Pros and Cons of a Gold Standard

[Gumby]

I definitely see the appeal of a gold standard, but — generally speaking — what are everyone's thoughts on the arguments against a gold standard?

Mainly...

Gold Standard: Disadvantages

• The total amount of gold that has ever been mined has been estimated at around 142,000 metric tons. This is less than the value of circulating money in the U.S. alone, where more than $8.3 trillion is in circulation or in deposit (M2). Therefore, a return to the gold standard, if also combined with a mandated end to fractional reserve banking, would result in a significant increase in the current value of gold, which may limit its use in current applications. However, this is specifically a disadvantage of return to the gold standard and not the efficacy of the gold standard itself. Some gold standard advocates consider this to be both acceptable and necessary The amount of such base currency (M0) is only about one tenth as much as the figure (M2) listed above.
• Deflation rewards savers and punishes debtors. Real debt burdens therefore rise, causing borrowers to cut spending to service their debts or to default. Lenders become wealthier, but may choose to save some of their additional wealth rather than spending it all. The overall amount of expenditure is therefore likely to fall. Deflation also prevents a central bank of its ability to stimulate spending. However in practice it has always been possible for governments to control deflation by leaving the gold standard or by artificial expenditure.
• Mainstream economists believe that economic recessions can be largely mitigated by increasing money supply during economic downturns. Following a gold standard would mean that the amount of money would be determined by the supply of gold, and hence monetary policy could no longer be used to stabilize the economy in times of economic recession. Such reason is often employed to partially blame the gold standard for the Great Depression, citing that the Federal Reserve couldn't expand credit enough to offset the deflationary forces at work in the market. Opponents of this viewpoint have argued that gold stocks were available to the Federal Reserve for credit expansion in the early 1930s, but Fed operatives failed to utilize them.
• Monetary policy would essentially be determined by the rate of gold production. Fluctuations in the amount of gold that is mined could cause inflation if there is an increase, or deflation if there is a decrease. Some hold the view that this contributed to the severity and length of the Great Depression as the gold standard forced the central banks to keep monetary policy too tight, creating deflation. Milton Friedman however argued that the main cause of the severity of the Great Depression in the United States was the Federal Reserve, and not the gold standard, as they willfully kept monetary policy tighter than was required by the gold standard.[38] Additionally, three increases by the Federal Reserve in bank reserve requirements occurred in 1936 and 1937, which doubled bank reserve requirements.
• Although the gold standard gives long-term price stability, it does in the short term bring high price volatility. In the United States from 1879 to 1913, the coefficient of variation of the annual change in price levels was 17.0, whereas from 1943 to 1990 it was only 0.88. It has been argued by, among others, Anna Schwartz that this kind of instability in short-term price levels can lead to financial instability as lenders and borrowers become uncertain about the value of debt.
• James Hamilton contended that the gold standard may be susceptible to speculative attacks when a government's financial position appears weak, although others contend that this very threat discourages governments' engaging in risky policy (see Moral Hazard). For example, some believe that the United States was forced to raise its interest rates in the middle of the Great Depression to defend the credibility of its currency after unusually easy credit policies in the 1920s. This disadvantage however is shared by all fixed exchange rate regimes and not just limited to gold money. All fixed currencies that appear weak are subject to speculative attack.
• If a country wanted to devalue its currency, it would generally produce sharper changes than the smooth declines seen in fiat currencies, depending on the method of devaluation.
• Mainstream economists believe that a low, steady rate of inflation is ideal for an economy because it incentivizes people to purchase consumable goods now rather than later. This low, steady rate of inflation is most easily achieved with a fiat currency system in which the monetary authority is free to regulate money supply.

Source: Gold Standard: Disadvantages

[TBV]

• I definitely see the appeal of a gold standard, but — generally speaking — what are everyone's thoughts on the arguments against a gold standard?
  
  Mainly...
  

  Gold Standard: Disadvantages
  

  • The total amount of gold that has ever been mined has been estimated at around 142,000 metric tons. This is less than the value of circulating money in the U.S. alone, where more than $8.3 trillion is in circulation or in deposit (M2). Therefore, a return to the gold standard, if also combined with a mandated end to fractional reserve banking, would result in a significant increase in the current value of gold, which may limit its use in current applications. However, this is specifically a disadvantage of return to the gold standard and not the efficacy of the gold standard itself. Some gold standard advocates consider this to be both acceptable and necessary The amount of such base currency (M0) is only about one tenth as much as the figure (M2) listed above.  
  • Deflation rewards savers and punishes debtors. Real debt burdens therefore rise, causing borrowers to cut spending to service their debts or to default. Lenders become wealthier, but may choose to save some of their additional wealth rather than spending it all. The overall amount of expenditure is therefore likely to fall. Deflation also prevents a central bank of its ability to stimulate spending. However in practice it has always been possible for governments to control deflation by leaving the gold standard or by artificial expenditure. Don't debt burdens rise when debtors are encouraged to borrow beyond their means?  The reverse is true when people face the music.  Hasn't consumer debt dropped since 2009 even though we experienced deflation?  And while government can certainly stimulate certain kinds of highly visible spending (often to reward political clients), it often comes at the expense of other types of spending, which being unanticipated, are ignored. So no net benefit.  Also, after the experience of the last three years, can we really be so sure of the beneficial effects of deficit spending?
    
    [*]Mainstream economists believe that economic recessions can be largely mitigated by increasing money supply during economic downturns. Following a gold standard would mean that the amount of money would be determined by the supply of gold, and hence monetary policy could no longer be used to stabilize the economy in times of economic recession. Such reason is often employed to partially blame the gold standard for the Great Depression, citing that the Federal Reserve couldn't expand credit enough to offset the deflationary forces at work in the market. Opponents of this viewpoint have argued that gold stocks were available to the Federal Reserve for credit expansion in the early 1930s, but Fed operatives failed to utilize them. Prior to the era of government intervention to "mitigate" recessions, they tended to be fairly brief events.  Since then, we've seen lengthier durations of up to 10 years.  Can the remedy be worse than the disease?
    
    [*]Monetary policy would essentially be determined by the rate of gold production. Fluctuations in the amount of gold that is mined could cause inflation if there is an increase, or deflation if there is a decrease. Some hold the view that this contributed to the severity and length of the Great Depression as the gold standard forced the central banks to keep monetary policy too tight, creating deflation. Milton Friedman however argued that the main cause of the severity of the Great Depression in the United States was the Federal Reserve, and not the gold standard, as they willfully kept monetary policy tighter than was required by the gold standard.[38] Additionally, three increases by the Federal Reserve in bank reserve requirements occurred in 1936 and 1937, which doubled bank reserve requirements.
    
    [*]Although the gold standard gives long-term price stability, it does in the short term bring high price volatility. In the United States from 1879 to 1913, the coefficient of variation of the annual change in price levels was 17.0, whereas from 1943 to 1990 it was only 0.88. It has been argued by, among others, Anna Schwartz that this kind of instability in short-term price levels can lead to financial instability as lenders and borrowers become uncertain about the value of debt. This is indeed a serious shortcoming.  So glad we have seen none of that under our present fiat currency system!!!
    
    [*]James Hamilton contended that the gold standard may be susceptible to speculative attacks when a government's financial position appears weak, although others contend that this very threat discourages governments' engaging in risky policy (see Moral Hazard). For example, some believe that the United States was forced to raise its interest rates in the middle of the Great Depression to defend the credibility of its currency after unusually easy credit policies in the 1920s. This disadvantage however is shared by all fixed exchange rate regimes and not just limited to gold money. All fixed currencies that appear weak are subject to speculative attack.
    
    [*]If a country wanted to devalue its currency, it would generally produce sharper changes than the smooth declines seen in fiat currencies, depending on the method of devaluation.  Are we speaking of such smooth declines as Mexico's 30% devaluation in 1994, or Argentina's 75% devaluation in 2002, or Iceland's 80% devaluation in 2008?
    
    [*]Mainstream economists believe that a low, steady rate of inflation is ideal for an economy because it incentivizes people to purchase consumable goods now rather than later. This low, steady rate of inflation is most easily achieved with a fiat currency system in which the monetary authority is free to regulate money supply.  It's also ideal for concealing from voters the diminution of their life savings, while helping to generate illusory capital gains based on inflated valuations.  Of course, those (non-real) gains are then subject to taxation.  Thus, the people end up with both inflation and taxation.  Ideal indeed!  But for whom?

  Source: Gold Standard: Disadvantages

[moda0306]

Here's my view with lots of doubt in between the lines:

Needing a medium of exchange  is an unfortunate chink in the market armor.  Not having a medium of exchange causes an unfortunate amount of friction in markets where otherwise harmony could exist.  Luckily, we have this extremely durable, nice looking piece of metal whose worth as a piece of rare jewelry is far more than any industrial value it might have (thereby sustaining its use as money), so for centuries this could serve as a market-driven medium of exchange... the best our market/god/nature could give us.  To be honest, we're quite lucky that we even have a metal like it, because a rare, pretty metal that doesn't deteriorate at all seems pretty convenient to me.

The use of gold as a medium of exchange didn't require government's hand.  Likewise, without government people still developed systems of defense of their property and paths of travel, but these were only efficient enough on a small scale.  If an economy "wanted" to grow, it'd need a more organized system of defense to protect its growing wealth and a more centralized, uniform, and efficient transportation infrastructure.

Likewise, (I believe) gold as a precious monetary metal eventually became very difficult to use as economies grew.  There's only so much of it, but that doesn't mean that the public will forever view it as valuable enough to prevent those frictions from creeping back into an economy trying to grow, not to mention hauling it around everywhere.  The first solution to this was bank notes, which made the economy a lot lighter on its feet, since people didn't need to haul around sacks of gold with them to engage in honest transaction.  Eventually, even this proved frictional as economies grew even more, and countries started having to ship tons and tons of gold back and forth between each other.

Once again, at this point, people decided, much like with their military and transportation infrastructure, that now gold as money was starting to appear to have too many frictions associated with it to be left to the market to negotiate without stalling growth.  A more efficient (and by definition, more centrally controlled and manipulatable (like military & transportation)) system hopefully could be implimented so the economy could continue to grow.

I could get into the detail of how the gold standard was dropped over time, but 1) I'm not 100% versed on the mechanics of it, and 2) you probably see where I'm going with this....

Certain things within a certain level of economic size are just fine if left up to individuals and markets.  Even sewer and plumbing infrastructure, much less other utilities, were one time never needed.  In order, though, for an economy to grow within a defined amount of space, it must rid itself of needless frictions, even if it takes the power of government to impose the lubrication.  At some point, the moral issues of creating a military, or a centralized transportation network, or a fiat currency, are probably required to remove the inefficiencies that are holding the economy back from growth.

Do new inefficiencies arise?  Of course, but are they as bad as the old ones?  Is the crony capitalism of the military industrial complex worth it in terms of having the security?  Is a "bridge to nowhere" here and there worth it to have a consistent, interlinked system of freeways & train stations & airports?  Is losing 1-3% per year in real value worth it to not be burdened by a gold-standard in a much, much larger 21st century economy of 1's and 0's?

To be clear, I'm not in favor of what Roosevelt did in gold confiscation, and I'm still working through my thoughts on all this.

[TBV]

The British built much of the world's railroads, maintained perhaps the world's best army and navy, ruled a vast empire, and controlled the world's commerce....all the while operating under the "inefficiencies" of a gold standard.

[moda0306]

I'm simply saying that there's a point at which gold becomes too inefficient and ineffective as a currency to support a world economy... not that I know at what point that is.

[stone]

Sometimes people talk as though all money was gold until 1972. Credit money also has a very long history (see the link to the medieval tally stick below). Of course silver was also used as money more than gold for most of history. I guess in medieval times, people adopted credit money because the person with goods or services to sell knew they would not find a buyer who possessed gold or silver. I think that principle is behind credit money in general.
My off the wall take on it all is that ownership needs to be widely distributed. If that were the case then we would not need our current system where monetary expansion gives cover for otherwise unsustainable credit. Basically in our system debts are largely paid off by credit expansion. My guess is that in a less expansive monetary system there would need to be much more ownership in the form of equity, much less credit and much more progressive taxation (such as an asset tax).
There were bank runs, financial panics and unemployment in the gold standard era. People were sent to debtors prisons.

http://www.thelocal.de/sci-tech/20110414-34399.html

http://en.wikipedia.org/wiki/History_of_the_rupee

http://en.wikipedia.org/wiki/Spanish_dollar

[TBV]

In every era, regardless of the monetary system, there will be bank failures and panics so long as government allows banks to pyramid assets to dangerously inflate the money supply.  "Allowing them" takes the form of holding banks blameless when such activities render them insolvent.  Instead of losing their capital through bankruptcy, irresponsible bankers are bailed out at the expense of more responsible institutions, or the general public.  Soon, everyone learns that it pays to be irresponsible.  THAT is it the factor which most increases the likelihood and severity of subsequent financial panics. 

Bank failures are merely a symptom of the dangerously speculative banking practices which preceded them. We should focus on preventing such practices, not making them less risky for the speculators.  A nominal gold standard is a toothless fiction unless it entails the promise of actual redemption in gold, which serves to limit such mischief.  The political benefits of encouraging easy money are too great to expect government alone to fill that role.  And the Fed is increasingly playing the enabler, as it intervenes in the bond market to alter the normal market response to unprecedented deficit spending.  A fully-redeemable gold standard could, in my opinion, overcome such shortcomings. You might regard it as a heaping, steaming bowl of peas: one which everyone must consume, like it or not.

[HB Reader]

Gumby –

That is a great question for this forum.  I may get into the specific points in a later post, but I can't help but make a bigger philosopical comment which I'm sure most of you have heard before in one form or another.

It seems to me that one problem with using the rational “pros and cons”? dialectic in discussing this topic is that historically neither development nor abandonment of the use of gold as money (or to back money) has ever been the result of such rational debate.  For virtually all of recorded history it has been used as money (or backing) because it is known and trusted to be impervious to counterfeiting or unrestrained production.  It has been periodically abandoned or marginalized by governments because it often seems inefficient and to get in the way of human “progress,”? or “overreach,”? depending on your point of view.  In short, the value or curse of gold really has more to do with one’s view of the honesty and competence of political man than it does with the mechanics of an economy.

My view is that an overwhelming tendency in all democracies is for officials, however well-intentioned, to be elected by promising to deliver “more”? rather than “less”? in terms of government actions (in the areas of economics, security, public health or morality, etc.), especially in the near term, than their opponents.  It seems to me that in such an environment arguing that the polity (or any polity with a captive "lender of last resort" central bank) should have the complete and unfettered right to manipulate the unit of account with which we measure the value of each individual’s labor and production is a prescription for disaster.

I admit that my bias against a fiat standard comes from viewing the topic from a historical perspective.  I also know that approaching problems with the logic that “it hasn’t worked in the past, therefore it can’t work in the future”? would never result in any progress whatsoever, especially in the realm of science and invention.  But as the Austrian economists like to point out, we aren’t dealing with physics, we are dealing with human nature which doesn't seem to change much over the millennia.

[Indices]

There were depressions while we were on a gold standard. Read about the Long Depression (1870s-1890s) on Wikipedia.

Before there was a Fed, Congress instituted Inflation Bills that did the same thing as QE. There were also silver buyback programs that acted like QE.

The idea that the gold standard prevented depressions is not true. The idea that the Fed causes trouble misreads history. Some other form of government will take over the Fed's duties in the event of a crisis.

A gold standard does not prevent inflation. A government can simply legislate that the devaluing of a currency.

[AdamA]

Gumby –

That is a great question for this forum.  I may get into the specific points in a later post, but I can't help but make a bigger philosopical comment which I'm sure most of you have heard before in one form or another.

It seems to me that one problem with using the rational “pros and cons”? dialectic in discussing this topic is that historically neither development nor abandonment of the use of gold as money (or to back money) has ever been the result of such rational debate.  For virtually all of recorded history it has been used as money (or backing) because it is known and trusted to be impervious to counterfeiting or unrestrained production.  It has been periodically abandoned or marginalized by governments because it often seems inefficient and to get in the way of human “progress,”? or “overreach,”? depending on your point of view.  In short, the value or curse of gold really has more to do with one’s view of the honesty and competence of political man than it does with the mechanics of an economy.

My view is that an overwhelming tendency in all democracies is for officials, however well-intentioned, to be elected by promising to deliver “more”? rather than “less”? in terms of government actions (in the areas of economics, security, public health or morality, etc.), especially in the near term, than their opponents.  It seems to me that in such an environment arguing that the polity should have the complete and unfettered right to manipulate the units of account with which we measure the value of each individual’s labor and production is a prescription for disaster.

I admit that my bias against a fiat standard comes from viewing the topic from a historical perspective.  I also know that approaching problems with the logic that “it hasn’t worked past, therefore it can’t work in the future”? would never result in any progress whatsoever, especially in the realm of science and invention.  But as the Austrian economists like to point out, we aren’t dealing with physics, we are dealing with human nature which doesn't seem to change much over the millennia.

HB reader--I really enjoy your posts.  Keep it up.

[Gumby]

Gumby –

That is a great question for this forum.  I may get into the specific points in a later post, but I can't help but make a bigger philosopical comment which I'm sure most of you have heard before in one form or another.

It seems to me that one problem with using the rational “pros and cons”? dialectic in discussing this topic is that historically neither development nor abandonment of the use of gold as money (or to back money) has ever been the result of such rational debate.  For virtually all of recorded history it has been used as money (or backing) because it is known and trusted to be impervious to counterfeiting or unrestrained production.  It has been periodically abandoned or marginalized by governments because it often seems inefficient and to get in the way of human “progress,”? or “overreach,”? depending on your point of view.  In short, the value or curse of gold really has more to do with one’s view of the honesty and competence of political man than it does with the mechanics of an economy.

My view is that an overwhelming tendency in all democracies is for officials, however well-intentioned, to be elected by promising to deliver “more”? rather than “less”? in terms of government actions (in the areas of economics, security, public health or morality, etc.), especially in the near term, than their opponents.  It seems to me that in such an environment arguing that the polity should have the complete and unfettered right to manipulate the units of account with which we measure the value of each individual’s labor and production is a prescription for disaster.

I admit that my bias against a fiat standard comes from viewing the topic from a historical perspective.  I also know that approaching problems with the logic that “it hasn’t worked past, therefore it can’t work in the future”? would never result in any progress whatsoever, especially in the realm of science and invention.  But as the Austrian economists like to point out, we aren’t dealing with physics, we are dealing with human nature which doesn't seem to change much over the millennia.

HB reader--I really enjoy your posts.  Keep it up.

Yes. Very refreshing point of view. Thanks again HBReader.

[TBV]

There were depressions while we were on a gold standard. Read about the Long Depression (1870s-1890s) on Wikipedia. Well, if you check you'll find that the "Panic of 1873" was linked to a huge federal government debt, a railroad construction bubble that had been encouraged by the federal government, the inflationary National Banking System (1864-on) that led to the pyramiding of deposits, and the government's decision not to honor silver as legal tender except in small coins.  From the early Civil War to 1879, the obligatory legal tender paper money was the highly devalued "greenback" which was not backed by either gold or silver.  The government did not resume the convertability of paper money into gold until 1879.  So gold can hardly be blamed.  Everywhere you look, the culprit was government-promoted easy money, not hard money.

Before there was a Fed, Congress instituted Inflation Bills that did the same thing as QE. There were also silver buyback programs that acted like QE.

The idea that the gold standard prevented depressions is not true. Correct.  But since no one has made such a claim, what is the point? In the same vein, diet and exercise habitually fail to prevent aging and death.  Should we reject them as well? The idea that the Fed causes trouble misreads history. Perhaps, but I don't see how this follows from what you've said so far.  But, shouldn't the practice of intentionally inflating our currency be seen as "causing trouble?"  The real value of the dollar has fallen from $1 when the Fed was created to just 4 cents today.  Isn't that troublesome? Some other form of government will take over the Fed's duties in the event of a crisis.

A gold standard does not prevent inflation. A government can simply legislate that the devaluing of a currency. Though nothing is fool-proof, fully convertible gold-backed currency is the best defense against inflation next to actual gold specie coins (the value of whose metal content cannot be retroactively manipulated by the state.)  Fiat currency, on the other hand, provides no such defense, either prospectively or retroactively. You are right to be wary of government manipulation of currency, but I can't see how that leads to a defense of the present state of affairs.  One solution, which has been put forward by some, is to dispense with specie/currency exchange rates entirely and denominate money directly as weights of gold. e.g. one gold gram.  That would go a long way to addressing your concern.  

[moda0306]

All good points...

I think there are a couple of elements of a fiat currency that need to be viewed in isolation when comparing to a gold standard.

1) Convertability - If a currency is not convertible to gold (or a commodity basket, etc) then it is able to be devalued or expanded, however you see it.  Yes, this punishes savers, but any saver must realize the risk of saving is different in a non-convertable world, and invest accordingly.  This investment might often be riskier, so this is called malinvestment if you're an Austrian, or full-employment policy and more efficient use of capacity by Keynesians & monetarists.

2) Subsidized Fractional-Reserve Banking - This is where I think the moral crisis usually lies.  Creating a "superhighway" for banks to "bend" savings into loaning adds risk to the system.  Most people save with the intention of preserving something for later, not loaning the money to their neighbor for their McMansion.  The system is trying to have its cake and eat it too... keep enough reserves in there to prevent disaster, but allow the rest to be lent out in accordance to supply & demand of money & debt.  This isn't awful logic, but the degree that leverage is being used and the serviceability of that leverage is now highly suspect.

It's fractional reserve banking that creates a system for trillions of dollars of what people think of as savings to be re-lent out to others... some as very reasonable short-term business loans or responsible mortgages, and some not-so-much.  It's this leverage that usually causes the big bubble problems, IMO.  I don't think these would be nearly the problem they are in a system of either high-reserve or 100% reserve banking, but within a fully sovereign fiat currency.

I believe from 1913-19?? we had a system of fractional-reserve gold standard banking, did we not (kind of odd to think of the two as co-existing)?  The banks were only required to hold xx% of the gold that would come due upon full redemption of all deposits?  This is why I see the fiat currency issue as slightly different than the fractional reserve banking issue, and maybe they need to be discussed separately when talking about cause/effect.

This is also why I'm much more of a proponant of fiscal policy than using fractional-reserve strategies, interest-rate policies, and other government mandates/subsidies to expand lending.  Yes, it's easier to control inflation when you are manipulating interest rates and reserve requirements than it is if you send debit-card stimulus out to people, but I think we have been trying to play on a more-and-more leveraged playing field for decades now, and it's time that we find a way to allow deleveraging without absolutely sucking the life out of the economic engine and let salt-of-the-earth businesses dry up and die... and pro-debt policies aren't going to achieve that as far as I can tell.  Maybe a mass liquidation of bad-debts would, but I think there would be systemic problems with that, and I think public fear would leave us chasing our balance-sheet tail, if you will, and asset prices would continue to plunge as we continue to try to liquidate the debt around them.

One observation of our current situation vs Japan's is the vast difference in private savings levels.  It seems that Japan, whether or not a large malinvestment or bubble led to their huge slump, has a populace of net-savers.  Ours our net borrowers.  We both have a sovereign floating fiat currency (and I'd imagine Japan has a fractional-reserve banking system).  What's the difference?  Is it just the people or is it some kind of government policy?  If it's the nature of the people, and not the monetary/fiscal policy, then maybe the private-sector balance sheet situation we've found ourselves in would have manifested itself anyway.  If it's a fundamental difference in their monetary/regulatory policy, then that would indicate that a fiat currency in-and-of-itself isn't to blame for private-sector balance sheets going to crap over the last 30 years.

My nervousness with a gold-standard is the idea of being beholden to foreign investors after years of trade-defecits.  Further, I think the world economies WANT a credit-risk-free currency with which to play with and back other currencies.  I'm really curious as to how many foreign US bond holders would even want to return us to convertability.

[AgAuMoney]

Though nothing is fool-proof, fully convertible gold-backed currency is the best defense against inflation next to actual gold specie coins (the value of whose metal content cannot be retroactively manipulated by the state.)  Fiat currency, on the other hand, provides no such defense, either prospectively or retroactively. You are right to be wary of government manipulation of currency, but I can't see how that leads to a defense of the present state of affairs.  One solution, which has been put forward by some, is to dispense with specie/currency exchange rates entirely and denominate money directly as weights of gold. e.g. one gold gram.  That would go a long way to addressing your concern.

Yup.

One note, in the long run it seemingly does not help to use weights as denominations.  See "pound" (or the full name "pound sterling" which also specified the purity) or "peso" or many other examples.  Those examples are exactly like us calling our money the the "pound" or the "ounce" or the "grain" or the "gram" or the "carat" or any of many other names for units of weight or mass which might be more or less familiar.  Instead the dollar (or Thaler) was named after the place where something roughly the size of that first silver thaler was originally made, instead of using a unit of weight.

Personally I don't think the name you use matters all that much and history seems to agree.  Didn't Shakespeare have something to say about that?    Our government was been given the authority to establish weights and measures, and one of the measures they delegated, the value of the dollar, has obviously been abused thru their neglect.

Thus as George Bernard Shaw said, "The most important thing about money is to maintain its stability... You have to choose between trusting the natural stability of gold and the honesty and intelligence of members of the government. With due respect for these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold."

[Indices]

There were depressions while we were on a gold standard. Read about the Long Depression (1870s-1890s) on Wikipedia. Well, if you check you'll find that the "Panic of 1873" was linked to a huge federal government debt, a railroad construction bubble that had been encouraged by the federal government, the inflationary National Banking System (1864-on) that led to the pyramiding of deposits, and the government's decision not to honor silver as legal tender except in small coins.  From the early Civil War to 1879, the obligatory legal tender paper money was the highly devalued "greenback" which was not backed by either gold or silver.  The government did not resume the convertability of paper money into gold until 1879.  So gold can hardly be blamed.  Everywhere you look, the culprit was government-promoted easy money, not hard money.

Before there was a Fed, Congress instituted Inflation Bills that did the same thing as QE. There were also silver buyback programs that acted like QE.

The idea that the gold standard prevented depressions is not true. Correct.  But since no one has made such a claim, what is the point? In the same vein, diet and exercise habitually fail to prevent aging and death.  Should we reject them as well? The idea that the Fed causes trouble misreads history. Perhaps, but I don't see how this follows from what you've said so far.  But, shouldn't the practice of intentionally inflating our currency be seen as "causing trouble?"  The real value of the dollar has fallen from $1 when the Fed was created to just 4 cents today.  Isn't that troublesome? Some other form of government will take over the Fed's duties in the event of a crisis.

A gold standard does not prevent inflation. A government can simply legislate that the devaluing of a currency. Though nothing is fool-proof, fully convertible gold-backed currency is the best defense against inflation next to actual gold specie coins (the value of whose metal content cannot be retroactively manipulated by the state.)  Fiat currency, on the other hand, provides no such defense, either prospectively or retroactively. You are right to be wary of government manipulation of currency, but I can't see how that leads to a defense of the present state of affairs.  One solution, which has been put forward by some, is to dispense with specie/currency exchange rates entirely and denominate money directly as weights of gold. e.g. one gold gram.  That would go a long way to addressing your concern.  

The problem with a gold standard is that at some point big businesses will demand that the government spend money on their businesses (which is what happened in the late 19th century with the railroads). Government will get into debt and devalue the currency to pay those debts. Yes a fiat currency has huge inflation risks, but a gold standard only works if everyone supports it, including the business community. History has shown this never lasts. Poor people aren't the only welfare queens, corporations are too. Advocates of a gold standard believe in a utopia of fiscal discipline. It can't be done.

[AgAuMoney]

I believe from 1913-19?? we had a system of fractional-reserve gold standard banking, did we not (kind of odd to think of the two as co-existing)?  The banks were only required to hold xx% of the gold that would come due upon full redemption of all deposits?  This is why I see the fiat currency issue as slightly different than the fractional reserve banking issue, and maybe they need to be discussed separately when talking about cause/effect.

Exactly correct, and in fact fractional reserve was practiced for centuries before then.  Every time it ends in bank problems, and one of the explicit purposes behind the Fed and most every central bank is to shield banks from the consequences of that behavior.

[AgAuMoney]

The problem with a gold standard is that at some point big businesses will demand that the government spend money on their businesses (which is what happened in the late 19th century with the railroads). Government will get into debt and devalue the currency to pay those debts. Yes a fiat currency has huge inflation risks, but a gold standard only works if everyone supports it, including the business community. History has shown this never lasts. Poor people aren't the only welfare queens, corporations are too. Advocates of a gold standard believe in a utopia of fiscal discipline. It can't be done.

How is that a problem with the gold standard?  It works the same way with fiat.  It seems you describe a problem of gov't with or without a gold standard, and if you give gov't power to do that, it will always do that.  Gold standard has nothing to do with it.

[TBV]

Indices:  Like AgAuMoney, I'm having a hard time following your logic.  Big business (which you seem not to admire) prefers inflationary easing, so let's just give them what they want?  Big government (which you also seem not to admire) will inevitably debase the currency, so why not just accept it? Huh?

Have you some third way that you haven't mentioned yet?  Otherwise, why would you prefer less protection against the above problems instead of more?

[Indices]

The problem with a gold standard is that at some point big businesses will demand that the government spend money on their businesses (which is what happened in the late 19th century with the railroads). Government will get into debt and devalue the currency to pay those debts. Yes a fiat currency has huge inflation risks, but a gold standard only works if everyone supports it, including the business community. History has shown this never lasts. Poor people aren't the only welfare queens, corporations are too. Advocates of a gold standard believe in a utopia of fiscal discipline. It can't be done.

How is that a problem with the gold standard?  It works the same way with fiat.  It seems you describe a problem of gov't with or without a gold standard, and if you give gov't power to do that, it will always do that.  Gold standard has nothing to do with it.

My point is that a gold standard is pointless. In a lot of ways it hinders good governance because a lot of government borrowing and spending is beneficial. A gold standard hinders government spending and borrowing.

[Indices]

Indices:  Like AgAuMoney, I'm having a hard time following your logic.  Big business (which you seem not to admire) prefers inflationary easing, so let's just give them what they want?  Big government (which you also seem not to admire) will inevitably debase the currency, so why not just accept it? Huh?

Have you some third way that you haven't mentioned yet?  Otherwise, why would you prefer less protection against the above problems instead of more.

Big business prefers a lot of things including low interest loans or outright grants. I have nothing against big business, just pointing out that they ask government for money.

There is no third way. It is inevitable that governments will turn to fiat currency. There are too many people and groups demanding money. I think of the world getting rid of the gold standard as an evolution.

Also in a way, we are STILL on a gold standard. The fact that Fed hoards so much gold is an implied gold standard. The more gold you own as a sovereign, the more confidence the world has in your economic stability. I suppose if the US were so deeply in debt that the amount of gold it held in reserve was such a significantly smaller amount than our debt that the markets would lose confidence in us. But I don't think we are at that point yet at all. Look how low interest rates are on US Treasuries. The bond market is obviously confident of our solvency.

[TBV]

The problem with a gold standard is that at some point big businesses will demand that the government spend money on their businesses (which is what happened in the late 19th century with the railroads). Government will get into debt and devalue the currency to pay those debts. Yes a fiat currency has huge inflation risks, but a gold standard only works if everyone supports it, including the business community. History has shown this never lasts. Poor people aren't the only welfare queens, corporations are too. Advocates of a gold standard believe in a utopia of fiscal discipline. It can't be done.

How is that a problem with the gold standard?  It works the same way with fiat.  It seems you describe a problem of gov't with or without a gold standard, and if you give gov't power to do that, it will always do that.  Gold standard has nothing to do with it.

My point is that a gold standard is pointless. In a lot of ways it hinders good governance because a lot of government borrowing and spending is beneficial. A gold standard hinders government spending and borrowing.

I thought so.  If I may be so bold, it appears your criticism of gold is not that it fails to do what it sets out to do, but that it might actually succeed.  Your last sentence says it all.

[Tortoise]

The problem with a gold standard is that at some point big businesses will demand that the government spend money on their businesses (which is what happened in the late 19th century with the railroads). Government will get into debt and devalue the currency to pay those debts. Yes a fiat currency has huge inflation risks, but a gold standard only works if everyone supports it, including the business community. History has shown this never lasts. Poor people aren't the only welfare queens, corporations are too. Advocates of a gold standard believe in a utopia of fiscal discipline. It can't be done.

That is why it's problematic to put the government in charge of defining and managing a nation's currency--even a gold-standard currency. The business community does not have the power to devalue currency; only the government does. Businesses often commit various abuses in partnership with the government, but that is only because the government's monopoly on the use of force provides the business community with the tool necessary to commit the abuses legally.

For me, the gold-standard issue boils down to the use of force. Why waste one's energy arguing the pros and cons of gold-standard currencies with various implementations? Why not simply let the market decide by removing force from the equation: Simply allow private-sector currencies to compete freely with the U.S. dollar. Allow people to freely form contracts with each other to exchange payments in whatever currency they choose.

If the U.S. dollar or any other currency is in fact the best possible currency for a given nation, then it will rise to the top in a market of freely-competing currencies. If a gold-standard currency simply doesn't work, as Indices and others on this thread are arguing, then it will certainly not rise to the top in a market of freely-competing currencies.

Talk is cheap. Give people the freedom to choose which currency (or currencies) they prefer to use in their daily transactions, and we will see very quickly which currencies survive and which do not.

[moda0306]

Tortoise,

I can see the benfits of your proposal, but I think it'd be the monetary equivalent of not setting up any kind of government transportation system... that only private systems should develop so as to not use force.  I don't think our private sector (yes, this includes the fact that we have gold at our disposal) is able to efficiently do either of those things...

...though I cringe when I think of the fact that we have to somehow engineer GDP growth every year to not live as free, prosperous people.

Also (as a side note... more of a discussion of private property and the free market) have you ever thought of the implications of the government having the authority to issue deeds for land?  If the land was here before we got here, in theory, how does the government have the authority to give or enforce "ownership" of it all.  I know if I make a think up new process or build a better widget, it's attached to me in a fundamentally different way than if I plant a flag in the ground and ask the government to give me a deed.

I'm not saying the government should own all land, or even that owning land isn't right or fair, but that it seems to me to be a fundamental breakdown of Austrian economics to say that all government should do, for the most part, is defend private property, if so much of the property isn't attached to you in any way other than your planting a flag on it.

[TBV]

Also (as a side note... more of a discussion of private property and the free market) have you ever thought of the implications of the government having the authority to issue deeds for land?  If the land was here before we got here, in theory, how does the government have the authority to give or enforce "ownership" of it all.  I know if I make a think up new process or build a better widget, it's attached to me in a fundamentally different way than if I plant a flag in the ground and ask the government to give me a deed.

I'm not saying the government should own all land, or even that owning land isn't right or fair, but that it seems to me to be a fundamental breakdown of Austrian economics to say that all government should do, for the most part, is defend private property, if so much of the property isn't attached to you in any way other than your planting a flag on it.

How much of private property is land?  I think not much. Is the land under Google's HQ really worth that much as a % of Google's market cap?  Or the land under one's house, for that matter, compared to the value of the entire property?  All that aside, few of us are pioneers and so have likely come by any land we own through purchases.  In those purchases, we pledge our labor (or the fruits of it) in payment for the land.  Thus, preserving the title to our labor is no small thing.  In fact, it's central to the preservation of freedom itself.  Should government defend that?  I should hope so.

[Tortoise]

I can see the benfits of your proposal, but I think it'd be the monetary equivalent of not setting up any kind of government transportation system... that only private systems should develop so as to not use force.  I don't think our private sector (yes, this includes the fact that we have gold at our disposal) is able to efficiently do either of those things...

That is not an appropriate analogy. What I am suggesting here is not the elimination of the U.S. dollar and its replacement with a private sector currency, as your analogy implies. So please do not put those words in my mouth. What I am suggesting is simply to allow competition in currency. Let the U.S. dollar continue to circulate, and let the government continue to collect its taxes and regulate the value of the dollar. But--here is the key--in addition to that, let other currencies (including private-sector currencies and gold) compete with the dollar.

Here is a concrete example: If any company in the U.S. declares that it will accept payments only in gold or some private-sector currency, not dollars, in exchange for its goods and services, I think that should be perfectly legal. But it is not. Federal legal tender laws in the U.S. force businesses to accept dollars for many kinds of monetary transactions.

Also (as a side note... more of a discussion of private property and the free market) have you ever thought of the implications of the government having the authority to issue deeds for land?  If the land was here before we got here, in theory, how does the government have the authority to give or enforce "ownership" of it all.  I know if I make a think up new process or build a better widget, it's attached to me in a fundamentally different way than if I plant a flag in the ground and ask the government to give me a deed.

I'm not saying the government should own all land, or even that owning land isn't right or fair, but that it seems to me to be a fundamental breakdown of Austrian economics to say that all government should do, for the most part, is defend private property, if so much of the property isn't attached to you in any way other than your planting a flag on it.

Sounds like a great topic for a completely different thread