Help me argue for a gold standard.

Economics Economics Questions
1

In discussing Ron Paul on another forum, the topic of the gold standard came up. Here are some of the objections/questions:

“I’m 100% certain the business community wouldn’t allow us to go back to the gold standard any more than they would allow us to implement a $100/hour minimum wage. Business owners may not be old enough to remember the late 1800s and early 1900s, but enough of them have studied economics to know the importance of monetary policy in preventing or at least mimizing depressions/recessions, as well as it’s role in helping to aid the recovery from these events. This isn’t a left vs right thing, either, it’s a “knows economic history” vs “doesn’t know economic history” thing. Hell, even Milton Friedman admits that wise monetary policy could’ve prevented the Great Depression, and he’s not exactly a marxist. Right wing economists and left wing economists and business leaders and anyone who has ever looked at what America’s schizophrenic boom-bust-boom-bust-boom-bust pre-monetary policy economy looked like will lobby incredibly hard to NOT choose schizophrenia over at least some level of stability.”

My argument: The economy may have been more volatile before monetary policy, but it was far less severe. Nothing close to the Great Depression occurred. Further, we can look at the hyperinflation of Zimbabwe and the Weimar republic to realize how potentially dangerous fiat currency is.

My argument seems weak, so I would appreciate your thoughts/response to the paragraph.

Next: "So the US reverts back to the gold standard, while the rest of the world continues to follow the basic tenets of modern monetary policy.

How the hell does that work in America’s best interests? How can we compete in a globalized economy that way? How will that grow jobs? How will we cope with the inevitable booms-and-busts that characterize a gold-pegged economy? What happens when there is no more gold to be found? Does the world economy just stop growing?"

My response: It’s not America’s best interest per se, but in the best interest of Americans. Gold is a stable money, therefore there will be very little (if any) inflation. Stable or declining prices promote savings and capital accumulation, which is how an economy grows. The U.S. would experience a lot of foreign investment due to the stable money, much like Switzerland experiences now.

When there is no more gold to be found, the value of the dollar increases (?) as the price of gold increases (?)

I thought I would ask you guys since you know more about this, and usually provide comprehensive and lucid arguments. Thanks.

2

I would start here:

Gold as Money: FAQ

What Has Government Done to Our Money?,

The Case for a 100 Percent Gold Dollar, & The Case for a Genuine Gold Dollar by Murray Rothbard

The Mystery of Banking by Murray Rothbard

3

Warning: I am no AE expert, but this is what I have come to understand from these forums.

I’m 100% certain the business community wouldn’t allow us to go back to the gold standard any more than they would allow us to implement a $100/hour minimum wage.

And I’m 100% certain Stalin would not have let the USSR dissolve. The poster is arguing against the “electability” of the law. We are talking about the ideal scenario, not what the current political climate allows. That’s the idea of fiat: http://en.wikipedia.org/wiki/Fiat_(policy_debate)

enough of them have studied economics to know the importance of monetary policy in preventing or at least mimizing depressions/recessions, as well as it’s role in helping to aid the recovery from these events.

That’s the whole idea of AE, to combat this Keynesian idea.

will lobby incredibly hard

And the fundamentalists will lobby incredibly hard to amend the Constitution to ban gay marriage. Again, we are talking about fiat. What should​ instead of what will.

Further, we can look at the hyperinflation of Zimbabwe and the Weimar republic to realize how potentially dangerous fiat currency is.

Eh. We can look at tons of countries doing different things we are and draw up doomsday scenarios.

How will we cope with the inevitable booms-and-busts that characterize a gold-pegged economy?

How will we cope with the same stuff that is due to free credit?

I would also argue that gold’s inflation/deflation is a natural byproduct of market forces, while the dollar’s inflation/deflation is essentially imposed wealth depreciation/appreciation. The government can essentially make you dirt poor in an instant if it prints $100 trillion and injects it into the economy.

4

I’ve read 3/5 of those, but I was looking for a quick response, especially in regard to the pre-Fed history. Is there a specific article/book that focuses on that? Maybe Rothbard’s History of Banking?

5

I didn’t realize you were looking specifically for history. How about the list of crises? The main take away is that even bubbles back then (even going back to Tulipmania in the 17th century) can still be traced to government intervention.

6

Why would you want to argue for gold standard i.e. upholding government monopoly on money supply? It didn’t work before and it won’t work ever. Why not argue for free market in money supply? Should be a lot easier - you could reuse a lot of arguments.

7

Bingo. It’s not about a “gold standard”. What you want is a free market in money. This is why Ron Paul talks about “competing currencies” or simply “sound money”. Just remove legal tender laws and let people use what they want.

8

This is exactly what you’re looking for :wink:

http://www.youtube.com/watch?v=yLynuQebyUM

9

NonAntiAnarchist beat me to it. The lecture by Selgin he linked and the paper Selgin wrote with Lawrence White and William Lastrapes called, “Has the Fed Been a Failure?” are excellent sources on why the 19th century monetary wasn’t as bad as it’s made out to be especially in comparison to the Fed.

Some things he points out:

-Short term fluctuations were worse, but long term price stability made long term bond issuance easier than today

-The 19th century experienced “benign” or “supply-side” deflation which is beneficial, not very extreme, and can be predicted fairly easily

-The price inidices relied much more on commodity prices which fluctuate more than the current CPI so price level comparisons are apples to oranges

Watch the video at least though. It’s very good.

10

Another thing to consider about the 19th century’s monetary system was that there wasn’t just one system. There were 2 central banks at various points, constant suspensions of specie payment, and the national banking system.

11

I posted this in another thread:

[Under the gold standrard] a bank would charge a storage fee. Imagine if I exchanged 100 lb of gold for $100. The bank charges me 5% per year to store it. In 20 years I’ll have no money or gold. Thus, what’s really going on is the bank is issuing me a loan and using my gold as collateral. There’s another problem though, how do I get the money to pay the interest? The only way is to acquire more gold and exchange it for money. So after the first year, I deposit 5 lb of gold and receive $5 to pay the interest. But that $5 is also debt, so next year I owe $6 in interest. In order to keep what I have, I have to increase my productivity 5% every year, compounded annually. There are only two other options: default or foreclosure. In defaulting, I somehow get to keep the gold without paying back the full value of the loan. In foreclosure, the bank gains permanent ownership over the gold. The only way to service debt is with more debt. No wonder so many people had to foreclose on their home mortgages. It’s not their fault, it had to happen to someone. On the other hand, the financial institutions had the luxury to default. Hmm…

Another thing I just realized. Since money is debt, then any unpaid interest on the money must be paid before ownership is transferred. This is what a sales tax does. Same for income tax for that matter. And if you try to withdraw your gold at the end of the first year, you’ll only get 95 lb of gold for $100. Thus, inflation has occurred without an increase in the money supply.

So some objections to a free market gold standard:

  1. Banks would charge a storage fee, making all money into ever increasing debt.

  2. A 100% gold reserve system is still fractional reserve if banks charge interest on holding it. At the end of the first year in the example above, there is $100 in circulation but only 95 lb can be withdrawn.

  3. We started with a gold standard but had to go off it because there wasn’t enough gold to monetize in order to pay the interest on holding the gold. Thus, we had to monetize more resources. Fiat is essentially just a property reserve system. Property in general serves as our collateral instead of just gold. Property tax is the interest we pay on the loan the government gives us. Money will govern more and more aspects of our lives as capitalism progresses.

Fiat is crap. Gold standard is crap. For me, there is only one satisfactory solution: abolish money.

12

Thanks for the video. I personally don’t advocate the gold standard, but I thought RP did. I didn’t realize he wanted a free market in money.

13

Ummm, your logic doesn’t follow to abolish money. It doesn’t even back sense in any degree. Can you try again from a simpler basis as to why a private bank would want to charge a percentage for storage of gold?

14

Ummm, your logic doesn’t follow to abolish money. It doesn’t even back sense in any degree. Can you try again from a simpler basis as to why a private bank would want to charge a percentage for storage of gold?

You’re right that abolishing money doesn’t logically follow. You can’t derive an ought from an is. Abolishing money is simply my desire. But I stand by the rest of it.

Why would a bank charge a fee to store someone else’s gold? If they didn’t charge a fee to store someone’s gold, they would be storing the gold for free. Why would they do that? Would these banks not be businesses? Would they not want to profit from this activity? Or are you suggesting that banks would charge by customer rather than by a set percentage? In that case, the bank would be charging the same fee for storing 1 lb of gold vs. 1,000,000 lb of gold. Doesn’t a greater quantity of gold require greater vault space and great defenses? But even if they charge a flat fee to each customer, it wouldn’t change the fact that the money is debt. It is still owed back to the bank in full.