What's wrong with the Gold Standard?

Factual Questions
1

Or any valuble standard set as the basis for a currency?

I mean, I can’t imagine that gold is being mined terribly fast compared to the amount of gold in circulation, nor lost at any large rate. If a ship with gold on it sinks, does it lie there? I imagine generally not - the first scavenger with divers will go and get it.

So what could contribute to large changes in the percieved value of gold? I know that it is not really worth nearly as much as it costs per gram (i.e. it’s not all that rare or hard to separate from its ores), due to the inflated human opinion of it. Much like diamonds, except that diamonds are expensive because of DeBeers’ stranglehold.

When and why did the US go off the gold standard?
Perhaps when the idea of international currency is respectable worldwide, we will go to a “credit” or something of the sort. Or perhaps the “dollar” will become the name of the basic unit of currency, like the American penny.
Any bank in the world that subscribes to the New Dollars will be required to give precisely one gram of gold for one million New Dollars.

Inflation is curtailed! Value of as New Dollar won’t decrease appreciably unless large amounts of gold are introduced into the marketplace.

So, on the first day of New Dollars (say 2010), a US$100.00 bag of groceries (dang inflation!) will be worth 1/5 of a gram of gold, or 200,000 New Dollars.

Some people would say, that’s a lot of zeros! I say, if you consider pennies, the US$99.97 bag of groceries costs N$199940. Just one magnitude of complexity greater - and it won’t change nearly as fast in prices. Plus, merchants won’t be able to pull that 9 tenths of a cent funniness in little type. I hate gas stations. Why gloss over prices?
Granted, the 999-effect will still be there, but I think merchants will have to be a little more honest.

2

Or any valuble standard set as the basis for a currency?

I mean, I can’t imagine that gold is being mined terribly fast compared to the amount of gold in circulation, nor lost at any large rate. If a ship with gold on it sinks, does it lie there? I imagine generally not - the first scavenger with divers will go and get it.

So what could contribute to large changes in the percieved value of gold? I know that it is not really worth nearly as much as it costs per gram (i.e. it’s not all that rare or hard to separate from its ores), due to the inflated human opinion of it. Much like diamonds, except that diamonds are expensive because of DeBeers’ stranglehold.

When and why did the US go off the gold standard?
Perhaps when the idea of international currency is respectable worldwide, we will go to a “credit” or something of the sort. Or perhaps the “dollar” will become the name of the basic unit of currency, like the American penny.
Any bank in the world that subscribes to the New Dollars will be required to give precisely one gram of gold for one million New Dollars.

Inflation is curtailed! Value of as New Dollar won’t decrease appreciably unless large amounts of gold are introduced into the marketplace.

So, on the first day of New Dollars (say 2010), a US$100.00 bag of groceries (dang inflation!) will be worth 1/5 of a gram of gold, or 200,000 New Dollars.

Some people would say, that’s a lot of zeros! I say, if you consider pennies, the US$99.97 bag of groceries costs N$199940. Just one magnitude of complexity greater - and it won’t change nearly as fast in prices. Plus, merchants won’t be able to pull that 9 tenths of a cent funniness in little type. I hate gas stations. Why gloss over prices?
Granted, the 999-effect will still be there, but I think merchants will have to be a little more honest.

3

I recently asked this same question. There is not enough of a gold supply to support the economy.

Haj

4

Couple of things:

Gold is used extensively in industry, therefore it has a commodity price. The fluxuations in price due to supply and demand might not be the best thing to base your economic system on. You can’t ignore this, gold may end up being worth more as transistors than as money. If you set the price of gold too high no one in industry can afford to use it.

The economy is much larger than the supply of gold. There’s no where near enough gold to back things up.

Most of the new gold being produced comes from South Africa and Russia, IIRC. It might not be wise to base a global economy on something that a few nations can control.

Inflation is good. A steady, slow, inflationary pressure is very good for growing the economy.

No one wants to carry gold. Metals aren’t a very good money system, so the expense of setting up this system doesn’t seem worthwhile.

Exactly what problem are you trying to solve?

5

Inelastic. Doesn’t allow for flexiblility.

6

If the value of a dollar is tied to the value of gold for no reason other than convention it reduces the number of ways that the government can manipulate the economy. In other words, the government would prefer to be able to set the value of the dollar to any value it chooses, instead of being forced to value it at the same price as gold.

All the business about new dollars sounds like a bunch of communist propaganda to me. What are you talking about? Do you honestly think the currency system has any effect on whether gas stations can gouge their customers?

7

The U.S. actually abandoned the gold standard several times- during the Civil War, for instance. We went off the gold standard for good during the Great Depression, however.

Even when the gold standard was the norm, nations regularly abandoned it, and usually for the same reason: sometimes, the government HAS to spend a lot more money than it had planned to (war was the most common reason, obviously), and if you’re constrained by the amount of gold you have in your vaults, you can’t spend what you have to spend.

Now, as a rule, when crises passed, nations went back to the gold standard as quickly as possible.

In 1933, when FDR took office, the U.S. was in the midst of its worst depression ever. FDR wanted to spend money to stimulate the economy and help the needy, but the U.S. Treasury didn’t have nearly enough gold to pay for the programs he had in mind. So, FDR decided the gold standard had to go. From 1933 on, the U.S. has used solely paper money, backed not by gold but by the promise of the U.S. government.

Getting people weaned from gold wasn’t easy. People had to be legally forbidden to own more than a small amount of gold, and had to be pressured to exchange whatever gold they had for paper money. ANd whereas people USED to be able to exchange paper money for a fixed amount of gold, after 1933, they were not allowed to do so.

Foreigners WERE allowed to trade their dollars for gold, for a few more decades. But Richard Nixon severed that connection even for foreigners. As of… 1971, I think, NOBODY can exchange dollars for gold.

And while a few nostalgic far-right types still want to restore it, nobody should miss the gold standard. It wasn’t flexible enough to allow governments to take necessary actions. And while it had SOME stabilizing effects, don’t forget that “panics” and economic crises were commonplace under the gold standard.

8

At the end of World War II, delegates from 44 countries met to redesign the international finance system, resulting in the Bretton Woods Agreements. One of the changes was the return to fixed exhange rates. The dollar was pegged to gold and the rest of the world’s currencies were tied to the dollar. By the mid-sixties, this system was almost on the verge of breakdown as indeed, countries had converted their dollars to gold, draining the US reserves to a point where there was actually little in the way of gold backing the currency. The expansion of the world’s economy during the 50’s and 60’s added still more pressure on the dwindling reserves. If the link between the US dollar and it currency had been tested, it would have fallen. And so it did, when in 1972 the system collapsed and exchange rates began to float again, as they have ever since.

This will only happen when governments are willing to give up at least some control over their domestic monetary policy. Only when the economies are as closely integrated as the European ones are, is this feasible. It will be interesting to see the future of the Euro and if all of the European community adopts it.

9

Worst is the operative word here. Since the Great Depression, there has not been a depression in the United States. Before the Great Depression, ther were “some twenty such occurences since the founding of The Republic,” according to Herbert Hoover in 1933, quoted by Arthur Schlesicnger Jr. in * The Crisis of the Old Order.*

10

Here’s where I get confused. Gold is still bought and sold on the commodities market right? So what do you buy it with? Pesos? :confused:

11

You can sell it, for pesos if you want to, and buy whatever you want with your pesos. Not different than any other commodity.
You can keep it and hope that someday, for some reason, the value of gold will significantly raise (you’d better buy stocks, though).
You can also use your 50 pesos gold coin (or 10 $ coin, or 20 francs coin) for its face value to buy a hamburger and lost a lot of money in the process.
Finally, you can fear the apocalypse (a world war, a raging inflation, your country bankruptcy, a major epidemic) and think that at this point paper money will be worth nothing and gold will become the only valued currency.

12

Regarding GOLD as an international transfer medium: I remember reading that gold is never shipped internationally now, because the insurance premiums are too high. Instead, the adjustments are made in the Fedral Reserve bank (in NYC) vaults: suppose the bank of France wants to convert $500 million into bullion-the bank merely debits the BOF the $500 million in UDS, then tells the forklift operator to move the appropriate amount of bullion, from the USA area to the area marked “France”. France gets its gold, and the bullion stays in the vault, safe from shipwreck or loss!

13

You buy it with whatever currency the seller will accept. However, each dollar no longer represents x amount of gold. While it was illegal for private US Citizens to own gold bullion, theoretically a person could take their dollars and exchange that for x amount of gold from the US Reserve. Today, the value of gold and the value of the US dollar fluctuate independantly(without getting into the whole issue of currency markets).

14

ralph124c, are you thinking of Ibn Fadlan?

15

Woops!!! I meant that for another thread!