Need help arguing for the gold standard

[apprentice]

In another forum i frequent it was brought up by a couple of the posters that going back to the gold standard is not only impossible (because of inflation) but not worth it. Now I remember Ron Paul touching on this issue in his book and in a debate but I just dont know enough myself to give a good rebuttle. I was wondering if maybe any of you guys who have way more knowledge then me on this issue could possibly help me out by helping me better understand why going back to a gold standard is not only better then our current system of Fiat money but crucial.

In the following im going to post what the two guys said and my respose to one of them.

Person A: Before the days of reliable paper money, gold was a good way to store money, because it was more or less permanent, didn’t rot, and didn’t corrode. That is not necessary so much anymore.

Gold is an awesome metall to make electronic components out of, there’s no reason to lock it up in bank vaults. There is also a finite supply of gold, while the world economy keeps on growing. Two good reasons in and of themselves to not use gold to back up currencies.

My Response (let me know what i missed or could add): I’m going to have to disagree with your last statement. I agree with you that gold is an awesome metal but in my opinion there is very much a good reason to “lock it up in bank vaults.” When your currency is backed up by a precious metal such as gold it doesn’t allow institutions like the Fed to inflate the currency. Also there being a finite supply of gold is exactly why it should be used to back up a currency, because that way the government wouldn’t just be able to just print infinite amounts of dollars.

Also not being able to go back to a fully backed currency by gold because our economy is constantly growing isn’t true. If we went back to a gold standard the right way (by buying gold at current market price) such a problem wouldn’t arise. So i believe you pretty much argued for why gold should be used to back up money.

The following is what another poster wrote that i know is wrong but i need help explaining why its wrong.

PERSON B: There isn’t anything stopping the government from revaluing the a currency based on the gold standard. If the government has X amount of gold which is worth Y dollars, nothing is preventing them from passing a law that states that X amount of gold is now worth Z dollars. Inflation doesn’t go away because we’re now backing our money with a metal that has 0 utility.

And the fact that there’s a finite supply of gold is exactly why you do not want money to be backed by gold. Eventually (if not already) we will not be able to extract enough gold from the ground to keep pace with the expansion of our economy. When that happens, you will have deflation, which most economists will tell you is a significantly bigger problem than inflation.

There’s nothing wrong with fiat money as long as it is handled properly. to me, it makes more sense for the Fed to focus strictly on having the money supply expand in concert with GDP. Doing that, theoretically, eliminates inflation.

We don’t have a way to track any increases (or decreases) in output in real time, though, so this is not practical right now.

[Jon_Irenicus]

The first guy is asserting the superiority of his preferences over those of consumers in the market. He has no leg on which to stand.

There isn’t anything stopping the government from revaluing the a currency based on the gold standard. If the government has X amount of gold which is worth Y dollars, nothing is preventing them from passing a law that states that X amount of gold is now worth Z dollars. Inflation doesn’t go away because we’re now backing our money with a metal that has 0 utility.

Does he understand what a gold standard is? He seems to be referring to the purchasing power parity.

And the fact that there’s a finite supply of gold is exactly why you do not want money to be backed by gold. Eventually (if not already) we will not be able to extract enough gold from the ground to keep pace with the expansion of our economy. When that happens, you will have deflation, which most economists will tell you is a significantly bigger problem than inflation.

What is the “problem” with deflation? Also, this argument is wrong. In the first place, the currency can be divided as necessary and in the second place gold expands at a steady rate of around 2-3%. Its purchasing power constantly goes up in a progressing economy, rendering the need for more of it redundant.

There’s nothing wrong with fiat money as long as it is handled properly. to me, it makes more sense for the Fed to focus strictly on having the money supply expand in concert with GDP. Doing that, theoretically, eliminates inflation.

Circular. He’s assuming what he ought to prove. He has no knowledge of what money is or how it functions. This is just ignorant rambling. What is the problem, exactly, with letting consumers freely choose which money they wish to use?

-Jon

[scineram]

@apprentice

Gold is an awesome metall to make electronic components out of, there’s no reason to lock it up in bank vaults. There is also a finite supply of gold, while the world economy keeps on growing.

Fractional reserve banking decreases the resourse costs, because fever gold has to be locked up in bank vaults.

[scineram]

@Jon Irenicus

What is the problem, exactly, with letting consumers freely choose which money they wish to use?

That is it. You should not defend the gold standard, but complete monetary freedom.

[apprentice]

@Jon Irenicus

The first guy is asserting the superiority of his preferences over those of consumers in the market. He has no leg on which to stand.

There isn’t anything stopping the government from revaluing the a currency based on the gold standard. If the government has X amount of gold which is worth Y dollars, nothing is preventing them from passing a law that states that X amount of gold is now worth Z dollars. Inflation doesn’t go away because we’re now backing our money with a metal that has 0 utility.

Does he understand what a gold standard is? He seems to be referring to the purchasing power parity.

And the fact that there’s a finite supply of gold is exactly why you do not want money to be backed by gold. Eventually (if not already) we will not be able to extract enough gold from the ground to keep pace with the expansion of our economy. When that happens, you will have deflation, which most economists will tell you is a significantly bigger problem than inflation.

What is the “problem” with deflation? Also, this argument is wrong. In the first place, the currency can be divided as necessary and in the second place gold expands at a steady rate of around 2-3%. Its purchasing power constantly goes up in a progressing economy, rendering the need for more of it redundant.

There’s nothing wrong with fiat money as long as it is handled properly. to me, it makes more sense for the Fed to focus strictly on having the money supply expand in concert with GDP. Doing that, theoretically, eliminates inflation.

Circular. He’s assuming what he ought to prove. He has no knowledge of what money is or how it functions. This is just ignorant rambling. What is the problem, exactly, with letting consumers freely choose which money they wish to use?

-Jon

Hey Jon, thanks for the great answers but I was wondering if you could possibly elaborate a little bit more. Especially on how the gold expands. Thanks again in advance.

[Jon_Irenicus]

There’s not much to expand on that, other than gold increases in supply by around 2-3% annually. If more gold is needed, it can be shifted from other uses (e.g. jewellery) to monetary use. The amount of the currency is irrelevant really. All that matters is that it is divisible and that prices are allowed to adjust to fluctuations in it. Remember, Austrians do not consider a mere expansion of the money supply to be inflationary. They consider an inflation in money-substitutes and credit over and above this to fit that bill. Anything else you want expansion on?

-Jon

[apprentice]

Nope, sounds pretty good. Thanks a lot Jon.

EDIT: Jon, you mentioned “what is the problem with deflation?” isn’t deflation considered bad? Or in this case is it good because it would mean price levels would go down?

[Juan]

Fractional reserve banking decreases the resourse costs, because fever gold has to be locked up in bank vaults.

False. Such idea is just what (wrongly) ‘justifies’ fiat money…and all the problems associated with it.

[Richard_Kane]

Theres really no reason why ‘market money’ would have to be gold today. It could be but we don’t know until we let commodities compete in a free market for the title of money.

[Jon_Irenicus]

It’s considered bad, but he ought to give reasons in support of such a view. Besides, deflation has a theoretical limit: the stock of actual money in the economy: it can’t go below that. Inflation has no real limit, unless one counts the collapse of the economy as one.

-Jon

[MatthewWilliam]

For a concise explanation of why falling prices are bad when caused by deflation, while falling prices are good when caused by productivity gains, see Reisman’s article The Anatomy of Deflation.

If you don’t wanna read it all, just skip to the table at the bottom.

[apprentice]

Thanks to everyone for the help and great answers.