I am no expert.
I think the deal is, when trading on a gold standard, you are dealing with the price of gold which is fixed on a global scale. China could say their currency is worth more or less but they cannot do that with gold and when buying and selling goods with the US you are not basing it on paper which is worth whatever the government says it is worth but rather gold which is a fixed price (“fixed” meaning not subject to government intervention…its price will certainly fluctuate).
But then a gold standard seems pointless. It seems to me you are right back in with governments manipulating their currencies which, in theory, a gold standard is meant to stop.
(And just to be clear and re-iterate…I do not think going back to the gold standard is a good thing. Just talking it out.)
Maybe I didn’t explain it very well, or I’ve missed something, but if the US makes a law that it can’t issue more dollars without getting gold in return, how can they manipulate their currency?
(I think we’re both clear that this is an interesting hypothetical, and neither of us is advocating for a gold standard).
They are arbitrarily setting the price since a dollar does not get you a dollar of gold from the government.
I mean, they’re not arbitrarily setting it. I assume they’re going to peg it to the spot price of gold at the time of announcement so as to not cause the sort of disruption in gold prices you (originally) suggested. It’s basically a commitment that they’re going to stop manipulating their currency in the future.
But they can’t back it up.
Consider…most banks want collateral for a loan. When you buy a house your house is collateral.
But what if you get a loan from the bank for $100,000 but your house is only worth $50,000. Now the bank (government for this exercise) is pretending it has $100,000 of assets and can cover all its obligations when in fact it can only cover half of that. This is kind of like currency manipulation.
Sure they can back it up. Because they never promised to buy dollars with gold at a fixed rate. There’s nothing to back up.
Currently the USD isn’t currently backed by anything at all. Going to a state where additional USD would have to be backed by gold would be a commitment to limit future currency manipulation. And it would be the commitment that gold bugs actually want, without any short term disruption.
There’s no reason that “if you give us $x, we will give you an ounce of gold” has to be part of the same promise that “We will not hand out any additional dollars unless they are in exchange for 1/x ounces of gold”. Historically it has been, but it doesn’t have to be!
Then what is the “gold standard”?
The gold standard is that additional dollars will not be issued without the receipt of gold.
The money supply is fixed at {current amount of dollars outstanding + future gold receipts}.
I’m going to try an analogy.
There’s an arcade that sells 4 tokens for a dollar. They go on for years, selling 4 tokens for a dollar, and people play games. And since everyone likes the arcade, the players start using the tokens as currency with each other. Hey, I’ll give you 3 tokens for a soda. Can I borrow 5 tokens? I’ll pay you back next week. And then a new manager comes in and says, you know, if we had a sale where we sold 5 tokens for a dollar, people would buy more tokens and they’d play more games and the velocity of arcade consumption would increase. We’ll all get rich. And he does it, and it works, but temporarily, and after a while he has to inflate the value of tokens again, now they’re 6 for a dollar, then 8. And the more popular games now require 2 or 3 tokens to play.
And the old arcade regulars think this is crazy, time was, a token meant something. Now it’s just crazy. And so they go to the manager and say: Let’s stop all this craziness. Let’s slow it down. We can’t even lend each other a few tokens without worrying that they’ll be less valuable in a week. Let’s go back to a dollar standard, where the value of a token doesn’t keep shrinking. And the manager agrees. He agrees: Ok, we’re going to freeze the value of tokens at the current amount (12 to the dollar). I will never sell tokens at any other price. You give me a dollar, I’ll give you 12 tokens. The only way that more tokens get out there is if I get more dollars. And the players who complained are happy. They can know that their tokens today will be able to play the same number of video games tomorrow.
That’s the dollar standard in tokens.
Now: If you bring 12 tokens to the arcade owner, will he give you a dollar? No, that’s not part of the deal. He agreed to sell 12 tokens for a dollar, not to buy 12 tokens for a dollar.
Do you get to audit the arcade’s books and see how much money it has and how many tokens are outstanding and determine the value of a token by dividing one by the other? No. That is not part of the deal. The token is not a claim on the arcade’s dollar reserves. The token is a medium of exchange which you can use to play video games. It doesn’t matter how many dollars the arcade has, because you don’t get to turn tokens into dollars unless the arcade owner wants to.
But from everything I’ve ever heard regarding the gold standard, that is exactly the deal. I can redeem my paper currency and get its gold equivalent. It’s actually called gold-backed, not gold-priced. If we have 20 trillion in paper currency, we need to have 20 trillion in gold bullion. Can you show a cite where this is not the case?
The gold standard is a monetary system in which paper money is freely convertible into a fixed amount of gold.
The gold standard, by limiting the dollars the government can print to the weight of gold it holds in reserves, is one way of doing so.
Under the gold standard, the government can only print as much money as its country has in gold.
In the most general terms, a gold standard means a monetary system in which a standard mass (so many grams or ounces) of pure gold defines the unit of account, and standardized pieces of gold serve as the ultimate media of redemption. Currency notes, checks, and electronic funds transfers
are all denominated in gold and are redeemable claims to gold.
I’d say more like McConnell making it as hard as possible. The America-hating fuckstick announced his intention to nominate her in July of 2019. Mitch has been sitting on the nomination since February, presumably out of fear that her presence would tank the economy while the A-HFS was in office. Now that it looks like there’s going to be a POTUS #46, that concern has been rendered moot.
One presumes that his window of opportunity on that closes on Inauguration Day, when Joe can withdraw the nomination himself.
There are numerous examples in history of countries that were nominally on a gold/silver standard not actually having sufficient reserves to meet all demands (because of course, once you have a printing press, it’s hard to resist the urge). Those issues are often later resolved by revaluing the currency. But they still price their currency in terms of gold.
But also what we’re talking about is largely something that hasn’t been done before. When you’ve always been on a gold standard and you’ve always only printed currency that you had gold reserves for, then you can promise to pay out gold because you have it. But to go from a fiat system that’s existed for many decades back to a gold standard, you have to be a bit more creative in the transition.
The way I assume a transition to a gold standard from fiat would work is that the government would start issuing gold certificates again, but it wouldn’t confiscate existing dollars. So, the dollars would still be out there, just like when we first deviated from the gold standard, they just started issuing fiat dollars but the gold and silver certificates were still there. From there, there are a number of ways that things go.
But going back onto a gold standard does not require that we immediately revalue the dollar to be worth drastically less gold than it’s worth right now on the open market, and doing so doesn’t actually accomplish the goals of any but the nuttiest of gold bugs.
Wouldn’t that lead to people refusing to take the pre-existing dollars, because rightly or wrongly they thought of them as worth less than the gold certificates?
Because of which, of course, they would actually be worth less than the gold certificates.
What makes money work, whether it’s based on gold or on anything else, is that just about everybody believes in it. If that belief disappears, the money becomes worthless.
I expect it would lead to an almost immediate discount rate, but not total refusal to take them. You’d likely either see two prices posted for things or there’d just be a floating exchange rate. Assuming that the government still accepts them at face value, they’re still worth full price for plenty of things. Plausibly money just gets a bit more complicated, like it is in many countries that have more than one currency, but I doubt it becomes “worthless”.
Again: This is a bad idea! We shouldn’t do it! But if you really wanted to move from fiat to a gold standard, this is how you’d do it with the least crazy side effects.
People would just hoard the gold-backed bills and spend the others. But really, most spending these days does not involve actual bills, so I’m not sure if issuing gold-backed bills would change anything significantly.
I thought this was a great explanation, thanks.
Yeah, this is Gresham’s Law (“Bad money drives out good”). I’m honestly not sure how a dual money standard would work with electronic accounts. Presumably you’d just have two account balances and you could convert back and forth between them? Probably not that different from, say, using a credit card in a foreign country where the exchange just happens automatically. The spread and fees would presumably be very small for such exchanges.
I don’t know. I’m not an economist or an economic historian or a gold-standard advocate. It would be interesting to see what a non-nutty gold standard advocate who is conversant in monetary policy would say might happen.
Oh, but it does matter.
How many countries have printed money thinking there is no end to it? Like your arcade…who cares if they print a billion tokens? (see: Zimbabwe with their worthless $100 trillion bank note)
But it does not work like that because your arcade has no exchange rate. You are stuck in the arcade and its economy. That falls apart when you have a broader economy and exchange rates become important.
Now the arcade cannot just print tokens willy-nilly. Same as a country. It falls apart when you print money you don’t have the collateral to back-up.