I was talking to someone about the gold standard the other day and they said that if the US were to go onto a gold standard countries like Russia and South Africa (and other countries with large gold reserves) would be in control of the money supply. Can someone comment on this? Also, what are the other common arguments against a gold standard and what would Austrian rebuttals for them be?
No one needs to go on any standard. Just repeal legal tender laws and capital gains taxes and let each market agent freely exchange whatever it wants for whatever it wants. The types of property most frequently exchanged for other types would be money. Whatever undesirable feature gold may have or end up having as money (such as, for example, someone owning all the gold on this planet) will be reflected in the propensity of the market to use it as such.
The Economics of Legal Tender Laws (by Jörg Guido Hülsmann)
If the supply of gold were determined by political authorities in other nations, then would it really be much of an improvement on the supply of fiat dollars being determined by the Fed?
There seems to be a common fallacy on this board that goes something like this:
Gold is good money,
Therefore,
The more something is like gold, the better it is as money.
Historically, gold has made good money, but the properties that made it good money in the past do not necessarily hold today. Circumstances can change and alternatives can rise.
It may be the case that governments of countries with larger stocks of in-the-ground gold (junior gold? not sure of the terminology) would have an advantage vis-a-vis governments that do not in much the same way that governments of oil-rich countries do today.
That said, what Austrians have called for is not a “gold standard” but the end of currency monopoly, that is, re-introduction of currency competition. It is possible that gold would be avoided in regions which are less gold-rich precisely because of the devaluation which gold-rich governments could induce in gold. However, I think this possibility is exaggerated since the stock of above-ground gold is truly massive… world-wide production of new gold is currently around 1% or 2% of the existing gold stock, IIRC. Furthermore, even if you had an “inflationary period” after gold was legalized as money, the governments of gold-rich countries would quickly run up against the laws of economics… as you mine gold, it becomes more and more costly to continue mining it as you have to extract less and less readily available gold deposits. So, any inflation would short-lived. After this, the supply characteristics of gold would be far more predictable than that of fiat money - gold supply can fluctuate by a percentage up or down within certain bands dictated by the physical circumstances on planet Earth but fiat money can be increased arbitrarily fast.
Finally, if gold was no longer suitable as a medium of exchange, a market in currency would simply choose another medium. There’s no need to wring our collective hands about which is the “right” money - gold, silver, copper, paper - we simply need to stop trying to centrally plan the market for currency production and allow entrepreneurs figure out what people want to use as money.
Lew Rockwell puts it perfectly:
Just imagine what would happen if legal tender laws were repealed and the government stopped intervention in the market for money. Virtually overnight, we would see the appearance of hundreds if not thousands of new payment systems and alternative monies online. Merchants would be free to accept any means of payment. There would be intense competition among them. Some would be foreign currencies like the Euro. Some would be new currencies based on existing commodities such as gold and silver. I’m certain that we would see a period of wild experimentation take place before the market settled back down again into a standard system that was famed for its reliability and stability and honesty.
Would we be able to endure the process of discovery? Certainly. We do this every day with our shopping online, or searches for good providers of services and products in the physical world, and our habits on how to invest our money. The market is a process of trial and error, one that never stops innovating and changing. We see everyday on the World Wide Web how this process of creation and change create the right balance between chaos and order, experimentation and standardization. This would happen in the field of money too.
Clayton -
There is a mercantilist fallacy hiding there. That money is what makes you rich.
I still have yet to see anything Russian or South African on the shelves at Walmart. Meaning their gold will flow to those countries that have the real wealth, goods and service that people want.