How would a gold standard be practical?

Economics Economics Questions
1

Hey doods,

I am new to this whole Austrian economics thing, but I have found it very interesting. While reading up on the differences between fiat currencies and specie-backed currencies, it seems that a currency backed by specie has many advantages.

However, I have recently thought of a problem with the gold standard (as I suppose many others have) and it is that if all our money were to be backed by gold, how would the increase in population have enough money? With more people sharing the same money supply, people entering the market will have to compete to share wealth that is already being divided among the current population. I guess injected fiat currencies at least give newborns money to earn without taking it directly away from someone else.

Please explain how a gold standard would combat this problem

2

With a stable money supply you will not see vast inflationary measure but also you will see a drop in the prices of goods relative to the increase of productivity and capital investment. Money is a medium of exchange that serves no other social purpose then being used as such. Therefore society doesn’t become ‘wealthier’ just because there is an increase in money. Wealth creation comes from investment. The greater the investment the greater the productivity, which follows with a decrease in prices because of supply and also a decrease in the amount of resources need to be expended on obtaining goods. Tom DiLorenzo covers his in his book How Capitalism saved America, I think it is page 96 if I recall correctly.

3

ehh… I realize that, but I think you missed the point of what I am saying. We have a finite supply of gold. Alot of Austrian economics enthusiasts I know think we should go back to a gold standard. However, since there is a limited supply of gold, what will we use to represent the increase in wealth once we have more wealth than can be backed by our limited gold supply?

Also, wealth can be increased by adding money to the system if it is in accordance with population growth. Well, maybe not increased but maintained. With a gold standard, once we have more wealth than can be represented by gold, our labor will result in decreased wages because there is no gold to pay the laborers with!

4

Rely on the economists, the enthusiasts are half baked goofballs like me.

Many Austrians believe in a commodity standard which they believe to be the likely outcome of a market determined money. That is, people will likely choose money based on a commodity, and traditionally gold has served this purpose. But Austrians by and large, should not be, and many are not committed only to Gold, or only to Silver.

Unless they own stocks in gold mines, in which case, they are only for Gold. [;)]

Money is not wealth. It is only a representation of wealth. Money’s function is to capture and retain purchasing power.

An increase in purchasing power is wealth. And that can be realized with a stable monetary supply, by falling prices. Your money buys more.

No, wealth has nothing to do with the size of the population.

We never want to maintain prices. We want them to rise and fall with a stable monetary supply so we can see increases and decreases in purchasing power.

There is nothing wrong with your boss cutting your wage from $5 to $4 an hour, if $4 buys as much or more than $5 did before.

Decreased wages will signal a rise in purchasing power. Wages will go down as money is divided into smaller increments, but the amount of economic output will remain the same.

The amount of gold is almost completely irrelevant. The only time gold would be an issue, is if it is denominated in such a small amount, that there is not enough to circulate. Then a secondary or new money might be introduced into the market. But with digital money and paper receipts, you could trade in gold grains if necessary (approx. 437.5 grains per ounce).

We no longer have to coin and carry gold, in order to have a 100% gold backed currency. We have moved past that technologically.

You should use the forum search because someone brings this up at least once every 2 weeks since I have been here (almost 18 months).

5

Greater increases in the purchasing power of the gold itself.

A Keynesian fallacy or at the very least a monetarist one.

No the value of gold due to its scarcity would go up. Let us theorize that 10 ounces of gold is our regular income and the world is supposedly running low on gold. Now, we would be getting a decrease of let us say 5 ounces bringing us to 5 ounces received, however the purchasing power of the gold ounce would increase due to its scarcity, 5 ounces could buy the same amount if not possibly more because of capital investment. I admit there is a great deal of unseen actions taken place which is why I had trouble with this concept when I first heard it.

6

Consider that statement.

You assume that because the amount of goods is growing that the amount of money must grow, too. Of course that’s not true. An ounce of gold is just as capable of being exchange for 100 cars as it is for 1 car.

That’s what determines prices, both the amount of goods and the amount of money. There is no right or wrong amount of money. Any amount will work. Did you think it just a lucky coincidence that the pricing system is able to function with our current money supply?

Half the gold on earth could fall into a volcano and there would still be enough for it to function as a medium of exchange.

Decreased nominal wages, but increased real wages.

7

AHhhhhhhhh, I am kind of beginning to understand, but I sitll think this required an absurd trust in humanity to work. Maybe I just don’t get it quite yet, but how is this different than the fiat currency system? With less gold, it becomes worth more as a currency. If half the dollars in circulation are burned by the Fed, it becomes worth more as a currency.

What makes gold any different? Especially if you are assuming that grains of gold will be of any practical value… after all it is just a mineral that you cant eat [:S]

Also, I think this gold standard idea will face enormous problems from huge information asymmetry. For example, say I buy 1/3 the current gold supply right now (lol i wish). We then revert to a gold standard and things operate as you have desribed. What would happen if I were to be like “Oh yea, I forgot to mention I have a hell of a lot of gold in my house that I have been hoarding all these years, let me use it.” Wouldn’t this cause similar inflation like the Fed injecting billions of dollars into the economy?

8

You can say what you want about fiat money, but it does fulfill its role as a medium of exchange. The fact that any quantity of money will facilitate transactions in an economy is true for both gold and fiat money.

The difference is that gold is more difficult to manipulate, cannot be created out of thin air and retains its purchasing power.

Historically when large pockets of gold were discovered (gold rushes of California and Australia), this resulted in only small increases in prices; nothing like the constant erosion of purchasing power we have today.

9

Which is why falling nominal wages wouldn’t matter. That objection is shot down.

Gold is a voluntary medium of exchange. The dollar is a monopoly tender given value by federal gun men.

So is steel.

So we are supposed to accept the federal government expanding the money supply many times over with in a single century because of that scenario? I’m unimpressed.

How is information more symmetrical in a managed currency than in a decentralized currency? You’ve got reality upside down. Perhaps because you still believe that idea the government is an impartial mediator in the economy?

10

What the hell man, I am just asking questions. If you read my initial post, you would know that I am new to this. Your attitude is EXACTLY what I am talking about in the other thread about why nobody takes you guys seriously. You insult me when I am asking questions? Not even religious extremists do such a thing. Thats probably why you have dozens of TV channels with religious speakers making millions of dollars while you guys sit here on an internet forum.

By no means am I arguing against a gold standard. I am asking questions to help myself better understand it. But maybe your anarcho capitalism will make thinking easier as well?

11

Great job giving a potential liberty-minded person a warm welcome guys. [:S]

12

Don’t get in a tiszy guys, it is a difficult concept to understand since all we have know is fiat currency.

13

I am new here too, the people here are not so bad, you should see some of the conversations I have had on other forum sites…

This is wrong too…

This is just a cheap shot…

Ok, now I am done being etiquette guy…

I am new to the workings of the Gold Standard (GS), but let me try to give you a little point in the right direction from what I understand to be true…

The amount of gold is irrelevant, once you fix the currency to the gold you are pretty much set

An increase of gold or decrease in productivity will increase the purchase power, lower wages and prices

A decrease of gold or increase of productivity will decrease the purchase power, raise wages and prices

If you have an increase/increase or decrease/decrease scenario not much happens

I used to have an issue with the amount of gold not being able to accommodate the size of the market until I was explained why the amount of gold is irrelevant…

The only changes are seen in the purchase power of the currency, which is healthy, and under any commodity standard (such as GS) this change happens uniformly and almost instantaneously

With a fiat currency as a medium of exchange you are relying on the government, or currency producer in a free market scenario, to be honest. This is mainly because the purchase power of the fiat currency changes slowly as the money circulates, allowing the fist to handle the money to benefit from over printing or currency destruction…

This is one of the reasons a lot of people I have read, that are Anarcho-Capitalists, support commodity based currencies…

I hope this helps you out…

14

Hey Travis,

We’re in the same boat, not world’s apart. No need to get vex over words. Glad you’re interested in learning about real economics.

In response to your questions, I offer the following:

“how would the increase in population have enough money?” - realize that the value of gold will flucuate but it highly fungible and divisible into extremely small units (e.g. 0.0005 gram Au) which makes it a prime choice for real money. Also the supply of gold harvested from mines tends to increase relative to our population growth resulting in less supply side volatility (another nice trait to have for real money)

Say there was 100 clones on island earth that used 100 ounces of gold as money. Each clone earned and spent 1 ounce per year. Then the clone master added 900 clones to the island but left the supply of gold the same. Then each clone would then be earning and spending 1/10 ounce of gold per year with no reduction in their standard of living.

“With more people sharing the same money supply, people entering the market will have to compete to share wealth that is already being divided among the current population. I guess injected fiat currencies at least give newborns money to earn without taking it directly away from someone else.” - .Wealth is not a zero sum game in which my bigger slice makes your slice smaller. Wealth is created through cooperation, allowing us both to enjoy bigger and bigger slices. The things you speak of arise through restrictions placed on the free market mostly through acts of government.

15

This is my problem though, if you spend 1 ounce per year and you now only earn 1/10 ounces a year, how are you able to buy 1 ounce worth of goods with only 1/10 ounces salary??

16

Scarcity of the medium of exchange (Gold) increases the purchase power of the medium…

The prices will fall as the value of the medium is increased when the population increases…

Using my breakdown I posted above, it is decreaseing the per person volume of gold from 1 oz to 1/10 oz, making gold more valuble compared to the commodities purchased…

17

The 1 ounce among 100 clones would have the same relative value as 1/10 ounce among 1000 clones, each unit of money (1oz in one scenario & 1/10oz in the other) would buy the same amount of goods. The widget that costs 1 oz. in the first scenario would cost 1/10 oz. in the second.

18

But surely there is some transition phase where wages have gone down and prices have not yet adjusted? Can we really count on the people to be aware of such changes in the purchasing power of their gold? This seems like it will be a problem when you are dealing with more than 100 ounces… say hundreds of millions…

19

…How would you buy a million dollar house only making 20k? The answer to this question is obvious.

20

Prices fall first, wages fall second.

Deflation is good for wage earners. Inflation is bad for wage earners.

Are you aware of the declining purchasing power of your dollars?

You are trying to hold this hypothetical gold standard to a much higher standard than you ask of Federal Reserve Notes.