The Gold Standard in Threads

Let's stop derailing the 2012 election thread with money standard talk. Further posts to attempt to highlight the convoy the best I can from my phone.

Aetius wrote:
Yonder wrote:
Robear wrote:

Show us how you accommodate a $14T GDP with a $400B gold reserve and we'll be in business.

This is also my main hangup over the whole gold standard thing.

We've been over this before, but I'll throw in a brief synopsis here so people understand the two positions. Things that are used as money have several necessary characteristics, and among those characteristics are fungibility and divisibility. Even with a fixed amount of gold, the number of "money tokens" is essentially unlimited because the gold can be divided into smaller parts as needed. Those tokens can be sized at whatever size is useful day-to-day (say, 1 gram or 0.1 grams), and that size can change over time if the need for more currency arises. As long as the currency is divisible enough, you could base a "$14T economy" on a single kilogram of gold, perhaps getting paid 0.00000001 grams per hour and buying lunch for .000000001 grams. Admittedly, that would be a little bizarre, but then so are Zimbabwean $10,000,000 notes being just enough to buy a loaf of bread.

My problem with this method is that it arbitrarily and randomly inflated the value of gold such that you get your required 'value'. For example, let's say we use a 1kg bar to base our "14 trillion dollar" economy off of. What do you do when some museum with 2 kg of gold in their exhibit asks to buy the entire economy? Twice.

Yonder wrote:

My problem with this method is that it arbitrarily and randomly inflated the value of gold such that you get your required 'value'. For example, let's say we use a 1kg bar to base our "14 trillion dollar" economy off of. What do you do when some museum with 2 kg of gold in their exhibit asks to buy the entire economy? Twice.

Spitefully revoke their federal funding?

We've been over this before, but I'll throw in a brief synopsis here so people understand the two positions. Things that are used as money have several necessary characteristics, and among those characteristics are fungibility and divisibility. Even with a fixed amount of gold, the number of "money tokens" is essentially unlimited because the gold can be divided into smaller parts as needed. Those tokens can be sized at whatever size is useful day-to-day (say, 1 gram or 0.1 grams), and that size can change over time if the need for more currency arises. As long as the currency is divisible enough, you could base a "$14T economy" on a single kilogram of gold, perhaps getting paid 0.00000001 grams per hour and buying lunch for .000000001 grams. Admittedly, that would be a little bizarre, but then so are Zimbabwean $10,000,000 notes being just enough to buy a loaf of bread.

Several issues with this. First, right now, people with a certain amount of gold have it valued at a certain amount of dollars. The first task, that of fixing the value of gold, will change the value of their gold significantly, one way or another. For example, if you expand $300B of gold at current prices to cover $14T, you will increase the value of individual gold holdings by over forty times. However, the dollar equivalents that the vast majority of people hold today will *devalue* by that much, instantly. So this is not a viable solution, some other change mechanism will be required. (Take a look at what Brazil did a few years back with the Real for an alternative based on modern economic theories.)

Second, arbitrary re-valuation of currency over time (much less on a day to day basis) is the essence of fiat currency, where the exchange rate is set every day by the government or the issuing bank. This is manipulation on a scale and with opportunities for abuse that dwarfs what we have today. It's also going to cause constant inflation or deflation, and since you suggest that this will be driven by the "need for currency", you're assuming a Fed-like monitoring and control engine for the economy. You've negated the very nature of a commodity currency by allowing this; we might as well instead fix our current system and *not* take the hit. There's also no natural drag on inflationary or deflationary spirals, as people can hoard money in a crisis and that then accelarates the problems that occur.

Third, you're still limited in growth by the amount of gold mined each year (although your floating exchange value seems to contradict the fixed standard idea.) If you did keep the rate fixed, economic growth will be below 1% *globally* each year, dependent on mining. And if you don't - if you change values based on currency needs - then growth will inevitably mean inflation, and it will automatically curb itself for that reason.

Fourth, you can't have international gold trade with each country setting it's own exchange rate without going back to the use of currency as a weapon of diplomacy. This was seen in the 20's and 30's and ruined entire economies, either through attacks on national currency basis or the required defensive revaluation. Further, your country is seriously affect by balance of trade issues - your foreign trade balance is *literally* deflating your economy if you are an importing nation, and inflating it if you export. Thus, your economic fluctuations are not a second or third-order effect of trade; you're directly vulnerable to trade laws, embargoes, tariffs and the like. So now we need an *international* monetary management organization which is binding on all countries...

Fifth, even political and corporate and other issues can cause bank runs, and in a commodity environment, your response will be to devalue currency, causing inflation and it's problems, or leave the currency at it's rate and take the shrinking of the economy in stride, watching things slow down as money vanishes under mattresses. And when does it come back? Depends on your citizens.

Sixth, since gold is a commodity, every commercial use will remove possible currency from your economy. Gold is used in a lot of industries, which will literally decrease the supply over time. And jewelry will as well. Maybe laws covering how gold can be used? That'll go over well...

Is this then the system you intend to fix what we've got now? Maybe there's a different way to do it, because it looks like a fiat economy with (gold) bricks attached, dragging it under the water as it tries to swim.

I think we should go to the pig manure standard. Never you mind about my monopoly on pig farms.

Yonder wrote:

My problem with this method is that it arbitrarily and randomly inflated the value of gold such that you get your required 'value'. For example, let's say we use a 1kg bar to base our "14 trillion dollar" economy off of. What do you do when some museum with 2 kg of gold in their exhibit asks to buy the entire economy? Twice.

Well, that's actually less than what the Fed has done to the dollar, which has lost 95% of its buying power over the last century. But I was just giving an example - if gold is in use as money, the market will price it according to demand and supply (as it would any other money), and known supplies would be taken into consideration.

Robear wrote:

First, right now, people with a certain amount of gold have it valued at a certain amount of dollars. The first task, that of fixing the value of gold, will change the value of their gold significantly, one way or another.

No one will "fix" the value of gold, if it's in use as money the market will price it appropriately, according to demand, just like any other currency. And yes, if gold was put back into use as currency, it's very likely that its value would go up.

For example, if you expand $300B of gold at current prices to cover $14T, you will increase the value of individual gold holdings by over forty times. However, the dollar equivalents that the vast majority of people hold today will *devalue* by that much, instantly. So this is not a viable solution, some other change mechanism will be required. (Take a look at what Brazil did a few years back with the Real for an alternative based on modern economic theories.)

"Some other change mechanism" is simply permitting gold to be used as currency (and anything else the market deems useful as money). You're making the invalid assumption that people will be forced to use gold. What Brazil did with the Real in '94 was essentially a re-denomination - it changed nothing, and the Real continued to inflate.

Second, arbitrary re-valuation of currency over time (much less on a day to day basis) is the essence of fiat currency, where the exchange rate is set every day by the government or the issuing bank. This is manipulation on a scale and with opportunities for abuse that dwarfs what we have today. It's also going to cause constant inflation or deflation, and since you suggest that this will be driven by the "need for currency", you're assuming a Fed-like monitoring and control engine for the economy. You've negated the very nature of a commodity currency by allowing this; we might as well instead fix our current system and *not* take the hit. There's also no natural drag on inflationary or deflationary spirals, as people can hoard money in a crisis and that then accelarates the problems that occur.

There's nothing arbitrary about market changes in currency valuation. All money changes in value regularly, because supply and demand change. The issue is whether those things are market-driven or government-driven. And I'm not assuming anything like the Fed - historically, various denominations have been in use at different times with no problems.

Third, you're still limited in growth by the amount of gold mined each year (although your floating exchange value seems to contradict the fixed standard idea.) If you did keep the rate fixed, economic growth will be below 1% *globally* each year, dependent on mining. And if you don't - if you change values based on currency needs - then growth will inevitably mean inflation, and it will automatically curb itself for that reason.

Again, I have no idea where this assertion comes from - I don't think you'll find any economist who believes that economic growth is strongly tied in any way to the amount of currency in circulation. if it were, why not inflate like mad to grow the economy? What are we waiting for?

With a suitably divisible currency, you don't change values based on currency needs, you change denominations when the current one becomes inconveniently valuable. We've all seen the opposite effect with the dollar as it declined - a dollar used to be worth quite a bit, but now we use a $100 bill to represent the same value.

Fourth, you can't have international gold trade with each country setting it's own exchange rate without going back to the use of currency as a weapon of diplomacy. This was seen in the 20's and 30's and ruined entire economies, either through attacks on national currency basis or the required defensive revaluation. Further, your country is seriously affect by balance of trade issues - your foreign trade balance is *literally* deflating your economy if you are an importing nation, and inflating it if you export. Thus, your economic fluctuations are not a second or third-order effect of trade; you're directly vulnerable to trade laws, embargoes, tariffs and the like. So now we need an *international* monetary management organization which is binding on all countries...

The reason these countries were vulnerable to the use of currency as a "weapon" was because they were lying about the value of their paper currency. They had fixed exchange rates to gold, but introduced more paper money than the gold could support at that rate. This, of course, incentivized anyone who had the paper currency to trade it for the gold. Without that distortion, the rest of that stuff becomes much less important. Further, gold has been used literally for millennia as the standard unit of international trade, so to argue that some kind of management body would be necessary to "bind" countries to the use of gold is ... well, laughable.

Fifth, even political and corporate and other issues can cause bank runs, and in a commodity environment, your response will be to devalue currency, causing inflation and it's problems, or leave the currency at it's rate and take the shrinking of the economy in stride, watching things slow down as money vanishes under mattresses. And when does it come back? Depends on your citizens.

Bank runs are caused by one thing: fractional reserve banking, i.e. loaning out more money than the bank actually has. With a 100% reserve non-fractional bank, a bank run doesn't mean anything - the bank hands back the deposits, and all is well. It is only when people start lying about how much money they have that bank runs become a problem. In a commodity environment the government cannot devalue the currency, so that's not a problem, and neither is saving. You're making assumptions about the actual use of gold as money based on what happens in a fixed gold exchange regime, which is incorrect.

Sixth, since gold is a commodity, every commercial use will remove possible currency from your economy. Gold is used in a lot of industries, which will literally decrease the supply over time. And jewelry will as well. Maybe laws covering how gold can be used? That'll go over well...

So? If they do remove some from the economy, the rest becomes more valuable, savers are rewarded, natural deflation occurs, and the market adjusts - just like it does for every other commodity. Again, the actual amount of currency doesn't really matter, especially if it's highly divisible - you just want the amount to be relatively stable and predictable, and most importantly not subject to political whims.

Aetius wrote:

And yes, if gold was put back into use as currency, it's very likely certain that its value price would go up skyrocket.

Yeah, that's not a solution for me, that's an enormous leap backwards. Right now gold is useful, not only for jewelry, but for various industrial and scientific processes that stem from its physical properties. Having all of those things cut off because gold suddenly goes up in price a hundred fold for no real reason is a deal breaker.

I think bitcoin is a pretty dumb idea, but I think it's a way better idea than the gold standard. No one was using those ones and zeros anyways.

On the plus side, if gold prices do skyrocket then maybe those gold-plated Monster cables will finally be worth their price tag.

Tying the value of currency to gold is as arbitrary as tying it to Cowrie shells or weights of barley. The net effect of it would be pretty catastrophic irrespective of what commodity we pick and would serve only to reward those who horded that particular commodity and punish just about everyone else who built or created anything of actual value.

Well, that's actually less than what the Fed has done to the dollar, which has lost 95% of its buying power over the last century. But I was just giving an example - if gold is in use as money, the market will price it according to demand and supply (as it would any other money), and known supplies would be taken into consideration.

Have you thought through the effects of inflicting a century's worth of inflation in one year? And you're good with that? Isn't that what we'd normally call hyperinflation? How can that just be shaken off?

The market price cannot be used to price currency. First currency is issued according to a standard exchange rate by the issuing body, usually (and historically in the US) the government. For example, when we moved off of a silver standard in 1834, the price of gold was defined as $20.67 per ounce, and it stayed there for a century. So the idea that gold is going to be priced by the market while still being a basis for the currency is just weird. It's not a system we've had before; heck, the very term gold *standard* speaks to the exchange rate being fixed.

Note that each country sets it's exchange rate and is trusted not to inflate their currency. This system is part of what broke down before WWI. The gold standard does *not* prevent government manipulation of it's currency ("lying about money").

No one will "fix" the value of gold, if it's in use as money the market will price it appropriately, according to demand, just like any other currency. And yes, if gold was put back into use as currency, it's very likely that its value would go up.

This means of course that the value of currency will fluctuate unpredictably. The whole point of the gold standard is to create stability in prices. Your interpretation, tying currency directly to gold and letting vary, eliminates this. Not only are you still vulnerable to various shocks due to events and the discovery of more gold, but your short-term prices become highly variable, even more than they were under the historical gold standard, which had about 20 times or more the variability of prices under the current system. Pricing variability is not a good thing for businesses.

"Some other change mechanism" is simply permitting gold to be used as currency (and anything else the market deems useful as money). You're making the invalid assumption that people will be forced to use gold. What Brazil did with the Real in '94 was essentially a re-denomination - it changed nothing, and the Real continued to inflate.

I make the assumption that there will be one standard commodity base. Bimetallic and other multiple currency systems have been tried in the US and elsewhere, and were expensive, cumbersome and open to serious abuse. We gave up on that in the 1830's.

If you don't base your currency on a single value, then you're into uncharted territory.

There's nothing arbitrary about market changes in currency valuation. All money changes in value regularly, because supply and demand change. The issue is whether those things are market-driven or government-driven. And I'm not assuming anything like the Fed - historically, various denominations have been in use at different times with no problems.

Now you're referring to practices under a fiat currency system. Under the gold standard, the only way you can arbitrage is to exchange your currency for that of other countries. Now, if you assume that there's an actual gold specie standard, your currency is *directly* tied to the amount of gold you have at the exchange ratio you set. If on the other hand you make it free-floating, not only do you not have the benefits of a fixed exchange rate between currency and gold, you are now *entirely* subject to the whims of the market. At least with a gold standard, currency issuance can be a primitive way to adjust the economy in a time of crisis. In your system, that would be functionally impossible; the government could do *nothing* to try to damp down monetary crises. Not even using the tools we actually had in the 19th century.

In many ways, the system you propose is even less structured than the initial system set up after the American Revolution. It sounds like you want to literally go back to an 18th century system which is completely deregulated, even between countries. And yet, the gold standard arose as a reaction to the problems those systems had. And then the modern system arose due to problems with the gold standard. I'm impressed with the boldness of the idea - throw *everything* we've learned in the last 300 years out the window and start over.

I would not like to live in the resulting system, however.

Again, I have no idea where this assertion comes from - I don't think you'll find any economist who believes that economic growth is strongly tied in any way to the amount of currency in circulation. if it were, why not inflate like mad to grow the economy? What are we waiting for?

With a suitably divisible currency, you don't change values based on currency needs, you change denominations when the current one becomes inconveniently valuable. We've all seen the opposite effect with the dollar as it declined - a dollar used to be worth quite a bit, but now we use a $100 bill to represent the same value.

Follow me here. When you set a gold standard, you say something like "one ounce of gold can be exchanged for $20.67". Period. This ratio does not change. That's the whole point. If the government *can* change it, or the market can change it, then you don't have a gold standard anymore.

Now, when you tie your currency *directly* to gold, that currency *is* gold. You only have so much available for economic activity, and without that, you don't have more activity. Monetary supply has *always* been an important component of economic growth; under gold standard, it's *the* most important element of growth, because without currency, you have no tokens to exchange.

Now, what you suggest is that we simply *inflate* the currency as the value of gold changes. Or deflate it, I guess. This is not a good way to set up a stable economy. The evils of massive inflation deliberately inflicted are obvious.

The reason these countries were vulnerable to the use of currency as a "weapon" was because they were lying about the value of their paper currency. They had fixed exchange rates to gold, but introduced more paper money than the gold could support at that rate. This, of course, incentivized anyone who had the paper currency to trade it for the gold. Without that distortion, the rest of that stuff becomes much less important. Further, gold has been used literally for millennia as the standard unit of international trade, so to argue that some kind of management body would be necessary to "bind" countries to the use of gold is ... well, laughable.

Then why did countries shift to the gold standard in the first place? Seriously. If you can explain that, you'll quickly see the problem.

What happened in the 20's and 30's is that countries acted to put their internal economic interests before those of other countries. That's not lying, that's self-interest, but it does show some of the big flaws of a gold standard. However, your proposed system creates those international currency value shifts *naturally*, meaning that countries wanting to take advantage of arbitrage opportunities to influence other countries economies don't even have to do it by manipulation. I don't think that's what you intend, but there it is.

Bank runs are caused by one thing: fractional reserve banking, i.e. loaning out more money than the bank actually has. With a 100% reserve non-fractional bank, a bank run doesn't mean anything - the bank hands back the deposits, and all is well. It is only when people start lying about how much money they have that bank runs become a problem. In a commodity environment the government cannot devalue the currency, so that's not a problem, and neither is saving. You're making assumptions about the actual use of gold as money based on what happens in a fixed gold exchange regime, which is incorrect.

Bank runs are caused by psychological and real crises. Fractional reserve banking does not *cause* them, but in a deregulated environment, it can enhance them, which is why we have government insurance to fall back on (another lesson learned in the early 19th century.)

Even if the bank gives out it's deposits one for one, and goes out of business, now you don't have a central source for local or regional loans. Additionally people will simply stash their money (their gold) under their beds, rather than spend it, massively slowing the economy. Of course, you also have market fluctuations that can actually devalue or seriously inflate your currency at the same time, since you've pegged your currency to the markets, which react *irrationally* to all sorts of things. Recipe for disaster.

So? If they do remove some from the economy, the rest becomes more valuable, savers are rewarded, natural deflation occurs, and the market adjusts - just like it does for every other commodity. Again, the actual amount of currency doesn't really matter, especially if it's highly divisible - you just want the amount to be relatively stable and predictable, and most importantly not subject to political whims.

Again, you've refused to set a fixed value for your currency, so you're not in a gold standard, actually. If you start adding currency when the price of the base commodity drops, that's serious inflation, nothing else. Essentially, you're supporting Zimbabwe here, which is emphatically not what you intended. It's as far from stable and predictable as you can get.

To have a gold standard, you *must* establish a fixed ratio between currency and gold. Period. What you've suggested above is not a gold standard. It's not a standard at all, as you've presented it. It literally recreates the medieval situation, where the value of specie (and thus currency) was dependent entirely on the value of the commodity in the markets. And that proved to be so problematic that it resulted in the *creation* of metallic standards.

All of the numbers I've seen estimating the skyrocketing cost of gold after a gold standard have assumed that you are just replacing dollars in circulation with gold. If you are going to move to a 100% reserve banking system on top of that and start switching over so that you are actually replacing gold with all of the wealth tokens in circulation instead of just the dollar bills, then increase that price hike even more

As a quick calculation, wikipedia says the total sum of mined gold is 5.3 billion troy ounces, and according to http://money.cnn.com/data/commodities/ at current (IMO on a large bubble) right now a troy ounce of gold is "worth" $1,560. That's a total of $8.259 trillion of gold. According to wikipedia the total private and public debt for the United States is $50.2 trillion.

Here's another sanity check. Is Australia the second wealthiest country in the world? Is Australia the country with the largest income in the world? If your answer to either of those questions was no, then the gold standard may not be right for you.

Paleocon wrote:

Tying the value of currency to gold is as arbitrary as tying it to Cowrie shells or weights of barley. The net effect of it would be pretty catastrophic irrespective of what commodity we pick and would serve only to reward those who horded that particular commodity and punish just about everyone else who built or created anything of actual value.

Well, the reason we're in this situation is because we abandoned the use of solid currency, and prevented the market from correcting with legal tender laws. Virtually any return to a real currency is going to have effects, but it doesn't have to be and won't be catastrophic. That's where a competitive market in currency comes in. In order to gain the benefits of a solid currency, you don't (and shouldn't) force people to change over immediately to one thing as Robear is postulating. All that is necessary is for solid commodity currency to be legal ... which it currently is not.

Robear wrote:

Have you thought through the effects of inflicting a century's worth of inflation in one year? And you're good with that? Isn't that what we'd normally call hyperinflation? How can that just be shaken off?

Huh? I just explained how such a situation with a commodity currency is much less likely than with a fiat currency, and how disruption can be avoided with a competitive currency market.

The market price cannot be used to price currency.

Then I guess we better fire all the banks' loan officers and shut down the currency exchanges? Currency is market priced every day in America, though the market is terribly distorted by government interference.

First currency is issued according to a standard exchange rate by the issuing body, usually (and historically in the US) the government. For example, when we moved off of a silver standard in 1834, the price of gold was defined as $20.67 per ounce, and it stayed there for a century. So the idea that gold is going to be priced by the market while still being a basis for the currency is just weird. It's not a system we've had before; heck, the very term gold *standard* speaks to the exchange rate being fixed.

It *is* a system we've had before, it's the system that was established by the Constitution - which was almost immediately subverted by the federalists with the first central bank. I already pointed out the difference between a gold specie standard and a gold exchange standard, and you're considering only a gold exchange standard, which has endemic problems. The government-imposed price controls on currency and gold were actually the core problem with that regime.

Note that each country sets it's exchange rate and is trusted not to inflate their currency. This system is part of what broke down before WWI. The gold standard does *not* prevent government manipulation of it's currency ("lying about money").

A gold exchange standard does not - in fact, it encourages it, as we've seen historically, because paper currency is so easy to replicate. A competitive currency system and a gold specie standard provide anti-inflation incentives.

This means of course that the value of currency will fluctuate unpredictably.

Unpredictably? Hardly. The growth of gold stocks is very slow, and very predictable, as are the industrial uses. Economic expansion also provides a natural deflation to offset the slow inflation. That's one reason why, historically, gold has been used as currency virtually everywhere it was available and permitted.

The whole point of the gold standard is to create stability in prices.

No, it's not - though that's a likely outcome. The whole point of using gold as currency is to prevent government currency manipulation from transferring wealth through the shadow tax of inflation and the ensuing manipulation of prices. Prices are vital economic information, and must be permitted to fluctuate if necessary.

I make the assumption that there will be one standard commodity base. Bimetallic and other multiple currency systems have been tried in the US and elsewhere, and were expensive, cumbersome and open to serious abuse. We gave up on that in the 1830's.

Forcible currency systems are always expensive, cumbersome, and open to serious abuse. We didn't give up on that, we institutionalized it with the Federal Reserve and legal tender laws.

If you don't base your currency on a single value, then you're into uncharted territory.

Hardly. We have many pseudo-currencies today that are or have been permitted to operate in various markets - the old bearer bonds, for example, before they were made illegal because they became preferred to cash in some circumstances. No one had trouble pricing them or using them. A competitive currency market would operate in the same way, with an emphasis on stability and reliability.

Now you're referring to practices under a fiat currency system.

No, I'm not. The price of currency (interest, for example) changes all the time due to market changes - or it should. One of the ways the Fed undermines the market is messing with interest prices.

Under the gold standard, the only way you can arbitrage is to exchange your currency for that of other countries. Now, if you assume that there's an actual gold specie standard, your currency is *directly* tied to the amount of gold you have at the exchange ratio you set. If on the other hand you make it free-floating, not only do you not have the benefits of a fixed exchange rate between currency and gold, you are now *entirely* subject to the whims of the market. At least with a gold standard, currency issuance can be a primitive way to adjust the economy in a time of crisis. In your system, that would be functionally impossible; the government could do *nothing* to try to damp down monetary crises. Not even using the tools we actually had in the 19th century.

This is a feature, not a bug. Governments messing with money are one of the core economic problems we have today (and historically). You're also misinterpreting gold specie standard, again. In a gold specie standard, gold itself is the currency. There's no fixed exchange ratio, and any necessary exchange ratios (say, with silver) are market driven.

In many ways, the system you propose is even less structured than the initial system set up after the American Revolution. It sounds like you want to literally go back to an 18th century system which is completely deregulated, even between countries. And yet, the gold standard arose as a reaction to the problems those systems had. And then the modern system arose due to problems with the gold standard. I'm impressed with the boldness of the idea - throw *everything* we've learned in the last 300 years out the window and start over.

Of course - because it's impossible that we, you know, might have made a few mistakes. The gold exchange standard arose because the government needed resources, and it was convenient to start inflating the currency instead of raising taxes. The modern system arose because, instead of recognizing the problems created by currency inflation, the government and banks institutionalized inflation so they would always be the first beneficiaries from it. Why do you think inflation never really took off until after the Federal Reserve was established?

Returning to a solid, competitive currency system isn't throwing everything we've learned out the window, it's using what we've learned to establish a stable competitive monetary system that can adapt to market needs in the future. It's acknowledging that government control of the monetary system is dangerous, especially for the regular citizens, and should be avoided.

I would not like to live in the resulting system, however.

Well, I'm not real fond of our current system of institutionalized theft.

Follow me here. When you set a gold standard, you say something like "one ounce of gold can be exchanged for $20.67". Period. This ratio does not change. That's the whole point. If the government *can* change it, or the market can change it, then you don't have a gold standard anymore.

Again, you're confusing a gold exchange standard for a gold specie standard. The problem with the system you've described is that the government does change it, every time, secretly, by printing more currency but not acquiring more gold, then forcing people to accept that new money at the same value. That's why it doesn't work.

Now, when you tie your currency *directly* to gold, that currency *is* gold. You only have so much available for economic activity, and without that, you don't have more activity. Monetary supply has *always* been an important component of economic growth; under gold standard, it's *the* most important element of growth, because without currency, you have no tokens to exchange.

And as I've already noted, with a highly divisible currency, you always have tokens to exchange. And again, economic activity is not related in any significant way to the number of available tokens - as long as there's something that can change hands when trades are made, the economy can function and grow. Indeed, how often this occurs actually is one of the major metrics in economic growth (it's called the velocity of money).

Now, what you suggest is that we simply *inflate* the currency as the value of gold changes. Or deflate it, I guess. This is not a good way to set up a stable economy. The evils of massive inflation deliberately inflicted are obvious.

No, due to previous assumptions and confusion between a gold specie standard and a gold exchange standard, these conclusions are entirely wrong. The evils of massive inflation deliberately inflicted are the result of our current fiat system, with all the benefits going to the government and their favored partners.

Then why did countries shift to the gold standard in the first place? Seriously. If you can explain that, you'll quickly see the problem.

They shifted to a gold exchange standard, from a gold specie standard, because they needed resources to prosecute wars and expand the bureaucracy, and didn't want to raise taxes. A gold exchange standard provided a convenient cover for massive currency printing and inflation. The problem with this is indeed obvious - but instead of returning to currency discipline, the government began a search for ways to mitigate the problems created by their inflation.

What happened in the 20's and 30's is that countries acted to put their internal economic interests before those of other countries. That's not lying, that's self-interest, but it does show some of the big flaws of a gold standard. However, your proposed system creates those international currency value shifts *naturally*, meaning that countries wanting to take advantage of arbitrage opportunities to influence other countries economies don't even have to do it by manipulation. I don't think that's what you intend, but there it is.

What happened in the 20's and 30's is that governments used the tools they had created in response to gold exchange standard problems to massively inflate their currencies. That's why the gold exchange standard had to be abandoned - they could no longer even maintain the pretense that gold was worth $35 an ounce. A competitive currency market that isn't government-controlled is extremely resistant to manipulation, because the incentives all tilt towards stability and reliability.

Bank runs are caused by psychological and real crises. Fractional reserve banking does not *cause* them, but in a deregulated environment, it can enhance them, which is why we have government insurance to fall back on (another lesson learned in the early 19th century.)

Ok then - why would people want to rush to take out their money if they were certain it would be there when they needed it? Bank runs are caused by fractional-reserve lending, because the depositors know that the bank cannot back all deposits. When the bank's viability comes into doubt, it becomes first come first serve to recover your deposits - a bank run. Government insurance and regulation in this case is actually a mistake, because it puts taxpayers on the hook for bank losses while at the same time encouraging banks and depositors to take more risks.

Yonder wrote:

All of the numbers I've seen estimating the skyrocketing cost of gold after a gold standard have assumed that you are just replacing dollars in circulation with gold. If you are going to move to a 100% reserve banking system on top of that and start switching over so that you are actually replacing gold with all of the wealth tokens in circulation instead of just the dollar bills, then increase that price hike even more

As a quick calculation, wikipedia says the total sum of mined gold is 5.3 billion troy ounces, and according to http://money.cnn.com/data/commodities/ at current (IMO on a large bubble) right now a troy ounce of gold is "worth" $1,560. That's a total of $8.259 trillion of gold. According to wikipedia the total private and public debt for the United States is $50.2 trillion.

Here's another sanity check. Is Australia the second wealthiest country in the world? Is Australia the country with the largest income in the world? If your answer to either of those questions was no, then the gold standard may not be right for you.

You're making the assumption, as Robear is, that a gold standard would be imposed immediately. That would indeed be quite disruptive, though in the long run we'd be significantly better off. Fortunately it's not necessary, all that needs to be done is to make gold, and indeed anything people agree on, available as a currency again and get our government out of business of manipulating currency.

Also, note that our debts are so large due to several factors, primary among them fractional-reserve lending, which vastly increases available credit (and is sharply inflationary), and government programs like Social Security which promise enormous unfunded liabilities. A stable monetary system would not have allowed us to get to this point, because the market price of borrowing money would have risen sharply.

Okay, gold specie standard. But you're still making a few mistakes in your beliefs. (Nota Bene - in a gold specie standard, gold coins of fixed denominations circulate alongside currency. The value of the currency is defined according to it's exchange rate with the gold coins. Normally - in the past - that would be set by a government at a fixed rate. Aetius further suggests that that value fluctuate according to the market value of gold.)

(BTW, long term price stability is THE goal of commodity standards. Your arguments against inflationary issuance of currency are based on this idea, since inflation changes prices. Further, in a gold specie standard, gold coins AND currency are the circulating money. You have to remember that *both* are available, simultaneously, and not forget that they have different physical characteristics. One of the arguments you make above is actually an argument to allow unlimited inflation in currency (as opposed to specie) but you have to consider the consequences.)

First, the market sets currency prices relative to other currencies. Normally, governments would establish their own mint rates (amount of gold exchanged for amount of internal currency) in order to have a defined value for international exchange. But if we let the market do this, volatility gets much worse. As one country's exchange rate of gold to it's own currency drops (ie, during times of inflation), it's gold will be siphoned off by trade and speculation to other countries, as the specie will be more valuable and exchangeable than the currency. In a gold specie standard, we *still* need a central bank to set the currency to gold exchange rate, and thus control it's rate relative to other currencies, at least minimally. (That still has historical problems, but at least there is only one axis of variation of exchange to worry about, rather than two. The more variation, the more price fluctuation and uncertainty in the economy.) Otherwise, there is no natural barrier to hyperinflation and the complete exit of specie, because there is no defined mint rate anymore.

Second, a gold specie standard still requires the minting and circulation of gold coins in addition to currency. The value of the currency is *directly* tied to the gold in circulation. When more currency is introduced, the value of the currency drops - inflation. And vice versa if currency is removed from circulation. So your argument that the gold value is indefinitely divisible is not actually correct. As gold value increases, those who hold it will tend to save it, thus reducing the amount of gold available for circulation - and they will thus reduce the velocity of money, which is a measure of how often currency or specie is used within the economy. If the currency keeps increasing, it's value will drop - inflation - and the economy will slow down. You've added rules that also encourage other countries and the market to affect the values of both gold and currency, which can make any crisis worse at the whim of currency traders, gold traders, or other national banks.

In both cases, we need some kind of bank to issue the specie and currency. The US has gone without a central bank several times - 1811-1816 and 1837-1862. In both cases, banks chartered by the states failed to provide the kind of stability you're looking for, and the economy was not stable or strong due to currency fluctuations. Banks had an average lifespan of only 5 years, and were often corrupt. So we have a good historical example that having lots of issuing banks is *not* a guarantee of economic stability. Also, as above, the central bank is needed to engage other countries in part as a buffer against the vagaries of the markets. So the idea that we can do without a central bank seems unduly risky.

Next, whether you like it or not, the increasing value of specie will increase the importance of the circulating gold to the economy. We *will* be limited by the amount of gold available for circulation; letting the market prices determine whether currency will be issued or removed from the money supply will (as I've pointed out) increase uncertainty and will slow the economy as distrust for the currency (as opposed to specie) grows. Paul's entire idea is that we are thus weaned from the need for currency; this puts his theory back into the situation where the amount of gold actually *does* matter to the size and speed of growth of the economy. That's inescapable, as long as people prefer gold to currency.

You've argued that you don't want to throw out the lessons of the last century, that your system will "adapt to market needs in the future". But without a central bank setting monetary policy, how will that happen? The lessons of modern economies are based on the idea that we *can* manage economies, to some degree, even if it's small. Yes, mistakes have been made. But tearing down the ability to react to crises seems like *ignoring* the lessons of the last century, and explicitly *removes* the ability to adapt to the market changes in the future, by removing the tools to do it - the ability to set the mint exchange rate, for example, and to issue or remove currency through bank loans or direct issuance.

So some of the objections I raised still stand - the limiting factor of the total amount of gold available; the need for a central bank to both set monetary policy and issue currency; and the need to set consistent standards and regulations for the banking industry. The strengths of a gold specie standard *should* be price stability; the ability to make international payments in gold, not currency; the inability of the government to issue unlimited currency (contradicted in your ideas directly); and the dampening of boom/bust peaks and troughs due to the inelasticity of specie (which, again, you're willing to give up through currency issuance.)

Problems? Gold supply limits economic growth, as I've noted. I've even read this in Austrian papers; it's not a radical claim. Individual debtors are punished by deflation of currency, and inflating values of gold encourage savings, not investment (which you've decided to exaggerrate by pegging gold AND currency values to the markets.) You can't use monetary supply to fix recessionary problems (although I guess in your system, we could.) Countries that produce gold have an inherent economic advantage. And several methods of manipulating money supply to adjust to economic problems are out the window, as (normally) money supply can't be manipulated. (In your take, it apparently can be.)

Aetius wrote:

Forcible currency systems are always expensive, cumbersome, and open to serious abuse.

Ah.

I guess I shouldn't be surprised that the inherent immorality of government is part of your argument against fiat currency, or indeed any goverment enforced standard currency.

EDIT:

A system is either exploitable by bad actors or it isn't. Even if we ignore the elephant in the room, that participating in the economy is next to impossible unless you participate in the dominant currency system, your argument here is simply that since the currency system has been created by a Morally Correct source, it will work better.

We're supposed to take it on faith that bad decisions and bad actors do not exist in systems where participation is voluntary.

Alien Love Gardener wrote:

I guess I shouldn't be surprised that the inherent immorality of government is part of your argument against fiat currency, or indeed any goverment enforced standard currency.

Actually, there is a role for government in this case: to ensure that currency never falls under the control of the government, and that cases of currency-related theft and fraud are dealt with. This was attempted in the Constitution, but nearly immediately subverted by the Federalists, as I noted above. Also, historically people are very bad at detecting problems with currency, so enforcing laws against fraud would necessarily entail dealing with currency bad actors and would help stabilize the economy.

Alien Love Gardener wrote:

A system is either exploitable by bad actors or it isn't.

On the contrary, all systems are exploitable by bad actors. That's why you need a system that is heterogeneous, self-healing, and incentivizes corrective actions, while discovering and punishing bad actors. In a government-controlled monopoly currency system, the people controlling the system are the bad actors, and thus have no incentive to discover and punish themselves.

Even if we ignore the elephant in the room, that participating in the economy is next to impossible unless you participate in the dominant currency system, your argument here is simply that since the currency system has been created by a Morally Correct source, it will work better.

Ask yourself this question: if the government-controlled currency system is so attractive, why do we need legal tender laws? Wouldn't people select the government-controlled currency naturally because of its advantages, over gold or some other currency? In fact, government-controlled currency must be forcibly imposed, and the use of gold must be forcibly suppressed, as it was by FDR in 1933, because otherwise no one would accept such currency. Gold was the dominant currency system, until it was forcibly deposed.

The argument is that government-controlled currencies will be abused, and abused extensively, and that it's more economically healthy to avoid this abuse. The historical evidence is depressingly clear on this point, across many cultures and governmental systems. When you see the same steps taken in the Roman Empire as you do in modern America, the same rationales, the same laws, and the same effects, it becomes impossible to ignore. The basic principles of Gresham's Law, for example, were observed and established in the 1500's.

We're supposed to take it on faith that bad decisions and bad actors do not exist in systems where participation is voluntary.

On the contrary, you should absolutely assume that bad decisions and bad actors exist in any system, voluntary or not. A corollary to this assumption would be that handing over control of the system to known bad actors is probably not a good idea, and institutionalizing and systematizing bad decisions is even worse.

Ask yourself this question: if the government-controlled currency system is so attractive, why do we need legal tender laws? Wouldn't people select the government-controlled currency naturally because of its advantages, over gold or some other currency? In fact, government-controlled currency must be forcibly imposed, and the use of gold must be forcibly suppressed, as it was by FDR in 1933, because otherwise no one would accept such currency. Gold was the dominant currency system, until it was forcibly deposed.

Why did the Constitution require that only gold and silver be legal tender? Why was that even needed?

And I'll ask you your own question - why *were* private minting and the gold standard both eventually discarded?

Basically, you've turned history into a conspiracy theory. Where things went seriously wrong, repeatedly, for over a hundred years due to problems with the gold standard and other things you suggest, you just ignore the problems and announce that it's all due to "bad actors" suppressing the natural goodness of gold. But nowhere do you actually look at events and tell us why, given that the US was under various forms of a gold standard for nearly 150 years, all that bad stuff *happened*?

Of course you don't credit the idea that the gold standard was moved away from because of it's problems, because you refuse to deal with the historical reality of those. Until and unless you can describe them and give us an updated mechanism for preventing those problems - increased severity of deflationary/inflationary periods; corruption and abuse of private mints; rampant speculation due to competing currencies; hoarding of gold slowing the economy; bank runs due to rational or irrational fears rather than real problems; and your additional suggestion that currency can be infinitely inflated - you won't have a viable system, you'll just have a slogan or two.

Which countries have used Austrian principles again? Seriously, examples of successful modern implementations would be a great thing.

Robear wrote:

(Nota Bene - in a gold specie standard, gold coins of fixed denominations circulate alongside currency. The value of the currency is defined according to it's exchange rate with the gold coins. Normally - in the past - that would be set by a government at a fixed rate. Aetius further suggests that that value fluctuate according to the market value of gold.)

In a gold specie standard, any currency that circulates simply represents a certain amount of gold - there's no exchange rate, merely a representation of an existing stock of gold somewhere else. The only value that fluctuates is what the gold can be traded for, and that of course will fluctuate according to supply and demand, both of the gold and of the other commodities and services.

(BTW, long term price stability is THE goal of commodity standards. Your arguments against inflationary issuance of currency are based on this idea, since inflation changes prices.

Incorrect - the goal of using competitive currency is to determine accurate prices, and to avoid subtle and difficult-to-detect problems like transfers of wealth via inflation. Inflation, the expansion of the money supply, may change prices, or it may not, but it always transfers wealth to the inflater. The reason for this is that prices are affected by many other factors as well. "Price stability" is actually one of the goals of the Federal Reserve and our current fiat system, and their primary tool for maintaining price stability is inflation. Using a competitive commodity-based currency system, the expected long-term result is slight deflation due to economic growth.

Further, in a gold specie standard, gold coins AND currency are the circulating money. You have to remember that *both* are available, simultaneously, and not forget that they have different physical characteristics. One of the arguments you make above is actually an argument to allow unlimited inflation in currency (as opposed to specie) but you have to consider the consequences.)

Huh? I've made no such argument. In a gold specie standard, physical gold and gold-based paper or electronic currency can be circulated, but there's no effective difference - and indeed, making sure there's no effective difference is pretty important. Such a currency system does not permit inflation of the alternative currencies as long as the alternate currencies are redeemable in full at any time, and redemption is routinely exercised to purge any bad actors.

First, the market sets currency prices relative to other currencies. Normally, governments would establish their own mint rates (amount of gold exchanged for amount of internal currency) in order to have a defined value for international exchange. But if we let the market do this, volatility gets much worse. As one country's exchange rate of gold to it's own currency drops (ie, during times of inflation), it's gold will be siphoned off by trade and speculation to other countries, as the specie will be more valuable and exchangeable than the currency.

Here you've accurately described the precise problem with a defined exchange rate that is not based on weight, and the problem with government-driven inflation in a gold exchange standard. The volatility is entirely caused by the price fixing of the fiat currency to gold, and the inflation creates the imbalance. The reason these situations exist is because once the government has control over the printing press, the temptation to inflate becomes irresistible - it's so easy to deal with your financial problems by printing a little here and a little there. The draining of gold reserves is the market compensating for this bad behavior.

All that's necessary is to avoid these problems entirely is sticking with the gold specie standard. However, you'll note that the traditional government method of dealing with this problem is legal tender laws and suspension of redemption. However, the market does not tolerate such bad behavior for long, which is why every "Bretton Woods"-style agreement has fallen apart - as long as gold is more valuable, which is always is against the inflated currencies, it'll flow away from the inflaters. Of course, instead of acknowledging this further problem, governments took the obvious step of outlawing redemption altogether, removing any constraint on their inflation and wealth transfer.

In a gold specie standard, we *still* need a central bank to set the currency to gold exchange rate, and thus control it's rate relative to other currencies, at least minimally.

Obviously this is unnecessary in a gold specie standard, because any alternative currencies are issued by weight (and routinely verified), not by a government or central bank. The only reason for having such an exchange rate is if you want people to believe that your alternative currency is based on gold, but it actually isn't, which leads to the problems you noted above.

Otherwise, there is no natural barrier to hyperinflation and the complete exit of specie, because there is no defined mint rate anymore.

This makes no sense - as I noted above, it is the gold specie standard that is the barrier to inflation, because it does not permit currency to be created cheaply and undetectably. A gold specie standard is highly resistant to inflation, because it's difficult to obtain more gold. Indeed, that is what drives species to be in use as money, not to exit use as money.

Second, a gold specie standard still requires the minting and circulation of gold coins in addition to currency.

No, it doesn't - such conversions in shape and form are simply conveniences. It's quite likely that in a modern system, coins would be relatively rare.

The value of the currency is *directly* tied to the gold in circulation. When more currency is introduced, the value of the currency drops - inflation.

How could more currency be introduced? The only possibility in a gold specie standard is mining more gold, which is difficult, expensive, and slow, and is partially offset by wear-and-tear and industrial uses. Converting bullion to coins, or bars to strips, is entirely meaningless - you're assuming that a government would be mandating that the coins are currency and bullion is not, which is not how a gold specie standard works.

And vice versa if currency is removed from circulation.

Again, how? I suppose you could pull a GoldFinger and irradiate the gold, or attempt to destroy it - but even that would induce some minor deflation, and incentivize more gold mining and extraction.

So your argument that the gold value is indefinitely divisible is not actually correct.

This used to be true, but it no longer is. With the advent of electronic funds transfers and using a gold specie standard, we can transfer virtually any weight of gold anywhere in the world (and the banks will eventually settle with aggregated physical transfers as they do today).

As gold value increases, those who hold it will tend to save it, thus reducing the amount of gold available for circulation - and they will thus reduce the velocity of money, which is a measure of how often currency or specie is used within the economy.

This does not logically follow - it's quite possible for the total amount of money to be reduced, but the velocity of money to remain the same or increase. Economic activity and expansion drives velocity, not the other way around. Also, increased savings and increased value in savings is a good thing, especially for those with low incomes and fixed incomes.

The US has gone without a central bank several times - 1811-1816 and 1837-1862. In both cases, banks chartered by the states failed to provide the kind of stability you're looking for, and the economy was not stable or strong due to currency fluctuations.

Of course, because the state banks immediately began doing the same thing the Bank of the United States did: inflating their currency, issuing fractional-reserve loans, and generally defrauding the public. The fact that they repeatedly failed, or were protected by government-mandated suspension of specie payments, is a sure sign of what they were doing - and that the market was correcting by calling them on their lies and bad actions. The government reaction, of course, was to try to prevent the market from correcting.

So the idea that we can do without a central bank seems unduly risky.

On the contrary - continuing with our existing system of institutionalized wealth transfer and inflation is by far the greatest risk to our economy today.

Next, whether you like it or not, the increasing value of specie will increase the importance of the circulating gold to the economy.

Indeed, it is expected. However, note that in a gold specie standard, there is no such thing as "circulating gold" - all gold is considered to be money, no matter where it is or what form it takes.

letting the market prices determine whether currency will be issued or removed from the money supply will (as I've pointed out) increase uncertainty and will slow the economy as distrust for the currency (as opposed to specie) grows.

Our modern American currency should be distrusted, so I'm not seeing that as a problem.

Paul's entire idea is that we are thus weaned from the need for currency; this puts his theory back into the situation where the amount of gold actually *does* matter to the size and speed of growth of the economy. That's inescapable, as long as people prefer gold to currency.

Again, you've completely failed to show that the amount of gold is relevant. In reality, velocity is far more important than the total amount of currency, as long as the amount is relatively stable. If our modern American currency is so good and useful, why would people not choose it instead of gold in a competitive market? Why the confiscation of gold in 1933 and legal tender laws?

You've argued that you don't want to throw out the lessons of the last century, that your system will "adapt to market needs in the future". But without a central bank setting monetary policy, how will that happen? The lessons of modern economies are based on the idea that we *can* manage economies, to some degree, even if it's small.

Actually, adapting to market needs and accurate market prices can only occur in the absence of a central bank, especially when it comes to the price of money itself and interest rates. Further, market correction of bad actors in the currency market is only possible in the absence of a central bank.

The lesson of modern economics is that we cannot manage economies, and that to try is exceedingly destructive. Virtually all of the major economic crises that we've faced in the history of the United States have been induced by attempts to manage the economy. We need to understand the need to get out of the business of manipulating currency, and accept the restrictions that implies. We need a dose of governmental humility that is long overdue.

In a gold specie standard, any currency that circulates simply represents a certain amount of gold - there's no exchange rate, merely a representation of an existing stock of gold somewhere else.

"Represents a certain amount of gold" - that *is* an exchange rate, between gold and the currency. How it is set and possibly changed, therefore, is important. Aetius, can you give us an economist's article or summary of what you are suggesting? I don't think we're even using the terms in the same way. I honestly can't make sense of your proposal as it stands. For example, you said quite clearly that gold was infinitely divisible, and that currency could simply be issued based on any amount of gold in order to address a lack of currency, but then you *denied* that this was inflationary, when in fact it seems to be the very definition of one of the causes of inflation (excessive increase in money supply). (Above, you use the term "highly divisible" to get past what is an actual problem, economies running out of exchange tokens. The only conclusion I can draw is that you somehow expect to issue more tokens without damaging the value of the currency. Note that you can't argue that running out of currency is not a problem, as it's *historically* been a problem in various economies including US.)

You've also said that the gold standard is *not* designed to encourage price stability, but then you say it's *highly* resistant to inflation. Um, that *is* one of the definitions of price stability - the lack of major inflation or deflation over time. Can you see why I'm having trouble here?

Your definition of gold specie standard seems at odds with the ones I've found. For example, Wikipedia has it as "a system in which the monetary unit is associated with circulating gold coins, or with the unit of value defined in terms of one particular circulating gold coin in conjunction with subsidiary coinage made from a lesser valuable metal." Now, Ron Paul and you envision that the circulating gold coins will be supplemented with currency (ie, dollars). It follows that that currency has to get it's value from somewhere, and in a gold specie standard, that's coming from the value of the gold coins. An exchange ratio needs to be set, and it needs to be consistent across the entire country. But what you're arguing is that there are gold coins, and there are tokens that *represent* a weight of gold (currency), and nothing else. That's like a gold *bullion* standard, but also something like a specie standard. It's not a "coins only" standard, which is emphatically what the gold specie standard has been *historically*; gold specie actually is defined as "gold coined money".

So here's what I think I'm hearing you say: Circulate dollars (like we have now) and gold coins. Fix an initial transfer rate of dollars to gold. Let the market determine the value of dollars versus other currencies, and also the value of gold itself in various currencies. Now let the exchange rate of dollars to gold float. Is that correct?

I actually got some of my points from mises.org, for example, the requirement for a *statutory* fixed ratio of exchange of gold for dollars (you suggested that market prices should set this, and you also suggested that both the currency and the gold should trade freely, thus creating another axis of variation - or instability.) If you approve, I'll start with this document, or you can suggest another. But right now, I can't make sense of your claims. You seem to be taking from various systems as you need to make arguments, but it's not clear how you intend your system to work in the first place. So lay it out for us, please. Or go with something already published, your call, to help us understand what you're talking about. I and I'm sure others don't have an understanding of what your system actually is, and I'm getting tired of shining lights in one side of the box and seeing the beams come out of unexpected places.

Let me know.

Robear wrote:

Why did the Constitution require that only gold and silver be legal tender? Why was that even needed?

Because the Founders weren't stupid? They didn't force everyone to use gold and silver, they were simply making sure the federal government got paid by the states in gold and silver, because they knew the states would try to skate out from under their debts if permitted.

And I'll ask you your own question - why *were* private minting and the gold standard both eventually discarded?

They weren't. They were made illegal, as they have been time and time again throughout history.

Basically, you've turned history into a conspiracy theory.

Sure, I could be advocating a conspiracy theory that has existed for thousands of years, across many disparate cultures and economic systems. Or, you know, I could be positing that when presented with certain incentives and societal permission, people in power tend to behave like human beings and act in their own interest. Whichever you think is more plausible.

Where things went seriously wrong, repeatedly, for over a hundred years due to problems with the gold standard and other things you suggest, you just ignore the problems and announce that it's all due to "bad actors" suppressing the natural goodness of gold. But nowhere do you actually look at events and tell us why, given that the US was under various forms of a gold standard for nearly 150 years, all that bad stuff *happened*?

While I've repeatedly explained and addressed these very issues, let's try one more time, by addressing the Panic of 1837.

The Second Bank of the United States was established after the War of 1812 and the rampant inflation/credit expansion used to pay for the war, to provide an inflationary backstop to wildly over-extended banks (some with currency-to-gold ratios higher than 5 to 1) after a suspension of specie payments in 1814. It was a thoroughly cronyist institution, with exclusive handling of federal government accounts and tax deposits. In 1818, the Second Bank of the United States had issued over $22 million in notes, while holding only $2.5 million in specie - a inflationary ratio of nearly 10-to-1. It was also supposed to oversee state banks and make sure they didn't inflate their currencies.

This was a job at which it failed spectacularly, encouraging and overseeing massive inflation and credit expansion by state banks as well as itself. At the same time, repeated suspension of specie payment was the norm, and there were even laws against "money brokers" who were taking advantage of the rampant inflation to convert heavily devalued currencies into gold. When the Second Bank's charter ran out in 1836, the false boom created by the rampant inflation it oversaw began to unravel. The bubble quickly collapsed, taking about half of the existing banks in the country with it - most of which had been created during the inflationary boom of 1823-1833. In 1837 and 1839 specie payments were again suspended by the Second Bank as well as state banks.

It should be clear at this point that the "gold standard" was not the problem - the rampant inflation, suspension of specie payments, and the ensuing crash/deflation were. It was indeed the refusal of the Second Bank, the federal government, and the state governments to operate on a gold standard that created the situation where even a contraction of the inflated currency - not a full return to the gold specie standard - created a crash and panic.

Of course you don't credit the idea that the gold standard was moved away from because of it's problems, because you refuse to deal with the historical reality of those. Until and unless you can describe them and give us an updated mechanism for preventing those problems - increased severity of deflationary/inflationary periods; corruption and abuse of private mints; rampant speculation due to competing currencies; hoarding of gold slowing the economy; bank runs due to rational or irrational fears rather than real problems; and your additional suggestion that currency can be infinitely inflated - you won't have a viable system, you'll just have a slogan or two.

I've already detailed extensively how such a system would work, and the only currency that can be infinitely inflated a fiat one - as we've seen demonstrated over the last 100 years with a 95% decline in the value of the dollar. The gold standard was moved away from because of its restrictions - it forced a measure of honesty and constraint on the banks and the government, which they did not like and used legal means to mitigate. Deflationary/inflationary periods were caused by rampant inflation and ensuing market corrections; corruption and abuse of private mints is mitigated by competition; speculation in competing currencies is a function of inflation, and thus does not occur in a strict gold specie standard; there's no evidence that gold hoarding has any significant impact on the economy; and bank runs are caused by inflation and/or fractional reserve lending, which should both be considered fraud.

Which countries have used Austrian principles again? Seriously, examples of successful modern implementations would be a great thing.

Examples of successful modern implementations of fiat currency are not forthcoming either - and the history of fiat currency is littered with failure. The current American system is limping along, hamstrung by massive government debt and massive wealth transfers via inflation and open socialization of private losses. The European system, only a few years old, is in even worse shape and there is open discussion of the dissolution of the Euro.

The use of gold as a currency, in contrast, has been quite successful in international trade. That's why a competitive currency system is not a "return" to anything, but rather an advance that avoids the fiat traps and the various gold exchange standard problems.

Robear wrote:

Why did the Constitution require that only gold and silver be legal tender? Why was that even needed?

Because the Founders weren't stupid? They didn't force everyone to use gold and silver, they were simply making sure the federal government got paid by the states in gold and silver, because they knew the states would try to skate out from under their debts if permitted.

What? That does not even show up in the interpretations I've seen. Check out the Cornell Law Center Annotated Constitution, Article 1, Section 10, Clause 1:

Legal Tender

Relying on this clause, which applies only to the States and not to the Federal Government,1809 the Supreme Court has held that where the marshal of a state court received state bank notes in payment and discharge of an execution, the creditor was entitled to demand payment in gold or silver.1810 Since, however, there is nothing in the Constitution prohibiting a bank depositor from consenting when he draws a check that payment may be made by draft, a state law providing that checks drawn on local banks should, at the option of the bank, be payable in exchange drafts was held valid.1811

This is flat-out a requirement that the states can't circulate anything other than gold or silver, or drafts based upon them - thus, the government was setting the definition of legal tender for use by all citizens. Gold and silver *were* the dominant unit of exchange, because there were *defined* to be - as you noted, without the *government* making that choice, the states might have picked all sorts of different standards. Government is still needed to set the rules.

Quote:

And I'll ask you your own question - why *were* private minting and the gold standard both eventually discarded?

They weren't. They were made illegal, as they have been time and time again throughout history.

Again, that's not answering the question. Why were they both discarded? What problems led to the changes?

It should be clear at this point that the "gold standard" was not the problem - the rampant inflation, suspension of specie payments, and the ensuing crash/deflation were. It was indeed the refusal of the Second Bank, the federal government, and the state governments to operate on a gold standard that created the situation where even a contraction of the inflated currency - not a full return to the gold specie standard - created a crash and panic.

Here's an interesting item. While I do understand that early banks were corrupt and implemented poor policy, bear in mind that between the end of the first Bank of the US charter in 1811 and the institution of the Second Bank in 1816, we had no central bank controlling monetary policy. It was left up to the states and the private banks. This is a situation you are recommending, and yet, it was a complete disaster. The country was under a silver standard; indeed, a silver *specie* standard at this time with gold, silver and convertible dollars circulating, but both private and state banks took the rational step of inflating in order to deal with the massive war debt, in the absence of any controlling policy to the contrary.

Without a central bank to set policy, the markets acted in such a way as to destroy the monetary foundation of the country in order to get out from under debt. And the commodity standard did *nothing* to prevent this or ameliorate the damage.

Deflationary/inflationary periods were caused by rampant inflation and ensuing market corrections; corruption and abuse of private mints is mitigated by competition; speculation in competing currencies is a function of inflation, and thus does not occur in a strict gold specie standard; there's no evidence that gold hoarding has any significant impact on the economy; and bank runs are caused by inflation and/or fractional reserve lending, which should both be considered fraud.

That is a *huge* hunk of assertions. Some of it is demonstrably incorrect - there was *tremendous* competition between private mints and state banks in the 19th century, which did nothing to prevent abuse and corruption. Other points are interpreted differently by different schools of economic thought and thus are not as definite as you make them out to be (the interpretation of periods of deflation and inflation, for example, and the idea that speculation is caused by inflation). In fact, currency speculation occurs even under a metallic specie standard, and did happen historically. As for gold hoarding, it has no effect in a *fiat* economy, unless the hoarder is a nation; but it is extremely detrimental when it limits the amount of specie/currency able to circulate (and you have to recognize this, as otherwise the term "velocity of money" would have no meaning.) And bank runs have been famously shown to be caused by *psychological* factors - irrational or rational fears - as much as actual circumstances.

Examples of successful modern implementations of fiat currency are not forthcoming either - and the history of fiat currency is littered with failure.

Are there, or are there not, any countries using Austrian School principles? The fact that we are not sitting the ruins of American cities picking old trash heaps for recycling shows that the fiat system is in some useful way successful. It's not perfect - no one argues that - but it's been shown to be durable and useful. Failure is, after all, an excellent way to learn.

But the Austrian School principles have been tried, in the past - and failed in much bigger ways than the system we have now. Commodity standards, commodity money, decentralization and deregulation of banking - for all of these there are extremely bad results in history, which is why they are avoided now.

Robear wrote:

"Represents a certain amount of gold" - that *is* an exchange rate, between gold and the currency.

No, it means that the currency is literally a weight in gold (a "warehouse receipt", to use Rothbard's terminology). In a gold specie standard, there is only gold - there's no "exchange rate", just different ways of representing gold weights. The naming of a currency, such as "dollar", tends to separate the two things in people's minds, which creates the idea of the "exchange rate". In a gold specie standard, that's absurd - at what rate would you exchange gold for gold?

How it is set and possibly changed, therefore, is important.

For non-gold currencies such as the dollar versus gold, yes - and that rate must be driven by the market, or you end up with imbalanced, disruptive absurdities like the federal government claiming to exchange gold at $35 an ounce when it's actually worth over $100 an ounce.

Aetius, can you give us an economist's article or summary of what you are suggesting?

Sure - Section II of Rothbard's "What Has Government Done to Our Money?".

For example, you said quite clearly that gold was infinitely divisible, and that currency could simply be issued based on any amount of gold in order to address a lack of currency, but then you *denied* that this was inflationary, when in fact it seems to be the very definition of one of the causes of inflation (excessive increase in money supply).

You're making unfounded assumptions, particularly about the issuance of a currency. With modern technology, the dollar is also effectively infinitely divisible - I could easily pay $3.49.9 for a gallon of gas, for example. And note that by definition, divisibility does not have any impact at all on inflation or deflation, it's simply the ability to use the money in smaller units.

Such divisibility is not a concern for fiat currencies, since they only decrease in value over the long term. Their problem is the opposite one of worthless pennies and ten trillion dollar bills. It is, however, a concern for a competitive commodity currency, which should experience an increase in value on a regular basis.

The example I gave was that any amount of gold would do to serve as a currency due to that high divisibility. You could base our entire monetary system off of a kilogram of gold, if that was all you had. The only change would be the denominations of gold in use - perhaps 0.000001 gram instead of 1 gram in a system that was based on the current amount of gold in world circulation. There would be no "currency" issued, only the gold in various forms. If a gram of gold became so valuable that it was inconvenient to use, then a half-gram or 0.1 grams could be used instead. There's obviously no inflation involved with that.

(Above, you use the term "highly divisible" to get past what is an actual problem, economies running out of exchange tokens. The only conclusion I can draw is that you somehow expect to issue more tokens without damaging the value of the currency. Note that you can't argue that running out of currency is not a problem, as it's *historically* been a problem in various economies including US.)

The historical American problems with currency are almost entirely problems stemming from Gresham's Law and government price-fixing, not a shortage of actual currency.

You've also said that the gold standard is *not* designed to encourage price stability, but then you say it's *highly* resistant to inflation. Um, that *is* one of the definitions of price stability - the lack of major inflation or deflation over time. Can you see why I'm having trouble here?

Only because you're changing your definition of inflation. Inflation is the expansion of the money supply - it may or may not result in increased prices, depending on the many other factors that influence prices. A a gold specie standard would be likely to cause prices to fall slowly over time, as it did during the early American periods in the absence of various inflationary efforts.

Your definition of gold specie standard seems at odds with the ones I've found. For example, Wikipedia has it as "a system in which the monetary unit is associated with circulating gold coins, or with the unit of value defined in terms of one particular circulating gold coin in conjunction with subsidiary coinage made from a lesser valuable metal." Now, Ron Paul and you envision that the circulating gold coins will be supplemented with currency (ie, dollars).

I'm fairly certain that Paul is not that old-fashioned, and I certainly am not. Modern physical gold currency is often a certain amount of gold embedded in a plastic protective sheath that permits easy verification. A gold specie standard means that there is no other currency besides gold (yes, traditionally coins of a certain weight). It might include something like "warehouse receipts" that represent a certain amount of gold that is located elsewhere. However, if those receipts are not completely and immediately convertible into gold on demand, then you no longer have a gold specie standard.

It's not a "coins only" standard, which is emphatically what the gold specie standard has been *historically*; gold specie actually is defined as "gold coined money".

The gold specie standard has historically included all forms of gold, with coins being the most common and easiest to use. At various times, gold dust, gold nuggets, jewelry, gold bars, etc have been in use as currency under a gold specie standard with few difficulties - all that's necessary is a method to weigh the gold and perhaps determine purity in order to convert to gold coin-based prices.

So here's what I think I'm hearing you say: Circulate dollars (like we have now) and gold coins. Fix an initial transfer rate of dollars to gold. Let the market determine the value of dollars versus other currencies, and also the value of gold itself in various currencies. Now let the exchange rate of dollars to gold float. Is that correct?

Sigh. No. All that is required is to make gold legal to use as currency again, and the government should stop prosecuting people who use or encourage the use of hard currency. The government may continue to circulate dollars for a time - such a change cannot be made overnight, and indeed should not, but there has to be a time limit, otherwise the incentives are too great. (That's not too big of a deal, though, because in a competitive system the dollar will devalue to virtually nothing in short order.) No gold coins should be issued or controlled by federal or state governments in any way. The market conversion rate between gold and dollars, as well as other currencies is already known, and should be deliberately left alone to fluctuate as needed.

I and I'm sure others don't have an understanding of what your system actually is, and I'm getting tired of shining lights in one side of the box and seeing the beams come out of unexpected places. :-)

I'm not sure why it's confusing, since I've been explaining the same thing over and over in different ways. This is the simplest explanation I can think of: the government should get out of the currency business entirely. Does that at least make sense?

Robear wrote:

This is flat-out a requirement that the states can't circulate anything other than gold or silver, or drafts based upon them - thus, the government was setting the definition of legal tender for use by all citizens.

No, it's not. It's upholding the clear Constitutional requirement that the states cannot do business in anything other than gold and silver (which includes their dealings with the federal government). It says nothing about private issuance of currency, nor what currencies citizens chose to use among themselves. It only established legal tender as far as the state governments were concerned.

Gold and silver *were* the dominant unit of exchange, because there were *defined* to be - as you noted, without the *government* making that choice, the states might have picked all sorts of different standards. Government is still needed to set the rules.

Quite the contrary - it was government acknowledgement of the existing system. The rules had already been defined, and gold and silver were already the dominant unit of exchange before the American government was created.

Again, that's not answering the question. Why were they both discarded? What problems led to the changes?

Sigh. It is answering the question. They were not discarded, they were forcibly made illegal. The problem, singular, that led to them being made illegal was that the government needed resources and didn't want to raise taxes - the overwhelmingly popular reason for government currency debasement.

While I do understand that early banks were corrupt and implemented poor policy, bear in mind that between the end of the first Bank of the US charter in 1811 and the institution of the Second Bank in 1816, we had no central bank controlling monetary policy. It was left up to the states and the private banks. This is a situation you are recommending, and yet, it was a complete disaster.

Dear god, no - why would you think that? The state banks were incredibly corrupt and highly politically connected, typically requiring a charter from the legislature to operate which had to be lobbied for. The legislatures, in turn, provided them protection by suspending specie payments when necessary and using them to borrow money for government projects. It was a terrible cronyist system made worse by the addition of the Bank of the U.S..

The country was under a silver standard; indeed, a silver *specie* standard at this time with gold, silver and convertible dollars circulating, but both private and state banks took the rational step of inflating in order to deal with the massive war debt, in the absence of any controlling policy to the contrary.

The country was not on a specie standard, because the banks were permitted to inflate and then protected from the consequences. The moral hazard created by government protection of the banks made inflating appear to be without consequences, which is a grave problem.

Without a central bank to set policy, the markets acted in such a way as to destroy the monetary foundation of the country in order to get out from under debt. And the commodity standard did *nothing* to prevent this or ameliorate the damage.

It would have, if permitted to operate - but even then, government interference prevented the market from working. It wasn't the markets that acted to destroy the monetary foundation, it was the state and federal governments.

Aetius wrote:

Deflationary/inflationary periods were caused by rampant inflation and ensuing market corrections; corruption and abuse of private mints is mitigated by competition; speculation in competing currencies is a function of inflation, and thus does not occur in a strict gold specie standard; there's no evidence that gold hoarding has any significant impact on the economy; and bank runs are caused by inflation and/or fractional reserve lending, which should both be considered fraud.

That is a *huge* hunk of assertions. Some of it is demonstrably incorrect - there was *tremendous* competition between private mints and state banks in the 19th century, which did nothing to prevent abuse and corruption.

Gosh, could that be because they weren't permitted to fail, and were often assisted in their inflation by the state and federal governments? You can't blame competition for failing when it wasn't permitted to function and subverted at every turn.

Other points are interpreted differently by different schools of economic thought and thus are not as definite as you make them out to be (the interpretation of periods of deflation and inflation, for example, and the idea that speculation is caused by inflation).

Well, okay. Of course, other schools of thought said that high inflation and high unemployment can't co-exist, so I take their recommendations with a grain of salt.

In fact, currency speculation occurs even under a metallic specie standard, and did happen historically.

And again, the reason for this is because the specie standard was routinely ignored or actively subverted by the governments in question, leading to the profitability of speculating. How would one speculate on gold other than holding it in savings?

And bank runs have been famously shown to be caused by *psychological* factors - irrational or rational fears - as much as actual circumstances.

Okay. Explain to me, then, why someone would remove their deposits from a 100% reserve bank. Why would I take my gold out of a safety deposit box, for example? The only reason would be that I doubt the honesty of the bank. And if I doubt that, there's one sure way to verify it - take my gold out! With an honest 100% reserve bank, my fears are immediately put to rest, as are all the other depositors. Thus the bank run is thwarted.

The psychological factors of bank runs always have to do with fractional-reserve lending, which is inherently dishonest. When the bank's viability comes into doubt, a bank run occurs because people understandably do not want to lose their deposits. In fact, their fears are quite rational, because it's well known that the bank cannot, in fact, restore all deposits to their supposed owners!

Saying a 100% reserve bank would suffer a bank run is like saying that my safe at home is going to suffer a bank run - it doesn't make logical sense.

Are there, or are there not, any countries using Austrian School principles?

You know the answer - there are times and places where a gold standard was approximated and examples of Austrian principles can be seen in action - usually in international trade. Further, I'm amused by this argument. First, you claim that "going back" to a gold standard is "ignoring decades of progress", then you ask if there's any examples of its use! How can it be "going back" if no one has ever used it? The Austrian School was built from examining past failures, and trying to recognize the core causes.

The fact that we are not sitting the ruins of American cities picking old trash heaps for recycling shows that the fiat system is in some useful way successful. It's not perfect - no one argues that - but it's been shown to be durable and useful. Failure is, after all, an excellent way to learn.

No, it shows that even a partially free market is incredibly resilient and able to tolerate numerous and systemic disruptions. It's certainly not durable - it's only been in its current form for less than a hundred years, and it's already in serious trouble. An orderly transition to a better system is definitely preferable to a governmental and societal meltdown.

But the Austrian School principles have been tried, in the past - and failed in much bigger ways than the system we have now. Commodity standards, commodity money, decentralization and deregulation of banking - for all of these there are extremely bad results in history, which is why they are avoided now.

So ... there's no countries that have used Austrian School principles, yet they have been tried in the past? Could you give me some examples? Where and when has a competitive currency market and decentralization and deregulation of banking actually been tried?

Currency is a natural monopoly.

Taxes can only be paid in what the state deems a currency. This gives currency value.

Gold and silver or sea shells or whatever backing is always and everywhere a government law. It is this that gives it value.

MMT (state-theory of money) is Austrian's nemesis. A better theory of money gives better predictions.

http://moslereconomics.com/2011/12/3...

And Tsy yields at record lows!

Even with $trillion federal deficits!

Even with the S and P downgrade!

Even with large foreign holdings of US Treasury securities!

Who would have thought?

Happy New Year to all!!!

So ... there's no countries that have used Austrian School principles, yet they have been tried in the past? Could you give me some examples? Where and when has a competitive currency market and decentralization and deregulation of banking actually been tried?

Well, several times in the 19th century and the late 18th century. All pretty tough times economically (one of them was 1811 to 1816, where the magic of those things could really have shone, but somehow collapsed into corruption.) It's important to remember that system vulnerabilities are important, too. Or are you the only one who gets to rant about the exploitation of a system?

I'll take a look at Rothbard's reference above. Thanks for your patience. There really is a lot confusing here; for example, you feel Ron Paul would never be so "old-fashioned" as to recommend both gold and currency circulating, but then a few paragraphs later you allow as to how that might be *necessary*. Which again creates questions like "How much gold will you get for your dollar?" and "Why did my savings, my salary and my stock values evaporate while that guy next door who collected gold coins is now a millionaire?"

I look forward to Rothbard's explanations.

Aetius, just to check, you are aware that Rothbard is an - THE, perhaps - anarcho-capitalist? Anarchy is the highest form of capitalism, and all that?

I usually can at least follow what's going on here, but I got a little lost in the line-by-line quoting and counter quoting above, so I apologize if this is obvious to everyone else.

Aetius - In your gold specie system, do 'dollars' exist at all? Or would our paper currency instead be replaced entirely by 1 gram, 1 half-gram, 1 decigram et cetera notes. Is the government still the exclusive printer of that paper currency, or can anyone back currency with their own reserves?

Hopped Up On Koolaid wrote:

Aetius - In your gold specie system, do 'dollars' exist at all? Or would our paper currency instead be replaced entirely by 1 gram, 1 half-gram, 1 decigram et cetera notes. Is the government still the exclusive printer of that paper currency, or can anyone back currency with their own reserves?

Preferably no, yes, no, and yes. As I noted above, the purpose of calling something a "dollar" is a semantic one - it separates the dollar from gold in people's minds. The vagueness of what a "dollar" is one of the things that makes inflation more difficult to detect. The government being the exclusive printer of that paper currency simply means that the government is the first benefactor of any inflation, and thus has no incentive to police itself.

Robear wrote:

Aetius, just to check, you are aware that Rothbard is an - THE, perhaps - anarcho-capitalist? Anarchy is the highest form of capitalism, and all that?

Quite aware, yes. That's really unrelated to this discussion, though.

goman wrote:

Currency is a natural monopoly.

Hardly. Commodities became money because it was more convenient and more efficient than barter. This is easily proven by the fact that gold was used as currency historically by international traders, who were not under any obligation to accept the national currencies (and indeed, often would not, because they were worthless at home). The history of wampum is also highly instructive as to the market-driven nature of money and money-like commodities.

Note that this doesn't mean that government backing can't be used to create money. Indeed, the whole argument is that such currency systems are inherently exploitative and redistributive. Government currencies are economically sick from the very beginning, and get worse over time.

Quite aware, yes. That's really unrelated to this discussion, though.

No, it's not, because the 112 page book you pointed me to is entitled "What has government done to our money?". If your system of money is based on principles of anarchy, that's got to be part of the consideration of it's suggestions.

Aetius wrote:
Robear wrote:

Aetius, just to check, you are aware that Rothbard is an - THE, perhaps - anarcho-capitalist? Anarchy is the highest form of capitalism, and all that?

Quite aware, yes. That's really unrelated to this discussion, though.

goman wrote:

Currency is a natural monopoly.

Hardly. Commodities became money because it was more convenient and more efficient than barter. This is easily proven by the fact that gold was used as currency historically by international traders, who were not under any obligation to accept the national currencies (and indeed, often would not, because they were worthless at home). The history of wampum is also highly instructive as to the market-driven nature of money and money-like commodities.

Note that this doesn't mean that government backing can't be used to create money. Indeed, the whole argument is that such currency systems are inherently exploitative and redistributive. Government currencies are economically sick from the very beginning, and get worse over time.

You think the market and government as opposites. But I think of them as the same structure.

Anyway.. The two or more traders coming together to trade goods and because like you said barter pretty much sucks (barter really never happened) always go to marketplaces. Marketplaces were never stateless. They have always been governed. Using wampum or gold as a unit of account is always done through agreement. Agreement that is not ad-hoc but rather state enforced through treaties.

State-backed currency is the only currency that ever happened. Why else there be so many ideas of what currency is if it doesn't always come back to what government or proto-government says "this is currency."

The gold standard is state-backed through treaties or agreements.