happened with the price revolution in western Europe in the 15th through 17th centuries.
I was thinking “curing a brain tumor with a guillotine.”
Gold mining can be rough on the environment. One of the problems is that cyanide is often used to extract gold from ore, and the cyanide can contaminate groundwater (which is an important source of fresh water, and an increasingly scarce resource in some places). Going back to the gold standard would encourage more gold mining, which would mean more environmental problems caused by gold mining.
And note where those gold mines are. They aren’t just in the US but are also in Russia, South Africa, Australia, and Canada. Do we REALLY want to be at the mercy of the Canadians if they decided to play with the supply?
South Africa is a major supplier of gold (79% of world gold production in 1970, and one third to one half of the world’s gold in the 80s and 90s). I wonder, if we’d been on the gold standard in the 80s, how that might have affected apartheid in South Africa and various nations’ attempts to get them to change their ways. I wonder if the money they would have gotten from gold might not have propped up the apartheid regime, like the money from oil props up governments in the Middle East…
Even without a gold standard, even though the price of gold in the US in 1966 was fixed at a mere $35/oz, Bobby Kennedy thought we did:
Before opting for a sale, perhaps the U.S. government should seek the opinion of U.K. Chancellor of the Exchequer Gordon Brown in view of his success with a similar plan. :dubious:
While I agree with Ron Paul that we should be aware of how government policy leads to a shrinking dollar, there’s no point in obsessing over its value in gold for exactly this reason. Far better to compare the dollar to a pair of blue jeans or a dozen eggs over time.
Crunching the numbers this works out to an annual inflation rate of 3.6% over the last 75 years. I mean, sure it looks bad to say “since we’ve been off the gold standard the CPI has gone up by a factor of 15”, but that’s what happens when you have exponential functions: they get big fast. Is the complaint that 3.6% is too high an inflation rate, or is it just “the number is much bigger now”?