The Gold Standard - Actually prefferable to fiat?

Great Debates
1

Alright, assumptions and acknowledgements:
–Fiat currencies always go to zero, with 100% certainty given sufficient time, usually with a period of wealth-destroying hyper inflation and chaos
–Fiat currencies are inflated through the (always suboptimal) operation of the issuer/government
–Gold (or any precious metal) is sound money, with strong historical support for the retention of value, lack of government manipulation and zero hyperinflation

Most people look at these three assumptions and argue in favor of a gold standard… but is a gold/PM standard actually preferable for a society? Especially when considering things like human nature and expectations and the impact of deflation?

Some other things that often fly under the radar or are completely unaddressed in arguments in favor of gold/PM include the inherent deflationary properties of a gold standard. Every day, technology makes the production of goods and services cheaper - usually in an exponential fashion. Gold production has never, and likely will never match the production increases in goods, and therefore the value of gold continually increases when measured in goods.

Lets use a can of coke. The aluminum alone was once so expensive that only kings and emperors could hope to have any at all, let alone the cost of shipping the sugar and other ingredients across continents… so a can of coke a thousand years ago, or even 300 years ago, was quite high in terms of troy oz gold. Today it takes, what, 1/1300 troy oz gold for a can of coke, or therabouts. That’s inherently deflationary, one troy oz has gone from (generously) 1 can to 1,300 cans lets say.

The problem is, deflation doesn’t work with human psychology. If we’re on a gold standard, and aggregate production costs go down, the value of the Gold Dollar relative to the goods produced goes up. Either businesses across society cut their workers wages or they risk going out of business. And this every single time production increases faster than gold is produced. In the aggregate, so it’s even worse if your production costs haven’t changed. Imagine the battles fought, the outrage, at having wages cut every year, year over year.

It would also be financial suicide to take a loan. With manipulated inflation, we have a reasonable estimate of what inflation will be. We can fix an interest rate (always in excess of inflation), that tells us with reasonable certainty how much we will owe in the future, or less. Inflation can always be higher, which benefits borrowers. With a Gold Standard, on the other hand, we can’t know how much deflation we’ll have year after year. It all depends on new resource discovery, technological advancement, demand shifts, etc. It can’t be manipulated. That’s often touted as a core benefit to Gold. So I might owe 2 bushel equivalents of “goods” one year, but next year I’d have to pay the equivalent of 4 bushels of “goods” if some technology made aggregate production dramatically increase. Or maybe not. There’s no certainty, no way to guess. What business would take a loan with no way to determine how successful they would have to be in order to repay that loan? If businesses aren’t taking loans, we can say goodbye to startups and new businesses.

I don’t want to turn this into a wall of text, but is the prevention of the occasional economic correction (or collapse, if you prefer to use more extreme language) really better than the benefits brought on by fiat? What are some of the other pros and cons of a gold based system, and how would a gold based system address these issues?

2

I’m sorry but this really needs a solid topic sentence and conclusory sentence.

3

Considering that gold lost half its value between its peak in 2011 and the end of last year I’m not sure you can make an argument that it’s more stable then the Dollar. It took the entire decade of the seventies for the Dollar to lose that much value. Considering that cap that gold puts on the wider economy I can’t think of any reason to prefer it today.

4

You got it upside down, Digger mate. The value of the dollar economy doubled since its trough in 2011. The value of gold was virtually the same throughout that period. It changed due to mainly its speculative value, one thing that gold standard economies are not immune to.

5

Does your human nature aversion to inflation prevent people from buying technology products like TVs and smartphones, whose prices are consistently falling?

This bit of human nature did not exist in the most prosperous period in American history in the late 19th century.

6

How are you figuring the value of the Dollar doubled in the last 5 years? I can’t think of any measure where that is true except for precious metals and oil but even then the more common way to put that is their value dropped.

I think I agree with you that the value of gold is intrinsic and that it doesn’t change without new uses for gold and that it’s price reflects anticipated scarcity or demand changes. That really doesn’t have much to do with me talking about the relative stability of a gold standard (unless the value of gold is set by the government) versus a Fiat currency.

7

How does gold have any value beyond what we arbitrarily decide? It’s a shiny rock, is all.

8

Is the first assumption true? Periods of hyperinflation have more to do with the economy tanking, usually as the result of war or gross economic mismanagement, than they do with fiat currency. Furthermore, are there any currencies left that are not fiat currencies? If so, I’d say that this is a pretty broad extrapolation from the minority of currencies that have gone kablooey.

Is the second assumption true? What is always suboptimal about how currencies are inflated?

While I don’t know of any instance of hyperinflation associated with gold, dumping gold into an economy far in excess of its wealth leads to inflation, as evidenced by Spain in the 1500s. Granted, given the size of the economy relative to the size of the gold supply, this is unlikely to happen again.

Rob

9

Someone should link to the thread we had about this awhile back.

One point. I think there is somewhat of a problem of saying what gold value in dollars is or was as a method of looking the relative merits of gold as basis of currency because it’s “trying” to be a competing/compensating currency.

You need to look at when only the gold is the currency. Or you have currency and it says on it “refundable for 0.1 ounces of gold” (which we ACTUALLY have stored somewhere).

10

I think part of the problem is gold simply gives a lot of people the vapors, rightly or wrongly. Probably wrongly, but at issue here is really the unit of account; what is telling, as technology advances, and standards (there’s the salient part) become more precise, a “dollar” is now basically undefined, apart from pieces of paper with dead presidents on them, or increasingly simply digital 1s and 0s inhabiting the aether.

As someone once pointed out, nobody mounts an expedition to recover some long lost monarch’s checkbook from the bottom of the ocean. Weights and measures, units of time, are all very well defined and described in excruciating detail. That something as basic as money, the unit of account isn’t is basically a scam. It of course doesn’t have to be gold, but some sort of objective standard would go a long way to making the “dismal science” respectable again.

11

Really? The United States has been issuing paper dollars since 1861. We went off the gold standard in 1933. But the American dollar has never reached a value of zero.

I suppose you can argue that it will happen some day. But you certainly can’t claim a 100% certainty.

12

But value is only defined in relation to the availability of goods and services, so a unit of money must be flexible to adjust to changing market conditions.

Locking money value to a single commodity will drastically limit the supply of money and cripple investments.

13

I never mentioned locking money value to a commodity.

What I said was, there is currently no objective unit of account, when it comes to money. This is almost unique, and glaringly so. The yard is defined, the ounce, the kilometer, an hour, an acre of land, etc to an ever increasing level of precision down to the number of vibrations of certain atoms. A dollar? Who the hell knows.

How would you feel if the acre was redefined every year to be less and less? We don’t wake up and turn the news on, and hear the announcer say “The meter lost several millimeters against the yard in heavy measuring yesterday”.

In terms or “crippling investments”, I would argue that an unstable unit of measurement over time punishes savers and makes it difficult to even make comparisons over time. It’s just dishonest at best.

14

The number of cars, refrigerators, or houses you could buy with gold dropped in half. The amount of goods you could buy with dollars did not double.

15

Okay.

That was funny :slight_smile:

16

Units of measurement do not involve value; they are simply what we agree upon.

How on earth can you possibly define value with precision *without *tying money to a commodity?

17

A dollar is equal to a dollar. It remains constant year after year.

Does the amount of dollars it takes to buy something change? Sure. But that’s because the prices of those things changed. But if you had stuck a dollar in your pocket fifty years ago and pulled it out today, it would still be worth one dollar.

Consider a yard, one of the units you mentioned. If you were measured when you were four years old, you might have been one yard in height. And if somebody measure you again when you were twenty, you might have been two yards in height. Would you conclude from this that the value of a yard is worth only half as much as it was sixteen years ago? Was there some kind of inch inflation which occurred every year which caused it to take more inches to match your height?

18

No, but it’s come close. Back in the day, a movie ticket cost 5 cents. One dollar could buy 20 movie tickets. Today a movie ticket costs 10 dollars. One dollar buys one tenth of a movie ticket. The dollar has lost 99.5% of its value, as measured in movie tickets.

Or take candy bars. Same story. Costs go way up. Purchasing value of one dollar goes way down. There doesn’t seem to be any reason to expect this trend to stop, so in the limit, we can reasonably expect that the value of a dollar will approach zero eventually, unless the government changes how dollars are defined.

19

Without adjusting for inflation, I make more money than Ty Cobb, so put me in the baseball hall of fame.

20

This board has gone round and round on the topic of fiat money vs gold; ignorance is fought; and then, after a few months, someone else shows up, often after watching a scary goldbug YouTube. Common Tater, you’ve been around for a while: Have you read the other threads?

Commodity prices vary. Nickel is sometimes twice as expensive as tungsten, sometimes half the price. (That comparison was just the first that showed up with my lame Googling; invest a few seconds of Search and find more interesting and more dramatic effects with other commodities.) And of course, the price of electronic toys continues to plummet dramatically, at least if performance is factored in.

And gold and silver also fluctuate dramatically in value over time. What has retained a very stable value over the past 30 years? More so than any commodity you care to name? The U.S. dollar has. It buys almost precisely 96 to 99% of the same “basket of goods” (cf, Price Index) that it bought the year before. Would gold do that? Silver? Widgets? Overall price stability is a major goal of central banks. Before modern central-bank money, fluctuations in the prices of gold or silver were a source of financial instability.

In other words, you’ve got it backwards.

That leaves four matters to dispense with: Hyperinflation, Inflation, Global currency, Insane Governance.

Hyperinflation is very bad, but it’s usually a symptom rather than a cause of economic problems. And even it doesn’t “destroy wealth” directly (though it will transfer wealth from lenders to debtors). Wealth consists of land, people, capital machinery, ideas, and, yes, the precious metals which have been dug out of the ground. What pure wealth is not is pencil marks on a bank’s ledger. Hyperinflation, BTW, refers to an inflation rate in excess of 50% per month! That’s an annual rate over 12000%. Congratulations for avoiding the “hyper-” prefix; most goldbugs and Youtube nuts stick it on automatically.

But very high inflation can be bad even when it doesn’t meet the threshold for hyperinflation. France experienced 20% inflation during Hitler’s occupation (and 50% for a few years after liberation). Do you think this was a cause or symptom of France’s woe during that time? In any event they’re doing OK now.

Inflation of 2% per year means that a goods basket worth $10 in 1800 will cost over $27,000 in the year 2200. And over $75 million in the year 2600. Welcome to the compounding effect! If that’s your big objection to “fiat” money, please start a new thread: “Teach me basic arithmetic.” :slight_smile:

In fact 2% annual inflation, or even 6% inflation poses little problem if it’s anticipated. Interest rates tend to follow inflation: if the expected inflation rate rises from 2% to 5%, interest may rise from 6% to 9%. Savers are not punished. In fact, savers are being punished right now, as desperate central banks drop interest rates hoping for inflation (or rather the positive economic growth of which that inflation would be a symptom).

> “makes it difficult to even make comparisons over time”
Did I answer you on this matter a few months ago? Or, by chance, are you repeating the fear of another Doper? Either way, please explain the problem you see. Many comparisons do use “constant dollars” and there are webpages that will convert to “constant dollars” for you if you want to better understand what Grandma paid for that piece of furniture. Yes, prices of commodities vary in time and space but they would do that if measured in gold or wood or iPhones instead of dollars. As pointed out above, the dollar (discounted by inflation) provides a more constant measure of value than gold or anything else.

Global currency. Using Euros in Greece led to problems. Different economies need different interest rates and different inflation rates. Common currency interferes with that.

Insane governance. It is possible for a central bank to destroy its currency, causing economic turmoil. But incompetent or malicious government will find a way to do mischief even if on the gold standard! Some people detest all government, assume all governments are incompetent and malicious. Start a new thread if that’s your position. For our purpose it’s sufficient to note that, despite the almost religious dogma of Hyperlibertarians, unfettered dog-eat-dog market economics itself has problems.

Hope this helps.