It seems to me that going back to the gold standard would be impractical for a few countries. However, convincing arguments have been made that the fiat system has failed.
Is it feasible to back a country’s currency with a commodity such as oil? I wonder if perhaps that could help out the stability of many OPEC economies.
Ruben,
This is a great question, I’ve been looking into this myself. I think with the substantial defeat of the Republicans this November and the apparent defeat of ‘Free Market’ Capitalism (Facist style). The ground is fertile for som real economic answers and political/social directions. I personally believe we need to get back to limited government bound by the restraints of our constitution (originalism) with powers outside of that relegated to individuals and state governments. Regarding our currency, it needs to be tied to something, gold has always stood the test of time, even though it has been manipulated from time to time. Ron Paul, Murray Rothchild and Larry Parks have commented on the need to return to gold although they do not advocate a ‘Gold Standard’, which was used initially by Britain. But they believe by abolishing ‘legal tender’ laws that the market’s themselves will choose value.
Why ?
Murray Rothchild? [:P]
-Jon
I will elaborate. Oil is also referred to as black gold. Many countries have extensive underground or storage reserves of oil. And other countries have instead extensive reserves of oil. So let us suppose that, should at any time in the future the governments of various countries decide to get rif of their fiat currencies, some will go back to the gold standard and some will venture into the oil standard.
However, gold always stays there. It complies with the definition of storage of value. On the other hand, oil is used for gasoline and combustion and evaporates, it is a consumption good. Is it possible to use a consumption commodity as the backup of a currency?
‘bard’, I have a friend named Rothchild, retailer.
In the early twentieth century, coffee used to back several South American currencies. Perhaps wheat, corn, cotton, etc. could also do the job. Especially for very impoverished third world countries with rampant inflation and fiat currencies pegged to other fiat currencies from developed countries. I just wish to know if it is possible to moneteraly back an economy with the commodities it locally produces
… or back it with a basket of commodities. Why limit it to one? Each country would back their currency with any number of commodities–preferably those manufactured, processed, or mined domestically–and the value of the currency would be derived from the market values of those commodities. It might make the currency more stable (i.e.: less susceptible to manipulation of value).
Keep in mind it’s still fiat money if you can’t redeem it. So the issuer of such notes backed by consumption products would have to stockpile them. But most of them are perishable, so they have two choices:
I’m not entirely sure this would work, but I’d be interested to hear more.
I am thinking about freezing the monetary base as a reform. Would end inflation but not using resources and increasing their price.
And one more thing… consumption goods are usually not as valuable as gold. This is a problem, because one would need large storage space for such goods. Think about potato banks and how large their vaults would need to be.
I would think storage media (Blank CDR’s, DVD’s etc.) would be easier to store & more useful as currency (& by proxy, information, as a currency?)
Self-producing such on a small scale might be a bit esoteric, though.
Thank you everybody for your insights.
I still wish to go back to the case of oil for currencies in major oil producing countries, OPEC & Non OPEC members alike. Petroleum is as valuable and as useful as gold and it is not a perishable good. I even think there would be the added environmental benefit of using gasoline somewhat more sparingly than today so that those reserves continue backing up a currency.
The case of storage media as a currency sounds very interesting and worth further thoughts, however their intrinsec value deflates over the time due to technologica advances. Wouldn’t that decrease in the intrinsec value of the currency hurt the economy?
No, the intrinsic value does not go down. Instead, other products with higher intrinsic value appear.
If we talk about gold or oil as a currency, a decrease in its market value does not hurt the economy. This is because increasing the available quantity helps satisfy more needs and redirects market efforts to other needed resources.
However, I don’t think information is a good currency. Information gets outdated rather fast and can be easily reproduced once it was created.
Storage media could be an option, but there is a problem. While you can use buy two pieces of gold and join them to suit your needs, people would prefer higher capacity media for some purposes. More specifically, consider the fact that 30 CDs can’t be suitably used to replace a Blu-ray disc. In contrast, gold/oil can’t be packed tighter, nor it gets more useful in such a form. So technological advances will obsolete the old stock, no matter its size.
I realized these issues after I had posted my reply. They definitely add an interesting obstacle to implementing such a system due to their bulk and shelf-life. My thinking is that we can get around these issues by making the currency a derivative of their values, i.e.: the market values of those commodities listed on the different exchanges. This would reduce the need to have the commodity on-hand in storage. Since consumption commodities are harvested nearly year round, there will nearly always be a supply available.
I’m not entirely sure that this would work; I’m just brainstorming the idea as I sit at home sick with the flu… maybe I’m delirious from a combination of illness and cough medication.
FIAT MONEY HAS NOT FAILED. It is a very good system, its only loophole is that we have no control over its supply. The Fed does. If we keep supply tight enough, fiat is an awesome way of financing an economy.
Tying to a mineral, commodities or anything like that is unpractical in the long run. Imagine we take gold as money, then new discoveries are made and each human in the planent can get 10 pound of it. ITS WORTHLESS. Fiat money enables us to always be in control of our money. MOney is only to value things under one universal good.
You contradict yourself. “… its only loophole is that we have no control over its supply. The Fed does.” Which is followed by “Fiat money enables us to always be in control of our money.” We are either in control or not.
As far as discovering a new source of gold that gives every human on the planet 10 pounds of it, to that I would counter with: Imagine if the Fed in conjunction with the Treasury Dept turned on the printing press and injected hundreds of billions of dollars (a fiat currency) into the financial system. It becomes worth less, does it not?
Thomas Jefferson: I believe that banking institutions are more dangerous to our liberties than standing armies. Already they have raised up a money aristocracy that has set the government at defiance. The issuing power (of money) should be taken from the banks, and restored to the people to whom it belongs. —
If the American people ever allow private banks to control the issue of their currency, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers conquered.
We need to remove the power to print money out of government and banks hands.
I’m all for printing money, as long as I own the printing press and I’m all for Monarchies as long as I’m the King. It’s good to be King!
We don’t need to imagine it – just check any history book.
No it is not. Besides the chance that huge amounts of gold will be discovered all of a sudden is pretty slim.