Wikipedia's "Disadvantages of the Gold Standard"

How would you defend the following? 

(Yes...it's like throwing fresh meat to the lions, but have at it!)

"Beyond the difficulty in transporting, storing, and preventing the debasement of gold, one of the main disadvantages of a gold standard is that it would artificially increase gold's value, due to the additional demand as a monetary medium, and thus increase the cost of items and industrial processes in which it is used. The total amount of gold that has ever been mined is estimated at about 142,000 tonnes.^[7] At a gold price of US$800 per Troy ounce, or around $26,000 per kilogram, the value of this entire planetary stock would be $3.65 trillion, which is less than the value of cash circulating in the U.S. alone, where more than $7.3 trillion is in circulation or on deposit. Under a U.S. gold standard, the price of gold would be more than proportionally higher, because all the gold in the world can not be brought in to U.S. bank vaults.

Under the gold standard, gold mined at a different rate than the economy grows can produce both inflation, when deposits are discovered and extracted, and deflation when they are mined to exhaustion.^[9] In practice, the production of gold has usually trailed economic growth, resulting in periods of deflationary pressure, including contributing to the cause of the Great Depression^[10] and events during it. During the gold rushes in California and Australia, soaring gold output contributed to a 5% yearly increase in wholesale prices during the period between 1850 and 1855.^[11][12]

Using a fixed commodity as a monetary standard gives central banks fewer options with which to respond to economic crises and stimulate economic growth.^[13] In particular, gold-backed currencies prevent tailoring the money supply to the economy's demand for money, and are subject to speculative attacks when the government's financial position looks weak; attacks which often require punitive economic measures to counter. Such measures exacerbated the Great Depression when the U.S. raised interest rates in the middle of a recession in order to defend the credibility of its currency.^[10][14] Finally, since commodity currency devaluations produce sharp changes in their values, rather than smooth declines, their effects are magnified."

 

whitespiral:

"Beyond the difficulty in transporting, storing, and preventing the debasement of gold, one of the main disadvantages of a gold standard is that it would artificially increase gold's value, due to the additional demand as a monetary medium, and thus increase the cost of items and industrial processes in which it is used.

Value in economics is subjective, meaning in order for something to have value, it must be useful and scare. Valuers or people value goods and/or services that are useful to them, i.e., that has utility. Gold has both monetary and non-monetary utility. In additional to being an excellent metal for jewelry, ornaments, an in industrial goods, gold has excellent exchange value. It serves as the best medium of exchange, as the best commodity for the facilitaion of the movement of ggods and resources. What does the author mean by artifical. Gold has a use. That use is money (at least it used to be). How is this artificial? Whats artificial? What should constitute value? Use or arbitrary legislation? The author evaluates gold improperly.

Essentially, the author is saying is that a good should not have both monetary and non-monetary purposes because then the price of that good will be too high.

THE AUTHOR IS CONDEMNING GOLD BECAUSE OF ITS LIFE-SUPPORTING NATURE AS A MEDIUM OF EXCHANGE!!!

Gold has many uses and it is scarce. Therefore it will be bought and sold at a high cost. No problem here.

whitespiral:

During the gold rushes in California and Australia, soaring gold output contributed to a 5% yearly increase in wholesale prices during the period between 1850 and 1855.

 

It's pretty funny that a 5% increase in wholesale prices for a short period after the discovery of a major new source of real money is significant, considering that wholesale prices always go up more than consumer prices during a boom, and that the increases are often much higher than 5% per year in such a situation.

 

whitespiral:

In practice, the production of gold has usually trailed economic growth, resulting in periods of deflationary pressure, including contributing to the cause of the Great Depression^[10] and events during it. 

Using a fixed commodity as a monetary standard gives central banks fewer options with which to respond to economic crises and stimulate economic growth.^[13] In particular, gold-backed currencies prevent tailoring the money supply to the economy's demand for money, and are subject to speculative attacks when the government's financial position looks weak; attacks which often require punitive economic measures to counter. Such measures exacerbated the Great Depression when the U.S. raised interest rates in the middle of a recession in order to defend the credibility of its currency.^[10][14] Finally, since commodity currency devaluations produce sharp changes in their values, rather than smooth declines, their effects are magnified."

All of the problems mentioned here are due to a partial gold standard (a gold standard with fractional reserve banking).  There is no need to 'defend a currency' when all of it is backed 100% by gold.  There is a need, however, when there is de facto gold backing of several percent like before the great depression.

And commodity currency devaluations are only necessary in a system of fractional reserve banking.  In one where banks were required to hold 100% gold reserves for every deposit and loan, there would never be a need for a devaluation.

  

I'll just add to the above retort with the following:

Under the gold standard, gold mined at a different rate than the economy grows can produce both inflation, when deposits are discovered and extracted, and deflation when they are mined to exhaustion.^[9] In practice, the production of gold has usually trailed economic growth, resulting in periods of deflationary pressure, including contributing to the cause of the Great Depression^[10] and events during it. During the gold rushes in California and Australia, soaring gold output contributed to a 5% yearly increase in wholesale prices during the period between 1850 and 1855.^[11][12]

As I understand it, the demand for mining new gold would be driven by the purchasing power of gold. As the economy grows, the purchsing power of the gold would increase increasing the demand for new gold, thereby increasing the profitability of mining gold meaning more gold will get mined. Conversely, mining gold at a rate that lowers the purchasing power of gold, the profitability of mining gold would fall creating a disincentive to mine further gold. Thus, we see a self-regulating mechanism in place.

Obviously though, there's going to be quite a time lag between variations in the purchasing power of gold translating into changes in the rate of gold being mined and it's not going to respond to short term fluctuations, only long term trends. That explains why prices were far more volatile day to day even though they were very stable in the long term.

Using a fixed commodity as a monetary standard gives central banks fewer options with which to respond to economic crises and stimulate economic growth.^[13] In particular, gold-backed currencies prevent tailoring the money supply to the economy's demand for money, and are subject to speculative attacks when the government's financial position looks weak; attacks which often require punitive economic measures to counter. Such measures exacerbated the Great Depression when the U.S. raised interest rates in the middle of a recession in order to defend the credibility of its currency.^[10][14]

If the central bank hadn't so inflated their money supply in the years leading up to the crash, there would have been no credibility to restore (and no crisis for that matter). If you see economic booms and busts as being caused by loose economic monetary policy, then you aren't going to see the loss of the ability to loosen monetary policy in the event of a bust as a bad thing.

from Wikipedia:

The total amount of gold that has ever been mined is estimated at about 142,000 tonnes.^[7] At a gold price of US$800 per Troy ounce, or around $26,000 per kilogram, the value of this entire planetary stock would be $3.65 trillion, which is less than the value of cash circulating in the U.S. alone, where more than $7.3 trillion is in circulation or on deposit.

The aggregate 'price' of gold is an extrinsic property that has nothing to do with its suitabilty as a proxy for purchasing power in general.  The aggregate price of Fabergé eggs is lower than all money in circulation while the aggregate price of real estate is undoubtedly much higher.  What gives gold its monetary characteristics are intrinsic characteristics like fungibility, transportability, durability, divisibility, scarcity, and the degree to which its value changes in proportion to more general changes in economic activity.

I also like the comment that changes in the price of gold due to variations in the supply and demand for the metal itself typically pale in comparison to changes in its price stemming from changes in the supply and demand for money.  To use the former lack of invariability as an argument against gold's use to govern the latter type of variability seems misguided.  It is letting the perfect be the enemy of the whole-heck-of-a-lot-better-that-anything-else-we've-tried.

 There are 4 money metals that can be used as money so there is no shortage of valuable coinage. I like the silver standard even better than the Gold standard because it more closely matches what I buy. If I need to make smaller or larger purchases I can just use my debit card or copper for change. Another reason I like the silver standard is that when you go the the store and pay for something you have a pretty good idea that the price is right if it is fifty ozt of silver to an oz of gold or 100/ozt to  platinum or 20/ozt palladinm. Not exact but close enough. If I want  better, I can check out the time stamp and the spot prices on the internet. Computers smooth out things so there is no problem which metal you use. They come in particular sizes and weights so your problem with debasement is not real. It would cost more to make special fake coins that are not obvious fakes than it would be worth.<br>I call mine the multi metal standard.

whitespiral:

How would you defend the following? 

(Yes...it's like throwing fresh meat to the lions, but have at it!)

"Beyond the difficulty in transporting, storing, and preventing the debasement of gold, one of the main disadvantages of a gold standard is that it would artificially increase gold's value, due to the additional demand as a monetary medium, and thus increase the cost of items and industrial processes in which it is used. The total amount of gold that has ever been mined is estimated at about 142,000 tonnes.^[7] At a gold price of US$800 per Troy ounce, or around $26,000 per kilogram, the value of this entire planetary stock would be $3.65 trillion, which is less than the value of cash circulating in the U.S. alone, where more than $7.3 trillion is in circulation or on deposit. Under a U.S. gold standard, the price of gold would be more than proportionally higher, because all the gold in the world can not be brought in to U.S. bank vaults.

Under the gold standard, gold mined at a different rate than the economy grows can produce both inflation, when deposits are discovered and extracted, and deflation when they are mined to exhaustion.^[9] In practice, the production of gold has usually trailed economic growth, resulting in periods of deflationary pressure, including contributing to the cause of the Great Depression^[10] and events during it. During the gold rushes in California and Australia, soaring gold output contributed to a 5% yearly increase in wholesale prices during the period between 1850 and 1855.^[11][12]

Using a fixed commodity as a monetary standard gives central banks fewer options with which to respond to economic crises and stimulate economic growth.^[13] In particular, gold-backed currencies prevent tailoring the money supply to the economy's demand for money, and are subject to speculative attacks when the government's financial position looks weak; attacks which often require punitive economic measures to counter. Such measures exacerbated the Great Depression when the U.S. raised interest rates in the middle of a recession in order to defend the credibility of its currency.^[10][14] Finally, since commodity currency devaluations produce sharp changes in their values, rather than smooth declines, their effects are magnified."

 

 

 

All I'm going to say to any attempts to call gold prices "unstable" is that, even assuming they are, it is more important for prices to be accurate and economic than stable and stagnant.  

The prices of gold is absolutly stable with respect to your transactions and contracts if you agree to pay them a certain amout of gold then that is what you pay them. Voltility only occures when you exchange your gold valued product for another product valued in some other metal or fiat currency.  That is done at current prices. They are listed on a moment to moment basis on the Internet. The precious metals trend pretty close together on a day to day basis. I am sure that one of them would do better as a tool for savings but that is long term and when we are talking about currency we are talking day to day.

If they have any problem shipping the metal around they they could convert it to platinum and ship 1/2 as much. Most such transfers would be local anyway. Also many would be electronic. We are not talking about that many tons of gold in any one transaction anyway.  Since banks would be funded there would be no need to ship around cash to replenish their funds. They would already have funds sufficient to run their business. Demand deposits would be available at the bank and savings would be time deposits.

 If I was listing out the benefits of free market hard money of whatever metal, I would list among the great benefits the protection from monetary debasement provided to savings.  All you economists can correct me if I am wrong - but progress as a free trade society on hard money would tend to INCREASE the real purchasing power of a unit of the hard currency over time.  Thus instead of currency inflation reducing the real purchasing power of saved or invested money and punishing the saver, economic growth would reward the prudent saver by increasing their real wealth over time.

As far as detecting metal debasement or clipping - if a little machine can go zip-zip over my federal reserve note or Chinese renminbi and tell me if it is a forgery, then some smart engineer would figure out how to efficiently check the veracity of coin.  Even very small shops in backstreet China have bill checkers.  In the old days it was a scale, teeth, and tongue for gold coin.  Our modern age can certainly do as good as that!  And since the largest counterfieters in the world are the governments and central banks, putting them out of business sounds great to me!

As for this gem from Wiki:

whitespiral:

Using a fixed commodity as a monetary standard gives central banks fewer options with which to respond to economic crises and stimulate economic growth.^[13]

 

That is the biggest frickin' reason to go to free market hard money!  The "options" are ways for the banks and central bank to steal real value from every unit of fiat currency in the market.  They are the way the few with power transfer wealth from the many to themselves!  That single line is why I would support hard money no matter how painful the conversion process.  And as various Austrian-bent authors have shown, in the absence of the "options" listed above, the broad business cycle does not exist!

 

whitespiral:

During the gold rushes in California and Australia, soaring gold output contributed to a 5% yearly increase in wholesale prices during the period between 1850 and 1855.^[11][12]

Five percent? That's the most inflation there has ever been under a gold standard, and it was only for five years?

 

That's a pretty strong argument for a gold standard, if you ask me. Can any fiat money system claim a better record?

There's an even better example than that:  the 1600s, when the price level tripled as Europe denuded an entire new continent of its gold.  Tripled--over the course of 100 years (essentially hollowing out and effectively ruining Spain in the process, not to mention what happened to the natives in the Americas).  The price level nearly doubled after FDR monkeyed with the gold price during the depression (lowering the price to $35/oz, then compensating at the old price of $20.67 as the citizenry had to turn theirs in, thus stealing 40% of the value of their holdings outright).  The price level increased by a factor of ten in the 1970s (yes, you read that right), and, if the current gold price holds over time, will complete the process of tripling again over the next few years.  It may get worse than that.

Gold ain't perfect, but like Winston Churchill's crack about democracy, it's better than anything else that's ever been tried.

Good enough for me.

whitespiral:

Finally, since commodity currency devaluations produce sharp changes in their values, rather than smooth declines, their effects are magnified.

What does that even mean?

Sounds like they are either generalizing from limited examples (bank runs?) or they're just pulling that out of their ass.

No problem with the wikipedia posing both sides of the issue though... 

Yes, that quote is just goofy.  If a commodity is chosen whose supply doesn't vary much (like, saaaaaay, gold...), and does so fairly well in line with the growth of the economy as a whole, then bad currency devaluations must be the fault of the thing that *does* change which would be the, uuuhhhh, currency!  Yeah, that's it.