Currency is a way to track exchange of value because it is much more portable than barter goods. There is now more trade being done every hour than was done over the course of a year back when gold made sense as a medium of exchange.
What commodity do you want the money supply shackled to?
It is nonsensical to say that the gold standard is better than fiat money, because the gold standard is the epitome of fiat money. What we have now is not fiat money, it is free-market money.
To elaborate: Gold standard proponents often say that we should base the value of money on the value of some commodity. All right, but why gold specifically? Even very similar commodities, like silver, don’t stay constant relative to gold. What makes a gold standard inherently any better than a silver standard? Given the fact that gold and silver fluctuate relative to each other, if there’s such a thing as “inherent value”, then we must conclude that at least one of those two precious metals fluctuates in its inherent value, and given their similarity, one ought then to conclude that most likely both fluctuate.
So how can we decrease those fluctuations, to make them more suitable as a basis for currency? Well, we can average commodities together. The average of gold and silver will fluctuate less than either one will by itself. But there are many commodities in the world, not just gold and silver. We’d get an even more robust currency if we based it on an average of all commodities.
But now we must ask, how do we weight that average? Should we just have some government agency saying that the dollar is equal to x% of the price of an ounce of gold, plus y% of the price of an ounce of silver, plus z% of the price of a ton of wheat, and so on? Declaring, by fiat, what the value of each of those commodities is relative to all of the others? And what happens when a new commodity appears: Does the government then need to add in “plus w% of the price of an iPod”?
No: That would clearly not be workable. There is only one human agency capable of keeping up with the requirements, here, and that is the free market. So should we base our monetary system on? On people all over the world using the money to buy gold, and silver, and wheat, and iPods, and anything else they wish to buy, and in each case, even each transaction, deciding what that commodity is worth to that person at that moment. That is the most robust basis possible for a monetary system… and it’s exactly what we have now.
Chronos - you said exactly what I was thinking in a better way. I was curious what the OP would think if the government fixed the minimum wage for an hour of work to a certain number of pounds of gravel. Would that be better than fixing the minimum wage to a certain number of dollars in a floated currency?
Right. The number of ounces you could buy with US cars, US refrigerators, or US houses rose two fold.
Well, obviously. High tide does not a higher yacht make.
That’s my question for Common Tator as well, which others have asked up-thread.
If he wants an “objective” standard for currency, what does he propose? He’s said he’s not arguing for a gold standard.
Okay, so how do you define an “objective” standard for currency?
Obviously you can’t have an objective standard of value, because every thing bought or sold (or not bought or not sold) is merely based on someone’s subjective whims.
Take, say, coffee. Is a cup of coffee always supposed to be a dollar? But what if there’s a coffee blight, and the supply of coffee is cut in half? Should we still mandate that a cup of coffee costs a dollar? What if coffee farmers increase production, and there’s twice as much coffee supply as before? What if people stop drinking so much coffee and switch to tea? What if there’s a craze for coffee houses and people start drinking a lot more coffee? What if I produce inferior quality coffee beans, and the farmer next to be starts growing better tasting beans? What if I serve watered-down sludge, and the cafe next door serves handcrafted espressos?
Obviously there can never be a decree that a cup of coffee will always cost a dollar, no matter what. Even if you can take a dollar today and go and buy yourself a cup of coffee, there’s no guarantee what the price of a cup of coffee will be tomorrow, or next year, or 20 years, or 100 years. It is ridiculous to expect, given the changes over the last 100 years about how coffee is grown, shipped, processed and served that the price today should be exactly the same as the price 100 years ago. And this is true regardless of whether we use the dollar, or the pound, or the yen, or grams of gold, or bushels of wheat, or cowrie shells as the unit of account.
It is perfectly possible for a business to keep their accounts, not in dollars, but in some other currency. You could buy and sell for dollars, but every time you make a purchase you calculate how much gold that would have taken, and every sale you calculate how much gold that earns. All your assets and liabilities can be tracked in grams of gold rather than dollars. The only defect of this system is the constantly changing value of the dollar relative to gold. Sometimes gold is high, sometimes it’s low. If you have a store are you going to raise prices in dollars every time gold is high, and cut prices when gold is low?
What would be the purpose of that? What exactly is the purpose of money? Money is a good that can be used as a medium of exchange, a store of value, and a unit of account. Again, you can use any good as money, but some goods are difficult and annoying to use as money, others are easy and convenient. So in Africa cows were used as a form of money. You would buy and sell land in terms of 100 cows for this farm, or 15 cows for that farm, or whatever. But cows are a terrible form of money, because they need to be constantly fed, they vary in quality, they die, they’re large, they’re difficult to move. And so of course, since ancient times people realized that small bits of precious metals were very useful as money. Gold and silver don’t evaporate or die, you can set them on a shelf and decades later they’re still there, they can be divided into arbitrarily large or small amounts, they can vary in purity but that purity can be objectively measured, they are small and portable relative to value, and so on.
And so gold and silver were frequently used as money. But the problem is that actually exchanging ingots of gold and silver is less convenient than exchanging the idea of gold and silver. If you come to my store and buy a bushel of wheat, you could give me a silver ingot of a weight that we both agree is equal in value to the weight of wheat. Or you don’t actually have to hand me the ingot, I can just write in my ledger that you owe me such and such silver, and you agree that you owe me such and such silver. No actual disks of silver moves, just the idea moves.
And now what have we invented? Fiat money. The idea that you owe me a certain value, tied to nothing except what we agree on. It’s easy to see that if tomorrow there’s a grain blight, I’ll wish I had kept the grain I sold you because it’s now worth more than the silver. If tomorrow a ship stuffed with silver arrives from Peru, then I’ll wish I had kept the grain. If tomorrow a ship stuffed with grain arrives from Egypt, what then? Of course every price of every good and service on planet Earth fluctuates relative to the value of every other good and service, this is easy to see with just two commodities like silver and wheat, now factor in the millions of goods and services produced and consumed on Earth every day, and you’ll see that there’s no way to have an objective valuation of those goods, let alone an objective valuation that stays stable over years or decades.
Yes it’s true that with 2% inflation the value of goods and services relative to the unit of account drops by half over 35 years. Which means that you can’t easily compare prices over the decades or centuries. But people don’t lose 2% of their wealth every year, and half their wealth over 35 years, unless they metaphorically put all their money under a mattress and leave it there. Except most people’s wealth doesn’t consist of stacks of banknotes in a vault. The only people where this is true are people with almost no net worth, you might have a wallet full of cash but that’s all you have, and it will all be spent by the end of the month.
It’s ridiculous to expect that since you bought a TV in 1985 for $200, you should be able to sell the TV today for $200. That if you had $200 in 1985 you should be able to purchase the exact same basket of goods in 2016, because $200 is $200. That could never happen. So why would you expect that since you could buy a candy bar for $0.50 in 1985 you should be able to buy a candy bar for $0.50 in 2016?
A dollar is just another good, and it follows the exact same laws of supply and demand as other goods. Yes, the value of a dollar isn’t stable over the decades. Neither are the values of other goods, including gold. A dollar doesn’t have an intrinsic objective stable value, neither do other goods. The price of a bushel of wheat relative to a dollar, or a gram of gold, or nice shirt, or an acre of land isn’t constant over time, and to expect these values to stay the same is delusional.
So what that a dollar doesn’t retain it’s value? Yes, high inflation, like 10% annual inflation, is annoying to deal with, and requires all sorts of annoying accounting. Really high inflation, like 100% annual inflation, is really annoying to deal with. Except right now we have something like 1% inflation, or maybe 2%. That means the dollar is very useful as a unit of account for the timescales most businesses are interested in, this year and maybe the next few years. The value might be different 30 years from now, or 30 years ago, but that’s not super important as long as the value isn’t going to change in unexpected ways tomorrow or next year. That makes it safe to keep dollars in a bank account for a year without worrying that next year the dollar will be wastepaper. It doesn’t matter that 100 years from now you won’t be able to buy a cup of coffee with that dollar you put in the bank back in 2016, because that’s not what a dollar is for.
Well put.
What you appear to be arguing is that you want a static economy; an economy that doesn’t change from year to year. That economy isn’t going to happen and even if it did, it wouldn’t be a good thing.
How do you decide the “value” of gold?
Compared to things like man/hours or food, the value of gold has fluctuated wildly throughout history.
Even here, you admit:* It changed due to mainly its speculative value*…
It’s totally false that the value of gold either doesnt change or always goes up. It’s a commodity, just like Silver or pork bellies. Only Gold Bugs believe Gold have magical properties.
Gold retains its value in a tautological way: 1 gram of gold in 3000 BC is still a gram of gold in 2016 AD.
Of course, then along come the people who want to tell you that a gram of gold bought a bushel of wheat in ancient Rome, and you can still buy a bushel of wheat for a gram of gold, etc etc.
But even if this were true it doesn’t mean anything. I mean, why wouldn’t a bushel of wheat be a better standard, if the wheat/gold ratio has stayed stable for 2000 years? But of course the wheat/gold ratio hasn’t stayed stable. And it isn’t just not stable over time, it’s not stable from place to place. Does the cost mean cost delivered to your door? Price that farmers get at the railyard?
I can get a 50 pound bag of wheat delivered to my door for about $50.00 when all is said and done. But the price farmers get selling their wheat to the grain silo people is a lot less. So does wheat cost $1.00/pound, or $0.10/pound? What’s the fair, or the objective, or the real price of wheat?
It certainly is true that in some places there exists a traditional “fair” price for goods. If you bought grain in Medieval England, there was a price you expected to pay, and it didn’t vary, because that was the traditional fair price. And it didn’t matter where or when or how you bought it, there was one price and you either bought for that price or you didn’t.
But of course this makes it impossible to run a business buying grain from farmers in the country and selling it in the city, because the price you paid to the farmer was the same price the city folk expected to pay. No markup allowed. And so it meant that most commerce was not done via market mechanisms, but by various sorts of feudal obligations. A baron didn’t buy wheat from his serfs, instead the serfs were obligated to provide a certain amount of wheat per annum. A king didn’t pay his knights, instead the knights were obligated to provide military service to the king. And so on and so on.
Which is a longwinded way of saying that the market price for a particular good in Medieval England isn’t a particularly good metric for how valuable that good was, because very few goods and services were exchanged this way, most were exchanged in a non-market fashion. It’s pretty easy to see how this means that prices can be stable over the decades if prices aren’t the main method of economic distribution. And if the prices get wildly out of proportion to the actual values that just means that extra-market punishments get imposed for violating the prices. And so if there is a tight labor market but wages are fixed by tradition you have to impose draconian punishments on peasants who leave their masters.
So the arbitrary value of the dollar is a feature rather than a problem. It’s up to you to determine how many dollars you would exchange for any given good or service, and if you don’t like the prices offered you don’t have to accept. And merchants can compete in all sorts of ways: on price, on convenience, on location, on quality, and so on.
Good points, but actually a gram of gold didnt buy a bushel of wheat in Roman times…
I did a comparo here some time ago, where I compared gold to the price of a meal- and gold fluctuated wildly. Same can be done with a man/day of labor, etc.
And of course here’s the point- no country on Earth is on the gold standard today. Not capitalist nations, not socialist nations, not communist nations, not monarchies, not democracies, not dictatorships- no one.
The one I’ve heard is that an ounce of gold has always been roughly equal to the cost of a “decent” men’s suit (or “good” suit). It gets trotted out on occasion to try and prove that gold has roughly kept its value over the past 100+ years.
It’s bogus, of course. Suits are made in totally different ways than they were 100 years ago. Years of automation and improved manufacturing practices (plus economies of scale) have made suits much cheaper than they were 100 years ago*. If gold really has kept track with a suit then obviously gold has suffered from inflation.
The notion that gold (or silver) protects against inflation is also wrong. The price revolution of the 16th century experienced high inflation rates.
In the end, though, it comes down to this: it’s a very poor decision to base the maximum size of your economy to the amount of metal one can dig out of the ground.
(* - the other problem gold bugs have to confront is that hand tailored suits are much cheaper in Hong Kong than they are in the US. Does that mean that gold loses its value just by coming to America?)
I’m not sure. I can tell what it ain’t, that’s clear enough. The temptation of “free” money is too much for humans. It always ends the same.
It’s certainly obvious in any case that the OP is correct in the assertion that no fiat currency has lasted more than a few decades. The dollar has fared better than most. All federal reserve notes are for example, are still legal tender since 1914, so that’s just over 100 years. I think maybe there are some British bearer bonds out there maybe that are older, not sure on that. Everything else? Many countries have gone through dozens of currencies and revaluations and social upheavals in that time period.
The ancients described good money as having several attributes among them rarity, divisibility, fungibility, durability, portability, ease of authentication etc. As a form of money it has never been surpassed. Silver comes close and has probably been in use longer. In fact the U.S. was initially on a silver standard.
Whatever we use for money should ideally remain stable and relatively unchanging over time in terms of purchasing power. Paper or fiat currencies utterly fail at this attribute becoming worth less and less, and finally worthless. Like I said, it doesn’t have to be gold or a commodity but some sort of objective measurable, defined standard is essential. The Zimbabwe stock market charts look awesome, but the nominal unit of account is practically worthless.
Don’t conflate the cost of an item with what is used as money to buy it. If there’s a coffee blight, the price will presumably go up in terms of whatever is being used as money.
Value is certainly subjective, and is an agreed upon delusion as it were, but some forms of money seem to endure, others not so much. It just seems pretty sad that the best we can come up with are shiny rocks (that were outlawed, by all the major totalitarian governments and the US at one time or the other) with all the technological advances, mature governing bodies, rule of law, etc.
Come to think of it, isn’t that kind of strange - the government outlawing money? Why would anyone do that?
That’s primarily because the governments in question outlawed private ownership of gold, suspended convertibility of currency into gold, reneged on gold contracts long used in business, particularly long term leases, etc. Then they confiscated it, and kept it for themselves? Nice, huh?
Lots of countries have thousands of tons of it under lock and key. Gold is not a commodity, it trades on the currency desk afaik.
Some of the anti-gold positions in this thread are indefensible. Gold is valuable. The price of gold fluctuates, but in the long term the dollar:gold ratio will most probably continue to rise on average. The dollar is a good currency because, in part, F.R.B. policy ties it (with modest inflation) to the CPI basket.
But none of this really addresses Common Tater’s concerns. Perhaps that’s because Mr. Tater hasn’t articulated his concerns fully. But I’ll continue to participate as a challenge to my own communication skills.
Common Tater, it really would help if you answered my questions. To start with, which of the following inflation scenarios would you consider to be a big problem, if it occurred:
[ul][li] The dollar loses 2% of its value (vs CPI) in one year[/li][li] The dollar loses 60% of its value in 45 years[/li][li] The dollar loses 60% of its value in one year[/li][/ul]
(Spoiler Alert: The first two are the same thing.) Please explicitly acknowledge the important difference between low inflation and high inflation. Unless you can do that, I’ll treat you as uneducable. No, it isn’t “just a matter of degree” – eating an after-dinner mint is not the same as gorging only on chocolate morning, noon and night.
Mugabe used his printing presses to transfer wealth from other Zimbabweans to himself. The paper money wasn’t the “wealth” – it was just pencil marks that let Mugabe gain possession of real estate. Note that he could have grabbed this land even if Zimbabwe used a gold standard; his lawyers would have just needed to find a different system of pencil markings.
Is it your concern that a Mugabe-style dictator will take over the U.S.?
If you think “wealth is being transferred” by U.S. inflation, why won’t you identify the winners and losers? It seemed, based on your own argument, that the government was getting the “illicit gains.” Don’t you see that that would be good? (I’ll give you credit for not being a Beck-Bundy zealot who thinks all government is by definition evil.)
No. The debate is not just a matter of semantics. You have a flawed understanding of the nature of wealth and the function of money. Open your mind and address my questions sincerely.
Describe the specific worries you have about present-day central-bank finance. (And if your main fear is the election of a Mugabe-type President, be aware that dictators can cheat with or without printing presses, and citizens can use gold for barter with or without ofifical sanction.)
I’d like a cite that *every nation on earth *outlawed gold and confiscated it all. :dubious:
Ultimately the problem with the gold standard is that it offers no real protections like the gold-bugs claim. What would stop a government from changing gold valued at $1500/toz to $100/toz?
Second, if the idea of gold is that it is supremely stable - a set amount valued at whatever dollars per ounce, what happens when the same amount of money has to be distributed among more companies and people as the economy and population grows?
Oh goodie. Let’s add American exceptionalism to the goldbug disease.
Britain, Australia, New Zealand and Canada have been off the gold standard since the late 1920s - early 1930s. Their currencies have not devalued to zero.