The Gold Standard - Actually prefferable to fiat?

Great Debates
61

I’m not sure. I can tell what it ain’t, that’s clear enough.
[/QUOTE]

So you’re not pushing for the gold standard, and you’re not able to come up with anything that has an objective value that can be the basis for a currency. So why are we having this discussion? :confused:

You just described an American $100 bill. Go pretty much anywhere in the world, pull out a Benjamin from your wallet, and you’ll be able to buy something with it.

I assume by “it” you mean gold, even though you’ve said you’re not pushing for a gold standard.

Alright, if gold has never been surpassed as a form of money, why does no county in the world use the gold standard today? If it is so obviously the best type of currency system, why does not one country latch on to it? If it is the best possible system of currency, wouldn’t there be at least one country in the world that would use it?

Again, until you can come up with something that has this mystical “objective” value that does not change over time, this discussion is in Cloud-Cuckoo-Land.

62

No it didn’t. The economy has absolutely not doubled in value since 2011, nor has the dollar doubled in value.

If it had then literally all things would be (approximately) half the price they are now, but they aren’t. Unless you eat gold, sleep on it and live in a house made if it, assigning the value of a dollar to gold, rather than the other way around, is total nonsense.

63

Getting back to the OP, another point to consider is that one argument against fiat currency advanced by those in favour of the gold standard is that we can’t trust governments, governments will manipulate the fiat currency, run the printing presses, hidden taxes through inflation, etc.

Well guess what? gold coinage is subject to government manipulation too. When coins were in specie, it was not uncommon for a government needing money to debase the coins, by melting down coins with a high percentage of gold and silver, and then re-minting them with a higher percentage of a base metal, like copper or lead.

Read the wiki articles on debasement and the Great Debasement of Henry VIII. (Disclaimer: I think the Great Debasement article has some objectivity issues, but it gets the basic facts right.)

And if you get into a paper currency backed by gold, it’s equally subject to manipulation by government, if you have a government so inclined.

So if fiat currency is bad because you can’t trust government, then gold currency is bad for the same reason.

Conclusion: in addition to the “objective, stable” basis for currency which Common Tater is looking for, you also need a guarantee that the “objective, stable” currency is immune from any government tinkering to make it superior to fiat currency.

Really, the quest for the invisible pink unicorn has nothing on this one.

64

Of course it’s always funny to talk about a “gold standard”. Because all that means is paper money “backed” by gold. As in, you can theoretically exchange your paper money for gold bullion at some agreed upon rate. Except of course that the first thing the government does in times of trouble is to stop this. Your piece of paper that says the government owes you some gold is only a piece of paper with some writing on it, same as a fiat dollar. The government’s promise to pay you that gold is only as trustworthy as the government. And you say you don’t trust the government, so why would you trust a piece of paper that says they promise to give you a certain weight of gold?

What goldbugs really should want is not a gold standard, but specie. That is, if you want a TV you walk into the store with a handful of gold and silver coins, and hand them over. Not a promise to pay at a certain date, not a piece of paper, but a completed transaction.

But of course this makes our current financial system impossible. How do you use a credit card under this system? Write a check? Credit is literally fiat money, a promise to pay someone later with money you don’t have today. How can you order your bushel of wheat from Amazon.com if you can’t pay by credit card?

And the thing is, if you want to exchange your worthless fiat dollars for gold or silver bullion, you’re free to do so. Every coin shop in America will sell you gold or silver, if you’d rather have gold than dollars. It’s just that the price isn’t fixed. If dollars are dropping in value, your gold is worth more. If gold supplies increase, your gold is worth less. When we were on the gold standard guess what, it was illegal to own gold. Now that we have fiat money there’s a free market for gold.

Gold was, in fact, rarely actually used as money. Even when there was no paper money as such, governments and banks and merchants would “exchange” gold based on nothing more than ledger entries. The king wouldn’t roll up to the blacksmith with a wagonload of gold coins, he’d order swords and promise to pay the blacksmith later. What exactly is this promise? Fiat money. The king hands you a piece of paper that says he owes you such and such. Paper currency is just a systematized version of promising to pay someone later, worth only as much as the promise.

And of course, history is full of examples of kings who decided they couldn’t pay their bills and had bankers arrested as traitors and executed and their fortunes confiscated. So much for the honestly of real gold.

So even if we had a gold standard you still wouldn’t touch actual gold, and it would require that the governments of the world control the gold market with an iron fist. Good bye free market in gold, gold is no longer a valuable but uninteresting shiny rock, it’s an absolutely vital strategic material.

Now, to go back to the coffee example.

Right. So the money doesn’t change value, the value of the money is fixed as a standard, it’s just that goods and services change in value relative to the money. But it’s not just coffee that can change in value, right? It’s coffee and wheat and tungsten and coal and iPods and tshirts and paper and the millions of goods and services available in the modern economy. And those goods and services don’t vary in price independently. If suddenly the prices of lots of goods started to rise, not just coffee but also tungsten and coal and so on, we could say that the objective standard money hasn’t changed value, it’s just that these things are more expensive. But it’s just as valid to say that coffee is worth about as much as before, what has changed is not the value of coffee but the value of the money.

As I said earlier, money is just a particular type of good. A dollar bill is a worthless piece of paper, except that you can exchange it for valuable goods and services, and therefore it isn’t worthless. Like a coupon for a dollar off a pizza at Dominos. If you had a stack of 1000 dollar-off coupons would they be worth $1000 to you? No, they wouldn’t. You’d have to actually want 1000 pizzas for those coupons to be worth $1000. So those coupons are actually worth substantially less. So the value of the coupons rises and falls due to supply and demand. And so does the value of any type of money. It doesn’t matter what you use as money, or if you have various types of money that compete against each other. Each form of money is subject to the same laws of supply and demand as any other good. If people don’t think your money is good then the demand falls and it is worth less. If people want more of your money the demand increases and it is worth more. Create more of your money and it is worth less, remove money from the marketplace and it is worth more. No exceptions.

65

I think this is what trips up people like Common Tater, combined with inflation, and I think it is largely based on the examples of hyperinflation in the Weimar Republic, 1940’s Hungary, and Zimbabwe, among others. They are worried that government can decide to “print” money and make all their dollars (largely) worthless and the gold standard can probably prevent it*. This is not an irrational position.

The issue is that while the gold standard may prevent government-induced hyperinflation it causes other problems. Prior to the Great Depression the US suffered multiple “panics” while it was on the gold (and silver) standard because the money supply could not expand and contract with need. In the 1800’s borrowing had cyclical periods when farmers borrowed money in the spring and fall to plant/reap their crops. During those times money got tight and if a bank couldn’t give its depositors cash there would be a panic (I’m simplifying).

Today we don’t have those panics because the money supply can expand or contract to fit the economy. Today’s gold bugs don’t realize how much more stable the economy is without the gold standard but they understand the (relatively) simple problem of hyperinflation.

(* - Although, as Lemur866 ably points out, if one can’t trust the government to handle the money supply how can it be trusted to abide by the gold standard?)

66

Okay, because I got really bored.

I took the price of a new Corvette and the price of gold over a sixty-one year period and calculated how many ounces of gold it would cost you to buy a new Corvette each year (or how many ounces of gold you would make from selling a new Corvette).

1953 98.5
1954 78.7 *
1955 78.9
1956 88.6 *
1957 90.1
1958 101.9 *
1959 109.9
1960 106.1
1961 110.8
1962 114.2
1963 120.6
1964 120.3
1965 121.7
1966 121.3
1967 123.6
1968 107.2 *
1969 116.6
1970 133.5 *
1971 123.2
1972 86.7 *
1973 52.2 *
1974 32.7 *
1975 48.9 *
1976 56.9 *
1977 64.6 *
1978 44.9 *
1979 22.3 *
1980 22.1
1981 40.6 *
1982 40.9
1983 -
1984 70.8
1985 74.7
1986 69.1
1987 57.6 *
1988 71.9 *
1989 78.7
1990 82.8
1991 91.9 *
1992 101.0
1993 88.3 *
1994 94.4
1995 95.1
1996 100.9
1997 130.6 *
1998 129.9
1999 135.0
2000 144.8
2001 146.4
2002 120.9 *
2003 105.2 *
2004 102.2
2005 86.2 *
2006 70.2 *
2007 53.8 *
2008 52.9
2009 44.0 *
2010 35.1 *
2011 32.6
2012 29.8
2013 41.2 *
2014 43.4

There are no dollars involved in these exchanges. If the fluctuating value of dollars was the problem, it doesn’t exist here and the exchange rate would be smooth.

Instead you’ll notice the exchange rate varies quite a bit. I’ve marked every year (twenty-seven out of sixty-one) in which the annual change was greater than ten percent.

This illustrates the fallacy of thinking there’s some hypothetical unit that would remain steady in value year after year. The reality is the prices of things change every year and therefore the amount of units you need to pay for those things is going to change every year.

67

And also note that back when banks could issue gold-backed paper money themselves, banknotes were subject to the same supply and demand issues as above. Oh, you want to pay me with a banknote that says Such and such bank from such and such a place will pay be such and such amount of gold? If I’ve never heard of the bank I’m not going to accept this piece of paper as if it were gold. The more I know about this bank and the more I trust it the more willing I am to trust that I would get my gold, or at least that I could pass along the banknote to a greater fool.

So even in the case where the banknote is supposed to represent an objective amount of gold, it’s still subject to the laws of supply and demand. A trusted banknote is treated as equal to the face amount. As trust in the banknote decreases, the more of a discount people will demand before they accept it.

And note that this is the exact thing that goldbugs want to avoid with a gold standard currency. You can’t trust a fiat dollar! Except you can’t trust a gold backed dollar either. If people stop trusting fiat dollars then they demand a markup to accept them, this is known as inflation. But we don’t have high inflation now. So the markup that people need in real life turns out to be something like 1%, not very high at all. When people really don’t trust your currency then you can get disastrous rates of inflation. Rates that make the double digit inflation of the 70s look like a rounding error.

And of course the notion that under some rate of constant inflation eventually the currency will inflate away to nothing is silly. It never reaches zero. Yes, after a while you start having to add more zeros on your bills, and 1000 lira is worth less than 1 dollar. But that doesn’t matter, the number printed on the bill is irrelevant, what matters is what you can buy with it.

68

We should make this a meme. It is both accurate and it would blow the minds of the right wing gold bugs.

69

You could add the list price in dollars with the rate of change. I’ll bet it’s a nice smooth climb except for when they introduced an all-new design.

70

Governments find it more convenient to milk a society with fiat currency. That doesn’t mean the people would not be better off with gold as a common medium of exchange. Poor argument.

71

gold prices fluctuate wildly because of government intervention. Your experiment traverses Breton-woods, multiple inflationary episodes, panics, etc. Of course money is going to flow in and out of gold wildly if the monetary system itself, and attitudes toward it fluctuate wildly.

Look at prices during the classical gold standard. Steady fall in prices, and very very slow increase in nominal wages meant a booming real wage increase. I’ll take that over the post Breton-woods wage stagnation any day.

72

You bring up a good point, the rule of law, and respect for property rights is a key component of a functioning society. Fiat currencies debauch societies as surely as anything else. This has been shown over and over in history, and barely in living memory.

Perhaps your definition of “money” is a little different. Inflation robs people of purchasing power. If your contention is that it does not, we’ll have to agree to disagree.
Monetary inflation is certainly possible under a gold standard, but that’s not the way to bet.

Let’s back up a bit, all the way to the original posters assertion that all fiat currencies have failed, so far. (paraphrased). I hadn’t really thought about it that way but since we’re being pedantic here, let’s look at the record.

Gold (and to a lesser extent, Silver)
5000+ years

Paper currency
US Dollar: 102 years, has lost 98% of value since that time, etc.

Can you name a fiat paper currency that even comes close? Maybe you guys will have me rethinking about this gold stuff.

73

If gold is a common medium of exchange, are you talking about gold coins? Or paper money backed by gold?

Because gold coins aren’t going to work. And if you want paper money backed by gold, you can exchange your paper money for gold at literally thousands of locations all over the country. Sure, the government isn’t going to exchange your paper dollars for gold at a fixed rate, but so what? Why do you want the government to set an official price for gold?

If the government can’t maintain the value of the fiat dollar relative to gold, then the dollar falls in price, or another way to say that is that gold rises in price.

And if you want to use gold and silver coins as a medium of exchange among your neighborhood, feel free. The only problem is that no one (except the guy at the coin shop) wants your gold, they want fiat dollars.

There’s a free market for gold. A gold standard ends that.

74

Again, with regard to the loss of value of fiat money. What’s the purpose of money? To stick in a vault for 200 years and when you take it out it’s worth just as much as it was before?

That’s not money, that’s a real asset. A gold bar you bury in the backyard isn’t money, it’s a valuable commodity that will retain its value over the years and still be salable in a decade.

Money is a means of exchange. Gold that isn’t used as a means of exchange isn’t money, it is something else, just like cowrie shells that aren’t used as a means of exchange aren’t money.

Gold is not money. Say it with me. Gold is not money. It is a good that can be used as money, like lots of other goods, and it has properties that made it very useful as a form of money in ye olde tymes. But gold is not money. Money can be any good used as a means of exchange, and we’ve found it convenient to do away with the actual goods and just use money as a pure accounting ledger that has no physical basis.

Will this end someday? Of course it will, all works of man are finite. One day the American government will end, and either before or after that the US dollar will stop being a useful form of money. So what? The point about money is that we use it today to exchange goods and services. If you want an asset that will last for a century, by all means do not get a bunch of dollars and stuff them into a mattress. Buy some gold coins, it’s a much better idea. Or land. Or stock. Or something that produces value. Dollar bills produce nothing. So what? You can exchange a dollar for a cup of coffee today, and tomorrow, and next year. The fact that you won’t be able to do that in 100 years is irrelevant, unless you’re foolish enough to stick a one dollar bill under the mattress in the hope of buying a cup of coffee in 2116.

75

I was simply pointing out that the US dollar is the only paper currency from that time period that is still (technically) spendable, legal tender. While it has lost 98% of its purchasing power since that time, that is apparently the only currency note that is still around.

Can you name another? While the UK still uses the pound, any notes from that time period are obsolete afaik. So far as fiat money goes, 100 years is an eternity. It really is remarkable.

76

Assuming constant income. If income increases with inflation also, in the long run there is no change in purchasing power. It gets a bit better after the raise, and worse with continued inflation. In the '80s we were giving people raises of > 10%.
Plus there are advantages. I started paying back my relatively small college debt in 1980. Thanks to inflation by 1990 or so the balance became so trivial I paid it off to avoid the hassle.
Plus moderate inflation encourages purchases, while deflation discourages them, and thus hurts consumption.

In the good old days when rulers wanted inflation they debased the currency. That was the real gold standard where people exchanged gold instead of promises of gold.

By this standard bleeding and leeches have been much more successful than modern medicine. When you measure things by cost per hours worked assuming median pay, the dollar does not look like it lost value at all in any real way.
Or do you think that dividing prices, salaries and account balances by 10 would improve the economy in any way?

77

Absolutely! Money should be durable, and maintain purchasing power.

That’s not money, that’s a real asset.

Money is absolutely an asset.

Sure it is! Money is also a commodity, by definition.

You left out the “store of value part”. This is the problem with currency that can be conjured up at will. It always (eventually) becomes worthless, and cause great harm to millions of people and revolutions, etc.

Really? It trades internationally on the currency desk.

Kinda sounds like money to me. LOL

78

How do I decide the “value” of gold?

I don’t feel sure on the difference between “value” and value but building upon the plain value I would say:

What an excellent question!

I would respond, as an accomplished weekend economist, that I first try to look at the rest of the flock and assess for how much they value.

Actually I think that is the one and only step seeing that they have 99.(9)% of the thing. If I had, say, 0.05%, I reckon there would be some market power to be exerted.

Then there is the gold that mutates and becomes sentimental. This kind of heavy metal is a real pita to value and honestly the less I reason about it the better.

79

The US fiat dollar will not be money if people stop acting as if it were money. Gold is only money if people act as if it were money. And by and large here in 2016 people have stopped acting as if gold were money.

80

I think Canadian and British currency from that time are still redeemable.