Criticism of the gold standard

Someone posted this on a discussion forum I frequent and I was just wondering if it was accurate:

 

"Adopting the gold standard would likely cause a massive deflationary spiral and/or provide a massively unfair advantage to gold producing countries and existing holders:

There is, at most, 200,000 tons of gold on the entire planet and gold is currently trading at $30 / gram or $30,000 / kilo or $30 million / ton. This means the world's gold supply is currently valued at around 6 trillion dollars. Now, the New York Stock Exchange ALONE has a total market cap of 19.3 trillion dollars - over three times the value of all the gold on Earth.

So the only way to reconcile the disparity is to drastically decrease the volume of dollars in circulation (i.e. deflation) or drastically increase the value of gold."

 

Considering that the demand for gold would rise dramatically if a gold standard was adopted, the price would rise as well.

However, personally, I think the whole "gold standard" thing is going a bit far. I prefer a "commodity standard" - that is, whatever you want to back your currency that consumers will accept. I see silver, perhaps copper, certainly platium and other precious metals as being viable backings, along with gold. I think, sometimes, advocates of free market money get too enthralled in gold and forget that the market should be left to decide whatever standard is most popular among consumers.

The only way the market could decide what standard is most popular is if the government stops taxing. Governments, by necessity, must choose what to force its citizens to pay taxes with. It can't let you pay in gold, me pay in Ring Pops, and Murray Rothbard pay in copies of his books. Government money had value, even before it had a legal monoply, because you needed it to pay taxes. Even in ancient days, you were forced to pay in gold or silver, not milk or cotton.

I think that transaction demand held up by legal tender laws and trust is the only thing that maintains the value of currency. If legal tender laws were revoked and trust fell, transaction demand would undeniably move from fiat money to a new form of currency. For anything other than fiat money to maintain the volume of trade which goes on in the world today, transaction demand would undeniably raise its price a lot.

The original argument against fiat money, let me remind, is that it offers government and/or the central bank sufficient power to create money, which it unintentionally uses to reduce general welfare. Because moving transaction demand for fiat money to anything else will cause its market value to increase, causing the current holders of whatever else to profit, is meaningless in the face of this original argument. And tell me, why is it wrong to make some people rich through the adoption of a gold standard in one event, when fiat money is continually destroying the wealth of millions?

JonBostwick:

The only way the market could decide what standard is most popular is if the government stops taxing.

 

Exactly. Free market money is incompatible with taxation and thus government itself. 

cyclops:

Someone posted this on a discussion forum I frequent and I was just wondering if it was accurate:

 

"Adopting the gold standard would likely cause a massive deflationary spiral and/or provide a massively unfair advantage to gold producing countries and existing holders:

There is, at most, 200,000 tons of gold on the entire planet and gold is currently trading at $30 / gram or $30,000 / kilo or $30 million / ton. This means the world's gold supply is currently valued at around 6 trillion dollars. Now, the New York Stock Exchange ALONE has a total market cap of 19.3 trillion dollars - over three times the value of all the gold on Earth.

So the only way to reconcile the disparity is to drastically decrease the volume of dollars in circulation (i.e. deflation) or drastically increase the value of gold."

 

Also, the gold standard is an incentive for imperialism.

"Adopting the gold standard would . . . provide a massively unfair advantage to gold producing countries and existing holders:"

 

Gold is valuable whether or not it's the official legal tender. Does anyone know around how much the value of gold would be predicted to rise if it was widely used as money again?

Nathyn:

Also, the gold standard is an incentive for imperialism.

 

 Actually, the gold standard reduces imperialism.  With a gold standard in place a government cannot just print money to fund imperialist missions.  There is a reason why the US government stopped using the gold standard before each of the great wars...they needed to print tons of money to fund those wars and they couldn't do that with a gold standard.  When you are using a gold standard the only way to raise money for wars/colonization/big projects is to raise taxes.  So it's harder to fund imperialism and pointless military efforts when you use a representative currency. 

Harksaw:

Does anyone know around how much the value of gold would be predicted to rise if it was widely used as money again?

 

This is from another post of mine:

The current amount outstanding of total currency and coin is $1,039,297,466,081.00 according to the "U.S. Currency and Coin Outstanding and in Circulation" report from Dec 2007 (http://www.fms.treas.gov/bulletin/b2007-4uscc.doc).  I don't know if that includes foreign investments or not.  Gold ended today at $878.05 an ounce.  At this price you would need 1183642692.422 ounces, or 33,555.705 metric tons, of gold to back all U.S. currency in circulation...According to Wikipedia the US has a total gold reserve of 8,133.5 tonnes as of 2007.  So the US would have to find 25422.205 tonnes of gold to add to it's reserves or revalue the US dollar so that $3622.5 equals an ounce of gold.

 

 Based on my understanding of Hayek's "Denationalisation of Money", there is no need to 'adopt' the Gold Standard. All that is necessary is to allow the issuance of private currency by anyone who wants to issue it (and under conditions of 'trademark' protection). The government could issue whatever it wants to issue, but nobody would be forced anymore to accept it as 'legal tender'. The idea of 'adopting' the Gold Standard, or whatever standard, is inherently incompatible with the free market. It would be akin to adopting the "Really Good Car Standard" for government manufactured automobiles. Cute, but even IF the  resulting car was swell, it would still not be a free market if the only car you are allowed to drive on public roads were the Government Car. 

So, the US could keep the FED, and it could keep fiat money, but it would no longer be allowed to force the usage of these currencies.

Regarding taxes: of course taxation is compatible with free money - the government would simply require to be paid it its own currency.

That's at least my understanding of it.  

dietwald:

 Based on my understanding of Hayek's "Denationalisation of Money", there is no need to 'adopt' the Gold Standard. All that is necessary is to allow the issuance of private currency by anyone who wants to issue it (and under conditions of 'trademark' protection).

 

So I go buy a TV from my buddy Phil and pay him in JonasBucks?  He then takes those JonasBucks and tries to buy a pizza from a local store?  I can't see how that could work...I'll have to brush up on my Hayek.

I  don't see any difference between this issuance of private currency and barter.

Jonas:

So I go buy a TV from my buddy Phil and pay him in JonasBucks?  He then takes those JonasBucks and tries to buy a pizza from a local store?  I can't see how that could work...I'll have to brush up on my Hayek.

I  don't see any difference between this issuance of private currency and barter.

 

 

If Phil is willing to accept them, why not. What is likely to happen, though, is that four or five currencies are going to be widely used by most people, with a few minor currencies also being used by some people (who might base their choices on cultural preferrences, for example). Conceptually, as far as I understand it, there is NO difference between this and barter -- the 'difference' between straight(?) barter and money-based barter is that people agree on an intermediate unit for simplicity. But, barter is simply one form of voluntary exchange, no different from money except that money makes accounting easier. When you use $ to buy stuff, you engage in barter, albeit 'mediated' by 'money'. You could use gold coins, of course, or silver ignots, or pieces of bread, or sticks of cigarettes - the only thing you need is another person agreeing to the exchange. 

Again, that's my understanding of the malaise.  

Nathyn:

Also, the gold standard is an incentive for imperialism.

 

 This is QUITE ludicrous on its face.

 FIAT money and central banking is the prime incentive for imperialism.  In fact, only the existence of this system permits the government to engage in endless warfare.  With any sort of commodity standard, plus 100% reserve banking, the government would soon run out of the ability to borrow as they would saturate the market.  They would have to engage in massive taxation to fund the war, a tax revolt would follow, the warmongers would be thrown out of office and peace would ensue.

 Fiat money=war.

Commodity money+100% reserve=peace. 

I think making a link between the monetary system and whether or not there is war is not quite sound. Fiat money may make it easier to finance war, but this tells us nothing about the motivation for war. Based on my reading of Rothbard and Hoppe, the cause of war is primarily the interest of the rulers who see it to their advantage to engage in war. The motive may be purely personal - they like war for its own sake. Or it may be political in the widest sense, namely that the entire country has gone mad and believes it has to invade the neighbour and kill everybody (or take their goods).

The current monetary system makes it simply easier to tax the population, because it is less visible -- the government could just as well tax outright, but that would be more difficult to do politically. Since fiat money does not creat any value, there is no difference in effect between really high taxation and government created inflation.  

 A tax revolt would only follow high taxation if the government's actions are perceived to be illegitimate -- if you happen to live in a democracy, chances are that most people have bought into the war's justification and are quite happy to fight it. As long as the government can maintain the myth that its actions are in the interest of the people, nobody will be able to do anything about.

So, the problem is not the monetary system -- it makes the original problem only worse. The problem is the idea of war in the first place.  

The total amount of physical paper dollar in circulation is only 7 trillion dollars.  When NYSE listings are valued in "ounces" instead of "dollars," there doesn't have to be any physical gold in the exchange at all, just like there is no physical dollar switching hands on the floors of the NYSE when stocks are bought and sold.  Gold Standard does not necessarily require 100% reserve.  However, so long as Gold Standard is maintained, the banks wouldn't be able to count on the central bank to bail them out (i.e. being "the lender of last resort"); without that "Central Bank put" in their pockets, the bankers wouldn't dare to speculate like crazy and count the public to absorb their speculative losses.

The problem with Gold Standard is actually the "Standard" itself.  It's merely a pledge by the government that the unit of account in that country (pound or dollar) will equate to a fixed amount of commodity, unless it's in a war or "declared emergency."  The economy would be in a much better shape if we ditch the abstract currency unit of count, and instead use "troy ounces of find gold" or "troy pounds of sterling silver" as unit of count, without any fixed ratio between the two, which are only mutually substitutable if the contract specificly allows payment in either.  Then the government wouldn't be able to suspend the "standard."  Historically, that's what people naturally adopt when they finally realize what a sham government seal of approval is, whether it's on a piece of paper or on a piece of metal (the former is completely worthless and the latter inevitably leading to debasement).  That's what happened when the largest land empire ever existed in world history, the Mongols, finally collapsed in a torrent of hyperinflation back in the 15th century.  Subsequently, the Chinese used lumps of uncoined silver for transactions, not because they didn't know how to coin money (they did that as far back as two thousands years previously), but because people finanlly got the epipheny that government seal of approval can only make a commodity worth less in the long run through debasement.

Correction: total amount of physical paper dollar in existence is about 760 billion dollars as of late 2005, not 7 trillion.  Just a minor point to further reinforce my point.

Nathyn:

Also, the gold standard is an incentive for imperialism.

 

You stumbled across an once of truth!

Gold standards are a form of government policy and governments are the sole means of imperialism.

JimS:

Correction: total amount of physical paper dollar in existence is about 760 billion dollars as of late 2005, not 7 trillion.  Just a minor point to further reinforce my point.

 

Actually, you were right.  According to a Federal Reserve Statistical Release (http://www.federalreserve.gov/releases/h6/current/default.htm) there is $7.4 trillion in circulation or held in deposit in the US.

As for 100% reserve banking, many people feel that Fractional Reserve Banking is just wrong...no different from counterfeiting.  A bank that practices FRB is creating money that it doesn't have, on the hopes that it won't get called on it.  I agree that removing the "lender of last resort" would help cut down on banks that do this...but forcing a 100% reserve goes much further in restoring faith in the banking system overall.

As for wars, having a representative currency doesn't stop war.  It forces governments to fund wars through taxation and good budget practices rather than simply printing more money.  The point being that if a war (or any other very expensive undertaking like massive public works) is worthwhile and has the backing of the people, the government will be able to tax the people to pay for the undertaking.  If the public doesn't back the effort then the government can't proceed.  With the fiat currency system the government can fund useless wars by simply printing more money and it never has to pay the political price that comes with raising taxes.

I have two problems with any representative currency:

1) Whatever commodity you decide to back your currency with, it has to be stored and secured somewhere.  Let's say that the US decides to switch to a Platinum Standard, with 100% reserve banking.  Right now the price of platinum is $1550.00 per ounce.  If the total amount of money that needs backing is $7.4 trillion then the US would need 4774193548.387 ounces (or 135346.11 metric tons) of platinum.  Of course this amount would go down if the price jumped a lot, but the government would have to safely store and secure all that metal at points across the country.  These storage locations become primary military, criminal, and terrorist targets.  This problem is compounded further if the country in question isn't the US but some other smaller country without the military power of the US.

2) You have to hope that, in the future, the commodity you use as backing doesn't lose its intrinsic value.  We can use gold and platinum because they are valuable materials that have worldwide appeal.  But what if, over a long period of time, people lose interest in getting their hands on these shiny metals?  I guess you could always switch to a different commodity but that is a very difficult process.

 

Jonas,

I'm no fan of fractional reserve banking myself.  However, I'm no fan of regulations either.  IMHO, consumers should be able to decide whom they want to bank with: the full reservists who charge storage fees, the fractional reservists who pay interest, and the ponzi scammers who pay very high interest . . . so long as the customers at the honest banks are not ripped off by the scammers due to being tied together involuntarily by fiat inflation.    Faith in the banking system can not be installed through bureacracy; all bureacracy can install is a false sense of security (just like FDA).  People losing money in failed ponzi schemes will be a forceful reminder that they should put their faith in honest banks. 

I do not like government-issued respresetative currency either.  That's why I suggested the return of uncoined metal commodity as unit of count; i.e. keeping books in "ounces" instead of "dollars" so that there can never be "delinking" without rendering all contracts completely meaningless (instead of a newly defined "dollar" to keep the contracts still going).   Private inter-bank and inter-regional "checks" however started as a private phenomenom.  They do not have to be backed by a centralized government storage of commodity.  Each bank was responsible for their own metal storage.  Notes from far away banks were discounted from face value, reflecting the cost of redemption and transportation of specie.  I'm a firm advocate of free trade, but IMHO, such a discount on notes issued by far away banks would also serve to encourage local sourcing and mitigate the social dislocation caused by low-cost competition from far away without getting the government involved (such as a tariff).  The non-trivial cost of moving real money across long distance is currently being papered over by the fiat representative currency system.   Consumers can then decide whom they'd like to bank with, based on the storage/safeguard fees, interest and money transportation capability of the bank.

 "Presidents don't have power; their job is to draw attention away from it." -- Ford Prefect, The Hitchiker's Guide to the Galaxy

The politicians and professional intellectuals are usually not members of the parasitic classes. They are merely in its employ (whether they are aware of it or not). Wars may be triggered and fought for emotional reasons, but this is merely how the parasitic classes manipulate the masses. The conditions for war are very consciously fostered. Enemies are demonized and military might is funded and deployed with very specific goals in mind.

The single largest industry in the United States right now is the financial industry. The astounding profits they make are only possible through the use of fiat currency and fractional-reserve banking. Halliburton and Bechtel may have billions of dollars of incentive to influence government policy, but the financial industry has trillions.

Let that sink in. 

Folks have mentioned that fiat currency is held in place by taxation. But the bankers and mercantilists (for whom the politicians and professional intellectuals really work) have another trick. In 1973 the U.S. government made a deal with the House of Saud. The U.S. would keep them in power, and in exchange, Saudi Arabia would accept only dollars in payment for oil. The rest of OPEC quickly followed suit. This is how the U.S. continued to impose the dollar as a world currency after it renegged in 1971 on its obligation to other countries to redeem dollars for gold.

What most people in the United States don't know is that in August of 2000, Saddam Hussein started demanding that Iraq's oil be purchased with euros instead of dollars. The first thing the U.S. military forces did upon arriving in Baghdad was to take over the Ministry of Oil and switch back to dollars.

Iran has similarly switched to demanding payment for oil in euros and yen. The real motivation for the invasion of Iraq and the current belligerence of the U.S. government towards Iran is the protection of the dollar's status as a world reserve currency. This is the real cause for which thousands of U.S. soldiers and hundreds of thousands of Iraqi civilians have been sacrificed.

"Death has a tendency to encourage a depressing view of war." -- Donald Rumsfeld

 

"Defending the dollar" may well be in the minds of some neocons, or at least their battle cry in order to sell agenda of imperialism (enabling war profiteering for the insiders) to a population that just might be opportunistic and morally bankrupt enough to believe that the ways to the riches is through robbing other people of the world.  Neoconservatism is at its root based on terrible economic theories.  Just like when they were young and were still liberals, Neocons believe the solution to problems is government intervention, while being completely blind to the side effects of such interventions.  Government intervention did not eliminate poverty in the inner cities 30+ years ago, and government intervention can not bring democracy or even pro-west alignment to Iraq today.  Just like 30+ years ago, the cost of government intervention is destroying the dollar.  Here we see the public education system doing a terrible disservice to the public: even today, it is taught in schools that the "oil crisis" of the 70's was the result of some tin pot dictator slamming us with oil emargoes when in reality it was a dollar crisis that drove every commodity price skyward regardless its production source.  The logic consequence of that bad education was of course, this time around, "we" have to have boots down the ground and hold the oil price down.  Well, the bloody experience in Iraq proves that the theory is completely bankrupt.  Just like 30+ years ago, metal prices and food prices are going up just as fast as oil . . . metal that are not from the middleast, and food that are produced in the US no less. 

The real lesson here is that, the cost of enforcing the dollar, the extra printing needed to keep the boots on the ground to force people take something that they don't want, makes the dollar even weaker.  The proper way to make dollar strong is by making it an attractive store of value, so that people all around the world would buy dollar and invest in dollar-denominated assets for capital growth.  That means, we need low taxation and low inflation.  That's how we can make dollar strong; what's more, no spilling the blood of our youths necessary.

JimS:

The real lesson here is that, the cost of enforcing the dollar, the extra printing needed to keep the boots on the ground to force people take something that they don't want, makes the dollar even weaker.  The proper way to make dollar strong is by making it an attractive store of value, so that people all around the world would buy dollar and invest in dollar-denominated assets for capital growth.  That means, we need low taxation and low inflation.  That's how we can make dollar strong; what's more, no spilling the blood of our youths necessary.

 

Your prescriptions are of course correct. But their goal in invading Iraq and trying to start a war with Iran is not to strengthen the dollar. Their goal is the perpetuation of their scam. Their scam makes the collapse of the dollar inevitable, but their egos are such that they think they will be the one with the chair when the music stops. If their choice is between doing something that has the chance of allowing the scam to continue a little while longer versus simply giving up on the scam entirely to prevent economic collapse, they'll choose the former.  Their contempt for the rest of humanity is such that spilt blood doesn't enter into their calculations. They probably even privately think the human race could do with a little more natural selection.

Also note that I'm not necessarily talking about the neocons. The neocons are professional intellectuals. They don't determine policy. They are being used to determine policy. The people who fund neocon thinktanks and buy neocons thier media exposure are the ones determining policy. The neocons get a healthy cut of the action, but they too are pawns. (How's that for a mind-bender?)

"I care not what puppet is placed upon the throne of England to rule the Empire on which the sun never sets. The man who controls Britain's money supply controls the British Empire, and I control the British money supply." -- Nathan Mayer Rothschild

 

if government is goint to tax anyway...maybe all who post here are tax avoiding rebels, i dont know....more power to you i guess if you are.

would not a money that is more difficult for the govt to manipulate and serve its own ends be desirable over the govt's money product?

if those who post here do pay the govt with its fiaty money - would there be a preference for the market to influence the money suply (albeit a govt mandated money type - a commodity in this instance) and have the govt only mint money?

 

 

cyclops:

provide a massively unfair advantage to gold producing countries and existing holders

I fail to see how the current monetary system is an answer to this. Countries who's currencies are pinned to the dollar experience this same sentiment in relation to the US.

cyclops:

This means the world's gold supply is currently valued at around 6 trillion dollars. Now, the New York Stock Exchange ALONE has a total market cap of 19.3 trillion dollars - over three times the value of all the gold on Earth.

This is stupid. Gold isn't used as a currency, so the "value" of it can't be compared to one. If gold was a marketable currency you'd see a lot more demand for it (which would give it a lot more value).

cyclops:

So the only way to reconcile the disparity is to drastically decrease the volume of dollars in circulation (i.e. deflation) or drastically increase the value of gold.

Equally stupid. You don't have to do either (and you can't "increase value". that's done on a marginal, agent oriented basis) all the government would have to do is say 1 dollar is redeemable for x ammount of gold. (where the ratio of gold per dollar reflects the dollars in the market to the ammount of gold on reserve).

cyclops:

"Adopting the gold standard would likely cause a massive deflationary spiral and/or provide a massively unfair advantage to gold producing countries and existing holders:

There is, at most, 200,000 tons of gold on the entire planet and gold is currently trading at $30 / gram or $30,000 / kilo or $30 million / ton. This means the world's gold supply is currently valued at around 6 trillion dollars. Now, the New York Stock Exchange ALONE has a total market cap of 19.3 trillion dollars - over three times the value of all the gold on Earth.

So the only way to reconcile the disparity is to drastically decrease the volume of dollars in circulation (i.e. deflation) or drastically increase the value of gold."

I've heard this argument before. It sounds like "there isn't enough gold in the world to buy everything". Things is, it doesn't need to. The gold money would be used for exchanges. One doesn't purchase all the stocks on the NY exchange in a single transaction!

I'm not sure what that means for the value of gold though. I suspect that we will have deleveraging and all prices in terms of fiat currencies will go down (including gold). At the moment, since gold isn't used as money, it's only the fear of the end of the fiat system that drives the price as well as industrial and jewellry uses. That could mean that the price goes up a lot as people rush out of their fiat currencies into hard currency. Equally people could buy other asserts though such as houses, cars, farms, baked beans etc. However, if people consider houses and cars etc as deflating, they may just choose gold anyhow which is what could give gold a counter-deflationary pressure. Gold may be seen as a good portable store of wealth in disasters. Certainly some see war and/or civil unrest ahead. For those, gold may be better than other fixed and less portable assets.

That's more or less where I am at with my thinking on it at the moment. One thing is for sure - we don't need the value of gold to increase in price so that one guy could front up to the cashier with his bag of gold and purchase the world :). The world will always be more valueable than all the gold.