Whenever I talk to guys in the financial industry, they tell me that it is impossible for us to return to a gold standard. Is this true? If not, what is a good way to make the transition from fiat to gold?
Thanks,
Egon
Data somewhat relevance would be “how much gold existed in the United States before it went off the gold standard?”
But anyway, it’s irrelevant. Stocks circulate with a fixed value as money even though certain types of stocks don’t give you any representation without a certain number and only do so if you buy enough of them. To have 1/100 or even 1/10000 of a gram isn’t inconcievable as money. It could simply be bank policy not to dole out its physical gold to anyone who has under that amount.
At any rate the point is that no one should be deciding this. The market should be deciding this. If gold is impractical then it will be dropped by the market.
Whether a gold standard would or wouldn’t work is immaterial, although some libertarians make of the gold standard a sort of make-or-break point. What matters is that there should be full competition in money, and all the monetary reform that is needed is for legal tender laws, implicit or explicit, to be abrogated (this would be somewhat harder than repealing a single law). If the Fed would also be fully privatized that would be much of a boon, but the market would work anyway even with a semi-public Fed. Whether gold would emerge as money is immaterial.
PS: I too do not believe that gold would work as money. In the past it has only because there has never been a free market in fiat currency to compete gold away.
The problem with gold standards in the past was that their value was fixed to silver and/or foreign coins were not legal and/or fractional reserve banking. That’s what I think at least.
Jackson’s specie circular was brilliant, but he should not have came up with a gold to silver ratio. If you have a government, then it should be constitutionally prohibited (and that limitation on the government cannot be removed unless every State consents) from accepting its revenues in anything other than exclusively gold or exclusively silver, and for it to not dictate what can be used in the private sector.
Merlin,
Why do you think gold won’t work?
I buy Hayek’s reasoning in “The Denationalization of Money”: deflation is pernicious too, and it’s not just inflation we must guard ourselves against. In a world where money was neutral, neither would hurt, but as things are, deflation too distorts the true price structure and the signals in a market economy, though not to the point of setting of a boom-bust cycle, of course. And gold is inherently deflationary, so I don’t think it would work for long (although it would probably work in the beginning of a free monetary market: if one must choose, deflation is better than inflation and gold better than the dollar).
Perhaps the way it would play is that once we get rid of legal tender, gold options become tradable among big businesses, and from there achieve a wider circulation. Then, a fractional reserve banking of sort evolves out of the originally 100% reserve options. Latter, the link with gold is done away entirely as companies find that roughly stable currencies sell more and cost less. From there it would be a world of credit cards, probably, with a couple of fiat (electronic) currencies circulation globally, and many more local ones.
I’m a bit confused by your reply. Do you mean by deflation “a decrease in the money supply” or do you mean “a general lowering of prices”?
If the former, how is gold inherently deflationary? Does it melt away in the hot summer sun?
If the latter, how does a gold standard cause a general lowering of prices? Does it open a Walmart and offer sale prices of all the inventory?
And if you mean gold doesn’t really do anything, and therefore improvements in wisdom tending to cause more efficient use of resources as time passes will therefore lower prices, why is that bad and/or a distortion? The new prices are then a legitimate expression of supply and demand , no?
I use ‘deflation’ in the ‘general lowering of the price level’ sense (yes, yes, I know, that cannot be measured, and so what?).
And in that sense, we can foresee that the production of gold will, due to its natural rarity, be always lower than the supposed growth of a free economy. Historical experience lends credence to this theory: in the past, even the fractional reserve gold standard brought a smooth deflationary trend in the west which grew at a modest compound 5% p.a.
Now, that may be bad because the price of, say apples, is not fully determined by supply and demand only, but also by the supply/demand of gold, which has nothing to do with apples. This means that the production of apples will also be influenced by other factors than simply the preference for apples and their cost: namely by the preference for gold and its cost. I feel this is wrong. Apples should be judged ‘on their own merits’
In a sense I see the gold standard as an elegant way to tiptoe around some important questions in monetary theory which I feel have not be answered: how much is the optimal supply (any supply as long as it stays put, as Murray held?), and once we agree on that, what kind of money would be produced in a free market in that precise supply? The call for gold just ignores all of this: the supply will be whatever we can mine, and the mining companies will mine whatever is worth. No answers at all to me. If we’re serious about our goal being zero change in the monetary supply, sure gold won’t do that. Perhaps some other mechanism could achieve that?
Now, at least I have a ton of open question I’d be glad to ask Hayek on his monetary ideas and his path has not been trodden again after his pamphlet, but I have a feeling that his general direction is sounder than Murray’s, though very undeveloped.
Judged by whom and against what exactly? Perhaps against “something” whose quantity must be engineered (by whom?) with the goal of “keeping aggregate prices constant”?
I, like Dave, am confused by your questions. Wasn’t expecting them knowing how long you’ve been around here.
If it can’t be measured, then how does one tell whether it exists?
Yes, many get confused by Hayek’s ideas but still I do not appreciate this kind of remark. Anyway, if you will, allow me a few questions:
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What is the optimal supply of money?
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What money do you think would emerge in a free market?
3, how do you think this money you’ll specify in question no.2 would make it in the interest of its producer to produce it exactly to the supply you will explain in question no.1?
You cannot measure utility. Does this mean it does not exist?
I am not confused by Hayek at all. He’s simply wrong. I was confused because I didn’t expect these kind of questions from you. Sorry, didn’t mean to be abrasive.
What is the optimal supply of apples? What is the optimal supply of anything? Optimal according to which (whose?) utility function?
I think gold would be money. Other things, as well.
Why would it have to? How is it in the interest of the producer of anything to produce it exactly to the supply demanded by its consumers?
Perfect, so you cannot agree with Rothbard who strictly held that the optimal supply is any supply as long as it does not change. Good, I too agree with you (and Hayek) than unless we have a free monetary market, we just cannot know the answer.
Hm, my understanding is that people produce stuff until the psychic profit from the last unit produced equals the psychic cost of that unit and that is precisely the optimal supply.
That would happen with gold too, but this simply does not translate into the Rothbardian idea that the monetary supply mustn’t’ change.
Now , I must point out that one could pause before taking offense (metaphorically) at a suggestion that gold might not emerge as money over, say, private fiat currency if you have no opinion (neither do I) on how the ‘perfect’ monetary supply should behave, and you have no idea of what kind of money would do just that. Both of us prefer to leave these choices to the market, but I instinctively feel that Hayek is right and that a private fiat currency could adjust much faster to market demands, and you instinctively feel that gold would do the trick.
See, we really cannot debate anything, and I cannot accept the implication that I have somehow made some unforgivable basic mistake.
I believe Rothbard’s idea is that monetary supply must not be centrally manipulated (changed, planned) as it is being done today. I don’t see how Rothbard would prevent a change in the supply of anything and still remain consistent with his free market principles. Where does Rothbard propose that the quantity of gold must not change?
First, “private fiat currency” is an oxymoron. Fiat money derives its value from government regulation or law. You probably meant fractional reserve notes issued by private institutions which are being treated as real money by the market. My intuition is that fractional reserve banking would die a quick death in a free market. Historically, it has always ended in: (1) a widespread run on banks (collapse; an utterly unpredictable and uninsurable event, like Madoff being found out) or (2) a formation of a central (fiat) note lender/creator of last resort. Moreover, advances in market infrastructure and organization for all sorts of instruments and contracts make it ever easier for savers of capital to meet with borrowers and entrepereneurs who need it. People obsessed by fractional reserves (banking!) are simply too narrow minded (sorry, Hayek too) and are looking in the rear view mirror too much.
I didn’t mean to imply you made a mistake. I was just surprised. Perhaps I shouldn’t have been.
In his lectures, Rothbard’s stance on the optimal supply of money was usually in response to the claim of a “shortage of specie”. It’s not that he believed in a true ‘optimal’ supply, rather the optimal is however much money that currently exists; as production increases, prices will adjust downward. Considering he viewed FRB as fraud, it’s safe to say he’d be against changes in the money supply through the banking system, but he certainly wouldn’t be against changes in the money supply brought about by new gold being mined or coins/bars being melted down and put to other uses.
Well, that is certainly not the idea I got from Rothbard’s monetary writings: what got through to me was that the supply must not change, at least not by much.
But, if this take on Rothbard’s monetary ideas (that we cannot predict what the optimal supply will be and only the market can do that) is closer to the truth (I really do not think so, but it’s nto a point important enough to start quoting), than I fully agree with this view. Of course, I still insist that gold would not do well what I expect a free market would ask money to do (be as close to neutral as possible).
I must add that Hayek’s idea is not the same as that of the Free Bankers: gold reserves but private banks freely pyramiding notes on top of that. Hayek proposes that a full fiat currency (redeemable for nothing) would work better than that system, which would in itself work better than 100% reserves on gold, I think. A bank run in not a threat for a Hayekian bank as it would be for a gold-pyramiding bank.
Anyway, only an actual test will show us what kind of money will work. As long as we all agree on free competition, all the rest are conversations among potential entrepreneurs on what kind of bank (Rothbardian, Free Banker or Hayekian) to invest in
PS: Bob Murphy’s take on Hayek.
Rothbard’s view is not that we cannot predict the optimal supply – it is that there is no such thing as optimal supply. “Neutrality” is a unicorn in a free market.
Again, fiat cannot be private.
I think proponents of free (fracR) banking are confused by equating the “production” (“supply”) of money to production (supply) of any other product/service demanded by the market. In a free market, there will be no entities holding special privileges (banks, as we know them today). Anyone with a laser printer could “produce” money. Gold’s advantage is that it’s not as easy to produce as colored paper or digits in a computer. The free market knows this, that’s why my intuition is that it would put a corresponding premium on gold (or certificates attesting to ownership of the same) vs. mere colored notes whose value stems from their printer’s mere proclamation that they hold any at all.
EDIT: Btw, Hayek’s proposal is already a reality. “Currency notes” pegged to baskets of commodities (or baskets of anything else, for that matter) already exist - they’re called (commodity) index ETFs. Structured notes guaranteeing that the ETF’s value would not fall below $X (i.e. that said “currency notes” are always redeemable for $X by their issuer) are also available and would become more prominent/liquid if the market demanded them. This is what I meant when I accused free bankers and Hayek of “looking in the rear view mirror too much”.
Now that is quite interesting. I’ll sure look into it, thanks for bringing it up.
EDIT: From a quick view, my idea is that index EFT’s are indeed what Hayek advocated, but only as a first step. It is Hayek’s main point that ‘his’ currency is redeemable in existing fiat currencies but tries to follow an index of goods, and not of those same currencies.
Index EFT’s would seem to me to do that: redeem for something, follow that value. Whereas a Hayekian currency could be redeemable for Dollars and Swiss Francs but try to follow an index of, say, prime materials on the London Stock Exchange. This difference is a main point of the plan. Anyway, need more thought on this one.