BlackSheep:Yep.
This is, of course, assuming that the entire world hasn't converted to just exchanging gold coins of certain weights. If everyone just carries around gold nuggets then there is no need for any currency. A nugget of one weight in Japan is the same as a nugget of the same weight in South Africa.
I don't think there are too many people who hold to this plan, though. Most people think of a gold standard as a representive currency system where you have gold stored in a vault somewhere, and you use paper or electronic currency to exchange ownership of that gold. That is my leaning, at least.
You hit the nail on the golden head. It is the violence backing up legal tender laws that ruin the chances of commodity money. As hyper rich folks horded gold then some might switch to silver or platinium or whatever. The Hunts proved this when they tried to buy up large portions of the silver market. The price of silver shot up when the Hunts made their first move. As people figured the Hunts were serious they sold silver and purchased other stuff. Eventually the price of silver dropped. The same thing would happen under a gold standard as well.
I wrote a post on the Hunt Brothers. It's one of my most popular!
What happened to the Hunt brothers is that they were borrowing in dollars and buying gold. When the Federal Reserve jacked up interest rates *AND* changed the margin rules, their scheme collapsed. The problem was not buying silver. The problem was *BORROWING* and then buying silver.
As an individual with a small budget, I'm not going to buy enough gold or silver to substantially move the price.
I have my own blog at FSK's Guide to Reality. Let me know if you like it.
Jonas: I don't see why there is this fascination with using gold. Why not something more valuable, like platinum, so there is less to store? Or go with something like palladium? I prefer the idea of a platinum standard, myself.
I don't see why there is this fascination with using gold. Why not something more valuable, like platinum, so there is less to store? Or go with something like palladium? I prefer the idea of a platinum standard, myself.
The "gold" standard doesn't necessarily refer to gold but any commodity. In reality most of the world used silver for day to day trades. Large purchases were often made with gold because it was valued more. The first dollar was actually silver. Of course you don't have to use gold, silver, platinum or even palladium. You could back a warehouse receipt with roads and bridges, buildings, diamonds or fine cognac. It isn't so much what backs it but that it is backed by something which has value, which has taken human labor to produce or collect. Mankind settled on gold and silver because they are beautiful and rare and are relatively easy to carry. Yes, you can back money with bridges but it is hard to carry a bridge to the store. If you wanted to trade with me I'd accept anything from gold to diamonds to platinum just so long as the weight is true to what you claim it to be.
"It does not require a majority to prevail, but rather an irate, tireless minority keen to set brush fires in people's minds. " -- Samuel Adams.
LanceH:Under a gold standard, no interest would be paid on any deposits which were withdrawable on demand. On the contrary, you would have to pay the bank's safe-keeping costs.
That's simply untrue, at least in an anarchic commodity money regime (in which there is no reason to believe that gold would be the sole chosen backing for money, but that is beside the point). It's what a lot of gold bugs want to be true, and what the prevailing hard-money delusion presumes to dictate should be true, but neither makes it true.
It's almost guaranteed there would be interest-bearing, or at least free-of-storage-charge demand deposits, and the FRB that is required to make it anything but a loss-leader - even in a convertible commodity backed currency - because it's very likely the market would demand it, and that bankers would respond. It's not fraud if the reserve requirement is stated up front and there is enough transparency to satisfy the depositors. It may or may not be inflationary - depending on the agreed-to rules of the reserve requirement and use of deposited notes as further reserves - but that cannot be prohibited except through market discipline. It's not even a fiat currency if the notes are redeemable, and if the reserve amount cannot (by contractual obligation) be changed arbitrarily.
It's simply a matter of trading risk for gain. If you hold a fractional reserve currency, or demand deposit, you are exposed to a risk of default by the issuer/banker. If you don't like that, there will almost certainly be safe-deposit boxes you can store your hard money in, for a charge. There will also likely be CD-type accounts that pay interest but are not redeemable on demand. Even these are not free of risk, they are only free of the particular risk of bad monetary decisions by the issuer/banker. But that's a risk I'm quite certain many people would be willing to accept, based on the fact that they did in the past, even prior to a Federal Reserve and FDIC insurance.
As somebody said before, it's not gold that makes for sound money, but freedom in the markets and in the issuance of money. If you have freedom, you cannot prohibit any type of commodity being used for backing, FRB, and even outright fiat currencies from trying to compete in the market. Gold/silver-backed and convertible currencies are the most likely kind to succeed, simply because they are the most suitable forms to the purpose.
The state won't go away once enough people want the state to go away, the state will effectively disappear once enough people no longer care that much whether it stays or goes. We don't need a revolution, we need millions of them.
Let's also not forget that any bank or group of banks that did inflate through FRB wouldn't upset the whole economic order once they finally collapsed. Without a central bank to spread the sickness throughout the country any financial collapse would be limited to the area or region in which it occurred. While it could potentially have an impact in other parts of the world the devastation it would unleash would be limited and through the free and unfettered market it would be quickly resolved.
kingmonkey:Let's also not forget that any bank or group of banks that did inflate through FRB wouldn't upset the whole economic order once they finally collapsed. Without a central bank to spread the sickness throughout the country any financial collapse would be limited to the area or region in which it occurred. While it could potentially have an impact in other parts of the world the devastation it would unleash would be limited and through the free and unfettered market it would be quickly resolved.
Yup. With real freedom, damage is routed around, and bad decision making is self-limiting in it's ability to influence others.
kingmonkey: It isn't so much what backs it but that it is backed by something which has value, which has taken human labor to produce or collect.
It isn't so much what backs it but that it is backed by something which has value, which has taken human labor to produce or collect.
l would add that it also needs to be valued by others you would want to trade with. You might have a country with a "cognac standard", and it might even work in a society where cognac is highly prized. But good luck trying to purchase something from someone in another country where they prefer beer over fine liquors. Since gold has nearly global appeal, it can be used as a global exchange. Unlike something like palladium or rhodium. Platinum could still work, although it doesn't have nearly the same "reputation" as gold.
histhasthai: LanceH:Under a gold standard, no interest would be paid on any deposits which were withdrawable on demand. On the contrary, you would have to pay the bank's safe-keeping costs. That's simply untrue, at least in an anarchic commodity money regime... It's almost guaranteed there would be interest-bearing, or at least free-of-storage-charge demand deposits, and the FRB that is required to make it anything but a loss-leader
That's simply untrue, at least in an anarchic commodity money regime... It's almost guaranteed there would be interest-bearing, or at least free-of-storage-charge demand deposits, and the FRB that is required to make it anything but a loss-leader
I assumed that the OP was referring to a "full" gold standard of 100% gold reserves, and in that context it would be true.If you are willing to accept FRB banks who redeem in gold, then I agree that their extra income from lending out some of their reserves would cover the storage costs. I doubt the reserve fraction would also be small enough to pay interest on demand deposits, and as far as I am aware historically interest was not paid.However, I agree with Mises that free banking under the discipline of 100% gold redemption would never permit a reserve fraction anything like as small as today. A bank which issued too much fiduciary media would simply lose too much of its gold reserves to 100%-reserve banks. Even if all domestic banks colluded in credit expansion, there would be a net outflow of gold reserves overseas which would soon put a check to the practice.
LanceH:I assumed that the OP was referring to a "full" gold standard of 100% gold reserves, and in that context it would be true.
Fair enough. I just doubt that that would be the only, or even the dominant form in a fully free monetary system.
LanceH:I agree with Mises that free banking under the discipline of 100% gold redemption would never permit a reserve fraction anything like as small as today.
That's almost certainly the case. Some would probably try, but I don't think they'd compete well, for, among others, the reasons you cite. It would probably take banks a very long time to establish a reputation sound enough to do any FRB, but even once they do, I doubt anything less than 50% reserve would be viable (just a hunch), if even that low. That may be enough to pay a small interest, but should at least cover storage costs.
Then there's the question of whether it is merely the reciepts that are fractionally backed (fractional reciept banking), or whether deposited reciepts can themselves count toward the reserve (full fractional reserve banking). The latter, I think, is a major source of instability and would not likely be tolerated by the market.
A bank which issued too much fiduciary media would simply lose too much of its gold reserves to 100%-reserve banks.
Could you explain how the process would function?
-Jon
To darkness I condemn you...
Even today most checking accounts do not pay interest and every savings account I ever had paid so little interest I didn't even bother with it. I think under a 100% reserve gold standard you'd see checking accounts and other demand accounts that would not pay interest. People don't open those accounts for interest payments but instead for the security and ease in which they can make purchases. I, like most people, use my checking account because it is safer than walking around with a wad of cash in my pocket, it makes it quicker and safer to make purchases (with my check card) and I can buy things online, something I can't do with cash. There is no reason to assume that banking services under a 100% reserve gold standard would be that much different than it is today except our money would actually be there when we went to get it, people would save more instead of using credit for everything, and interest rates on our savings account would more than likely be much higher than they are today.
"In Heaven His throne is made of gold
And the ark of His testament is stowed"
There you go.
I just came across this forum and find it interesting. I know I'm coming in late, but maybe someone will still see my post and reply to my questions.
I understand, from reading this forum, that the US would set the price of buying gold with dollars if we went back to the gold standard. That answers one question I've had for a while.
Other questions I have are:
1) How would this affect our currency against that of other countries? If other governments followed suit and backed their currency with gold using their own method of valuing the exchange from, say, yen to gold, would we be forever locked into a currency devalued against theirs?
2) If I understand it correctly, the reason we changed from gold standard to the current system is France (or China??) held a lot of US currency and demanded payment in gold. What would prevent this from happening again?
3) Will the amount of gold available worldwide affect the value of our gold? For instance, I understand there has been a huge amount of gold discovered in the hills of China - probably the biggest find in history. Will this devalue gold and, therefore, our gold standard currency? Would China be forever in the driver's seat?
4) I understand one argument for going back to the gold standard is that our current currency is now unconsititutional. If I remember the constitution correctly, we are actually only supposed to use coinage, which would make even paper money backed by gold unconstitutional.
5) I've seen one or more comments here that government should not be in control of our currency or that any kind of currency or metal should be allowed. I believe the constitution states that Congress is to manage, control or decide our currency. I believe the reason this was in the constitution was because each territory, before becoming a state, had their own currency and the founders wanted just one currency for the entire US.
I'm pretty ignorant on this issue, so I'm not making arguments here - just asking questions and hoping to get some answers. Please also excuse any really stupid questions. This is a really new topic for me.
gailtoo: 1) How would this affect our currency against that of other countries? If other governments followed suit and backed their currency with gold using their own method of valuing the exchange from, say, yen to gold, would we be forever locked into a currency devalued against theirs? 2) If I understand it correctly, the reason we changed from gold standard to the current system is France (or China??) held a lot of US currency and demanded payment in gold. What would prevent this from happening again? 3) Will the amount of gold available worldwide affect the value of our gold? For instance, I understand there has been a huge amount of gold discovered in the hills of China - probably the biggest find in history. Will this devalue gold and, therefore, our gold standard currency? Would China be forever in the driver's seat? 4) I understand one argument for going back to the gold standard is that our current currency is now unconsititutional. If I remember the constitution correctly, we are actually only supposed to use coinage, which would make even paper money backed by gold unconstitutional. 5) I've seen one or more comments here that government should not be in control of our currency or that any kind of currency or metal should be allowed. I believe the constitution states that Congress is to manage, control or decide our currency. I believe the reason this was in the constitution was because each territory, before becoming a state, had their own currency and the founders wanted just one currency for the entire US.
1. If there's an international gold standard and free shipment of gold between countries, that eliminates the currency derivatives market. Exchange rates would be stable and interest rates would be equal everywhere. Currently, currency speculators are profiting off central banks' actions. For example, in the "carry trade", you borrow one currency at a low interest rate and lend another currency at a higher interest rate, making a practically riskless profit.
2. The gold standard was abandoned in 1913, when the Federal Reserve was created. In 1933, President Roosevelt defaulted on the gold redeemability of the dollar for US citizens and confiscated the gold. In 1971, President Nixon defaulted on the gold redeemability of the dollar for foreign central banks. Due to huge budget deficits for the Vietnam war, international banks started demanding to exchange their dollars for gold, and Nixon defaulted.
The reason gold standards fail is that the insiders can't resist the temptation to print more gold-redeemable paper than physical gold they have. This guarantees an eventual default.
3. Even if someone has a huge gold hoard, that doesn't break the gold standard. In a true free market, there is no requirement to use gold and people may use whatever they choose as money. In a true free market, gold coins circulate. This allows the value of the economy to be a lot greater than the supply of physical gold.
4. Who cares about the Constitution? **** the Constitution! It isn't a valid contract.
However, a government that strictly followed the Constitution would be far better than what's in place now. Pretty much every individual freedom protected by the Constitution has been substantially eroded.
5. All government is theft. When you say "It's the government's job to 'manage the economy'.", you're advocating for communism. Who needs a government?
Before the Constitution was signed, each State had its own money and competing currencies were leading to increased individual freedom. The new Federal government put a stop to the freedom that was developing at the time.
I'm pretty surprised I got this reply so quickly and thank you for it. I'll have to think about some of the comments, though.
regards
When you say "It's the government's job to 'manage the economy'.", you're advocating for communism. Who needs a government?
Ontopic: Can we use non-fiat currencies for electronic transactions? Like Pay Pal and banking cards and such.
gailtoo: I'm pretty surprised I got this reply so quickly and thank you for it. I'll have to think about some of the comments, though.
Look around on my blog for more stuff. I've already written posts on most of the common topics.
banned: To my understanding a gold standard is still fiat currency. It's still the government dictating the currency of legal exchange.
To my understanding a gold standard is still fiat currency. It's still the government dictating the currency of legal exchange.
You're thinking about the gold exchange standard, when a government pegs its fiat currency to gold. A gold standard is when private banks issue reciepts for their stored gold that can then be used as money.
Mises Community Natural Rights Discussion Group
fsk: The reason gold standards fail is that the insiders can't resist the temptation to print more gold-redeemable paper than physical gold they have. This guarantees an eventual default.
A quick comment on this: it is vastly more probable that a government will engage in this sort of fraud, and on a vaster scale, than competing private entities, since liability for the latter is far higher, as thus is accountability. So this looks to me like a stronger argument against a gold exchange standard than against a gold standard.
As far as I am concerned, the entire matter boils down quite simply: fiat currencies offer only endless financial chicanery, both from government itself and its willing agents (like the Fed and the financial industry), to the great expense of the individual who would be free. The sophisticated financial manipulations which enrich the money and power elites and impoverish the rest of us spring directly from the fact that we have been saddled with fiat currency and legal tender laws.
Always thought this quote pretty much said it all:
"It is a [disputed] question, whether the circulation of paper, rather than of specie, is a good or an evil... I believe it to be one of those cases where mercantile clamor will bear down reason, until it is corrected by ruin." --Thomas Jefferson to John W. Eppes, 1813.
Hard to shake the notion that we're in the midst of that correction, and that ruin, even as we speak.
None are more hopelessly enslaved than those who falsely believe they are free. - Goethe
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