According to xe.com, a currency site, gold is currently $1056 per oz. It's been around $1000 per ounce for a while now. My challenge is this; I want to hear solid arguments against the idea of establishing of a gold standard where the fixed ratio is $1 to 1/1000 of an oz of gold. Please do your best to refute the validity of the gold standard. I have to admit my knowledge of economics is shaky so I will stand by the sidelines and ask questions to clarify positions from time to time. If people want to argue for the gold standard fair enough, but please make the effort to argue why the establishment of a system like the one I'm proposing would not work.
CrazyCoot: I want to hear solid arguments against the idea of establishing of a gold standard where the fixed ratio is $1 to 1/1000 of an oz of gold.
The simple answer is: Effecting such a standard would require people to turn in FRNs in exchange for gold or certificates fully-backed by gold. There is not enough gold in the world to redeem it all at $1/1000 oz.
Here is some more information:
A true "gold standard" is the absence of any "standard", as such "Dollars", "Yen" and "Euro" wouldn't exist, and currency/money would simply be a unit-weight of gold (grams, milligrams, micrograms, etc.) There would be therefore no such thing as an "exchange rate" with a commodity currency, for the same reason that there is no "exchange rate" betwen $1 Bills and $5 Bills, because one ounce of gold is the same as any other ounce of gold, no matter what it happens to be called in the local tongue.
Historically this was the case. Eventually sovereigns began assigning a sovereign-sounding name to a certain unit-weight of gold or silver such that a "Franc" was defined as X ounces of gold, or a "Pound Sterling" was defined as a pound of sterling silver, etc.
The assignment of sovereign names to currency was one of the first steps (intentional or otherwise) towards their eventual debasements. If you call something a "Franc" long enough, you eventually forget that it's supposed to be "X ounces of gold" and begin to believe that it's just something magical that people give and exchange for work or produce.
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David Z
"The issue is always the same, the government or the market. There is no third solution."
How would you implement your ideal form of a currency system? And would the system I proposed, I happen to agree with the idea of getting the government out of the money business btw, be a decent middle step? If exchanging FRNs is too burdensome of a process then how do we transition out of the current system?
Would also like to hear some arguments that come from opponents of free market commodity based money as well. Even if you don't personally agree with the arguments. What are some arguments for why inflation is a good thing for example?
A better approach, or "a decent middle step," would be to allow competing currencies.
There is a great deal of complexity in trying to save the FRN, i.e., you can't decree a ratio to a commodity without first ending fractional reserve banking practices. Even if a FRN were arbitrarily decreed to have a value of 1/1000 gold oz, fractional reserve banking would quickly force the market price of FRNs below this ratio. Nobody would trade gold for FRNs at the arbitrary price and the FRN would continue on its merry way.
The Case for a Genuine Gold Dollar - Murray Rothbard
It's not a long read.
Thanks for the link, in the process of reading it.
What are some arguments for fiat currency? What are the most common arguments against a free market based currency system?
CrazyCoot:What are the most common arguments against a free market based currency system?
The same fallacious argument made against freedom in any form. People can't do X because it makes them bad, or it might lead to bad outcomes. we must prevent X for the children. The poor. The old.
For example, the state must counterfeit, to prevent counterfeiters from counterfeiting.
If you find something evil that wobbles, push it. - Gary North
The gold standard is not absolutely valid. As long as bureaucrats set the value of paper vs gold the amount of inflation will be low but not zero. The only morally and economically valid monetary system is/are the one/ones determined by the market. Traditionally this has been a combination of gold, silver and copper as these three metals are easily identified and vary in quantity and most importantly have alternate uses.
As for getting to market base money, I recommend this means:
1. Remove the ability of government or its agents to create money. In the case of the USA that is shutdown the central bank. This will hurt large "Too big to fail" banks but who cares. The economy would have stable prices and necessarily less government intervention at that point.
2. Allow the market place to create its own currencies. The government killed Liberty Dollar and Pay Pal were very good choices. With an internet there is no limit to the experimentation individuals could do in the creation of new forms of money.
3. Remove capital gains taxes. This is especially true for gold and silver.
In the link that was provided it seems as if Rothbard is arguing that the government would have to establish a fixed ratio of dollar to gold before currency could be taken out of the government's hands; i..e some form of government action would be required to undo previous government action. Or am I misreading the article?
In terms of competing currency; wouldn't the same advantages and distortions of the market that apply to public schools, post offices etc apply to the currency issue? That and the issue of brand name.
And c'mon folks; let's see some at least half-way decent attempts at arguing that fiat currency is a good thing. You can't be a good debater if you get convincingly argue the other side's position.
Essentially to make the switch you require the gold to back the currency at that price. The Government has no gold at all, it would probably engage in a gold war in order to get it, maybe by domestic confiscation maybe by a foreign war.
The government has no gold? You mean Lethal Weapon lied to me ?!!?.
A gold standard would slow economic growth, since it would cause price deflation. Price deflation would occur because the growth of the money supply would be lower than economic growth, causing demand-for-gold to grow at a quicker pace than supply-of-gold. Price deflation is bad for the economy, since it prevents the loanable funds market from clearing at low real interest rates. In other words, if the loanable funds market clears at 3% real interest rates, but there is 4% real inflation, than nominal interest rates would have to be at -1% in order for the market to clear. Obviously, nobody would lend out money at negative interest rates, since simply hoarding that money would bring them higher returns and less risk. This would slow economic growth, since savings would be less productive than they would have been under a stable price system.
Mises Community Natural Rights Discussion Group
If the U.S. unilaterally went on the gold standard and other countries countinued to target price inflation of 2% per year, the dollar would strengthen against other currencies. This would lead to decreased exports and encourage U.S. companies to locate more operations overseas, thus exacerbating the already dismally high unemployment rate.
what are you measuring the decrease in exports by? nominal currency? quantities of goods?
Where there is no property there is no justice; a proposition as certain as any demonstration in Euclid
Fools! not to see that what they madly desire would be a calamity to them as no hands but their own could bring
krazy kaju: A gold standard would slow economic growth, since it would cause price deflation. Price deflation would occur because the growth of the money supply would be lower than economic growth, causing demand-for-gold to grow at a quicker pace than supply-of-gold. Price deflation is bad for the economy, since it prevents the loanable funds market from clearing at low real interest rates. In other words, if the loanable funds market clears at 3% real interest rates, but there is 4% real inflation, than nominal interest rates would have to be at -1% in order for the market to clear. Obviously, nobody would lend out money at negative interest rates, since simply hoarding that money would bring them higher returns and less risk. This would slow economic growth, since savings would be less productive than they would have been under a stable price system.
Here is an example. Falling prices tend to produce lower interest rates. If someone lends money at 5% per annum, and the rate of inflation increases to 5% per annum, he has lost money. He will have to pay income taxes on his profits, yet the money that he gets back is worth no more than the money he lent in the first place. When prices are relatively stable, and he lends at 3%, he makes money on the transaction. He pays income taxes on his 3% return. When prices are falling by 2% per annum, he can lend money at 1% per annum and come out ahead. He pays taxes only on the 1% return.
Here is an example. Falling prices tend to produce lower interest rates. If someone lends money at 5% per annum, and the rate of inflation increases to 5% per annum, he has lost money. He will have to pay income taxes on his profits, yet the money that he gets back is worth no more than the money he lent in the first place.
When prices are relatively stable, and he lends at 3%, he makes money on the transaction. He pays income taxes on his 3% return.
When prices are falling by 2% per annum, he can lend money at 1% per annum and come out ahead. He pays taxes only on the 1% return.
http://www.lewrockwell.com/north/north764.html
If there is deflation, and a higher demand for money, the banks could charge higher interest rates and make more money. If there is deflation, and less demand for money, banks can make a profit loaning out money at low interest rates because the money being paid back to them in the future is worth more than the money held by them at present, and it has interest added to it.
The logical extension of your argument is that "we need inflation to drive the economy"
The appeal to "charity" is a truly ironic one. First, it is hardly "charity" to take wealth by force and hand it over to someone else. -Rothbard
Wouldn't deflation lead to decreasing prices and a greater ability for people to actually save in terms of real value and therefore increase the stability of capital investments? And wouldn't lowering prices increase the spending power of the individual; thereby generating greater economic activity and therefore decreasing unemployment? What are the standard arguments against that?
Exports would be lower under a regime of low inflation, since the purchasing power of Americans relative to foreigners would be much greater, thereby creating incentives for Americans to spend their money on goods produced overseas. That said, it's obvious that such a monetary policy regime would be beneficial to Americans, since it would increase their living standards.
CrazyCoot:The government has no gold? You mean Lethal Weapon lied to me ?!!?.
And Die Hard.
krazy kaju: Exports would be lower under a regime of low inflation, since the purchasing power of Americans relative to foreigners would be much greater, thereby creating incentives for Americans to spend their money on goods produced overseas. That said, it's obvious that such a monetary policy regime would be beneficial to Americans, since it would increase their living standards.
So we need government schemes to steal money from people "for their benefit?"
Looking at 1873-1905 we see price deflation of about 3-4% per year, and the standard of living in the US improved greatly. How is it possible to have such a strong economy when exports are threatened by a strong dollar? Simple: the importance of a currency's strength, it's affect on the balance of trade, and the effect of the standard of living of the two is overstated.
Deflation would benefit creditors, but it wouldn't benefit the economy. A stable price level is preferable. If there is deflation, than it is quite possible that real returns on certain investments would be positive while nominal returns on those same investments would be negative. This would hurt those who borrow to invest. It would also reduce the total amount of investment, since it would become more profitable for individuals to hoard their money at certain real interest rates than to lend.
This isn't an argument for inflationism as much as it is an argument for a truly free market monetary system, as described by Hayek. With a free market monetary system, deflation would spur money-producers to produce more money, since their profit margins would rise considerably. However, as soon as inflation would occur, not only would their profit margins be reduced from rising prices, but demand could fall for their currencies. Thus, free market monetary producers would have very strong profit motives to keep both inflation and deflation to a minimum, effectively creating a stable price level.
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