Comments in reverse order.
"That would require monetary discipline, and you can't have that."
And that is the crux of the issue. I think, this being a government of the people, that we can demand it. However, it will take many more people understanding its importance.
After that, its a debate about how to achieve monetary discipline.
Servius | 09.21.09 - 9:49 am | #
Argentina's downfall was the result of trying to peg their peso to the U.S. dollar and the disastrous reforms they undertook under the demands of the IMF. Yes, it's a pretty good example of what can happen when you have an overvalued currency, but I doubt anything similar would happen to the U.S.
But I think the devaluation of the U.S. dollar that we've seen the past few decades does have important effects on the international monetary system, especially for the countries whose currencies are pegged to the our dollar. And, in fact, a lot of the negative effects have been realized since the collapse of the Bretton Woods system in 1971 and subsequent dismantling of capital controls.
The collapse of the gold standard didn't actually occur in 1971 but in the 1930s. Bretton Woods attempted to fix that. This, in turn, failed, as it's been pointed out, by the reckless spending on war and other fiscal irresponsibility (akin to what we've seen here since 2003). But I know of no law of economics that says this is necessary. Such a system could conceivably work (and did work). That would require monetary discipline, and you can't have that.
Benjamin Seghers | Homepage | 09.20.09 - 10:36 pm | #
I can't show you how to get a farm fresh tomato.
But when your paper money becomes worthless, this is how you can get fresh beef. Make sure to have a machete and someone to provide you cover fire.
(I'm not saying this will necessarily happen here because of that ever-strange "reserve currency" status of the US dollar, but recall Argentina was once one of the most wealthy countries in S. America.)
Aside, here is some food for thought about public debts, the ever growing welfare state, and the inevitable result. (IMHO, Japan, which is highlighted in the video, is us with a head start of about 10 to 20 years. The rest of the series is really interesting and worth watching too.)
bleak | Homepage | 09.20.09 - 8:57 am | #
Who wants a barter system? Why would I put a tomato in a bank vault? Who is carrying 1/1000 oz gold coins in they're pockets?
You're beating straw man. The actual bills and coins we use would not have to change any to represent gold in a vault.
If you want to keep the Fed AND the Congress from inflating you must first answer the question, "How much money is the correct amount of money?"
The market answers that question well for every other commodity. It would do the same for money particularly if we had competing private currencies.
Servius | 09.20.09 - 8:44 am | #
I still think I should quibble about the details, here. For example, to use "gold as money," don't we have to worry about losing those 1/1000 of an ounce Susan B. Anthonys out of our pocket? and our kids will put 1/10,000 oz coins, smaller than a grain of wheat, in the gumball machine? And how do you put a farm fresh tomato in there?
The flaw in your "go back to barter approach" and "100% reserve" ideas are using a sledgehammer to kill a horse fly (of which we will have many under your horse-and-buggy economic nostrums). If you want to stop the Congress, through the Fed, from inflating the money supply artificially, just stop the Congress from inflating the money supply. We don't have to go out through Peter's pigpen and around Robin Hood's barn to do it. Of course, it WOULD "take an act of Congress," which has become symbolic of a difficult thing to do, but all the more reason to approach the problem directly rather than indirectly, through prescriptions which would have their own undesirable side effects.
J. Ewing | 09.20.09 - 7:02 am | #
Also, what we abandoned in '71 was not the gold standard I advocate but a "gold exchange standard". It was illegal for a US citizen to own gold but the US government would redeem gold for dollars at $35/oz to foreign banks and governments.
Because the US was devaluing the dollar by printing too many we were driving the international price above this and taking it in the shorts on the exchange.
What I advocate would be better called "gold as money" where dollar bills just represent gold in a vault somewhere. Even better after converting the dollar we should repeal legal tender laws and allow people to use whatever commodity or currency they like as money. This way if the government devalues the dollar again we can just stop using it.
Servius | 09.19.09 - 10:18 pm | #
"As far as I know, the gold standard was abandoned, back in the 60s I believe, because the price of gold was becoming unstable."
I presume that by "unstable" you are referring to something other than fluctuations in price.
I remember those days. I wasn't paying a lot of attention to politics in 1971, but I wasn't ignoring it, either. I never heard of anyone then or before or since (until just now) complaining about the gold standard not working because of price fluctuations. It doesn't mean nobody was doing it, of course.
The Reticulator | Homepage | 09.19.09 - 9:30 pm | #
The 'instability' with the gold standard back in the 1960's was caused by massive deficit spending on the part of the US Government (USG) to fund the Vietnam War and funding the Great Society.
The USG started printing even more dollars in 1971. When foreigners wanted to convert all this paper money to dollars, Nixon stopped gold convertibility by closing the 'gold window' in 1971. See Nixon Shock for more details.
Near the end, the USG started cheating, and America's trading partners tried to hold the US to its own rules. USG ended up thumbing its nose at them.
Since then, as I demonstrate below, we've lost 95%+ of our purchasing power, as measured in gold.
As I keep reading and writing on this topic, I may convince myself into becoming a dreaded gold bug after all.
bleak | Homepage | 09.19.09 - 8:36 pm | #
"The gold standard has already been tried, hasn't it? The reason it was abandoned didn't have anything to do with price fluctuations, as far as I know."
As far as I know, the gold standard was abandoned, back in the 60s I believe, because the price of gold was becoming unstable. There were concerns for the outflow of gold being redeemed for dollars, to the point where we were running out of gold in the US treasury. I suppose one could assign to the politicians of the time the evil intention of inflating the currency -- that was about the time of the "guns and butter" criticism of Pres. Johnson -- but it isn't required that we do so to recognize the possibility of it that is inherent in fiat money, as well as some valid historical and practical reasons for sticking with it.
J. Ewing | 09.19.09 - 3:13 pm | #
"now have a big market for gold as a commodity rather than a store of value."
That's actually partly why a gold standard works.
Gold standard was abandoned because it limits the ability of a government to tax its subjects through inflation.
At the end of the 19th century a dollar bought 12% more than at the beginning. Bleak has already illustrated how much the dollar has lost just since 1971.
Servius | 09.19.09 - 10:09 am | #
The gold standard has already been tried, hasn't it? The reason it was abandoned didn't have anything to do with price fluctuations, as far as I know.
BTW, if we really want the Fed to be independent, we're going to need Congressional term limits.
The Reticulator | Homepage | 09.19.09 - 9:02 am | #
The problem with linking gold to the "number of dollars produced" is that we now have a big market for gold as a commodity rather than a store of value. The price fluctuates, whether you compare it to dollars, Euros, or the Chinese yuan. There is a speculative element to it, certainly, just as there is in all currency trading. The only way I know to keep a stable currency is to have a strong private economy and a fiscally sensible government. "Obama and his Krewe" are busily ruining both, and any change to the Fed isn't going to help much compared to their depradations.
J. Ewing | 09.18.09 - 6:00 pm | #
Gold is currently trading for $1,010 per troy ounce (down a few bucks today). Today's price this represents an 8.85% continuous compounding rate for the price of gold over the last 38 years, i.e., r = [ln(1010/35)]/38 . Recall, Nixon closed the gold window in 1971 where gold was fixed at $35 per troy ounce.
To put this into perspective, $35 in 1971 could be converted to one ounce of gold (though I'm not sure if one could privately own gold). Today, pulling that $35 from under your mattress would allow you to purchase 3.5% of an ounce of gold.
So, measured by gold, your 1971 dollar has lost about 96.5% of its purchasing power.
The handy-dandy CPI calculator at the Bureau of Labor Statistics tells me that $35 in 1971 gives me $186.52 of purchasing power today.
What the heck happened to the other $823?
Is this a fair assessment? Was gold a better store of value? Please correct me if I'm wrong.
Don't get me wrong the $1,010 price we see today could have a speculative element to it.
Disclaimer: I'm not a gold bug.
bleak | Homepage | 09.18.09 - 1:04 pm | #
One last try.
You are correct. If the price of gold in dollars were to run above the exchange rate of gold for dollars there would be a problem.
But if a dollar is not created except to exchange for gold then I don't see how this could occur. The purpose of the gold standard is to limit the quantity of dollars produced.
Servius | 09.18.09 - 12:17 pm | #
Only Obama is responsible for the dollar's instability. Haha, you are priceless, J. Ewing.
Benjamin Seghers | Homepage | 09.18.09 - 11:22 am | #
I'm not following the logic. If you set the selling/buying price of gold at X$ per ounce, and the world price is higher, people will trade dollars for gold and sell it on the world market for a tidy and instant profit. After all, who wants dollars if we can get gold AND make a profit in the process? If you set the price and the world price is lower, people will flood the treasury with gold and we will run out of dollars, in exchange for something that we cannot very easily carry around in our pockets. The only way we come out, as a nation, is if we engage in gold speculation-- buy low and sell high-- but that does nothing to improve stability, that I can see. And it probably makes the situation worse. If you want to pin the dollar to a commodity, then the price of that commodity needs to be essentially stable. For a long time, the dollar WAS the stable "commodity," and now Obama and Krewe are on the verge of destroying that exalted status.
I don't think "100% reserve" would work, either, but a variation of it would. That is, the Fed could not "lend" any money to the federal government that no private entity wanted to buy. This would, I assume, mean rapidly rising interest rates in the face of deficit spending, making it politically unpopular and thus self-correcting. The "stability" of the currency would be resolved if the government ceased its out-of-control spending.
J. Ewing | 09.18.09 - 10:46 am | #
J,
If gold were money then the number of dollars would equal the value of the quantity of gold in reserve. If we owe China more dollars than exists you would have a point but you must see that would be absurd.
You ask "So what is the value of gold going to be for the next century?" But you don't ask "in terms of what?"
On a gold standard, dollar == gold. A dollar is only created in exchange for gold and gold can only be received for a dollar [from the treasury]. It would be more proper to say, "gold as money" than "gold standard".
So if people send us [the treasury] dollars we send them the gold that was received when the dollar was printed. If people sell us gold, we create a dollar that equals that quantity of gold. It would be appropriate to charge a seignorage fee on the transactions to pay for the cost of the mint.
100% reserve banking is important to this. If banks create money when they lend then we could see pressure on the reserve gold supply.
Servius | 09.18.09 - 10:22 am | #
For Holger Awakens, here is the roll call on the defund ACORN vote.
Yes, Ms. McCollum voted against the measure, along with Mr. Ellison.
bleak | Homepage | 09.18.09 - 9:34 am | #
Gravatar Regarding China taking all the gold in the country; yes, there is the issue of whether the government actually has any to back the dollar. However, given stable supplies (we can't make it, and it's hard to mine), stable sources of demand (jewelry/industry/investment), and the fact that it doesn't rust, we can expect that it would be a LOT more stable than fiat money.
Really, the "other countries will collect on our debts" ought to sober us to begin with. No?
Bike Bubba | Homepage | 09.18.09 - 7:59 am | #
The comments section on the Economist article are worth a read as well.
indyjones | 09.18.09 - 7:01 am | #
If we keep the Fed and their method of money management this is the likely outcome. www.economist.com/businessfinance/ displayStory.cfm?story_id=14215012
indyjones | 09.18.09 - 6:57 am | #
That is just one of the problems with the gold standard. The purpose of the gold standard is to fix the value of the dollar (or anything else) to something which is stable in value, so that the currency doesn't inflate. So what is the value of gold going to be for the next century? Heck, we don't even know what the value of gold will be tomorrow, but if we peg the dollar to a value that is too low, gold will flow out of the treasury like dollars flow out of Congress today, or worse, until it's all gone. Set it to high, and everybody will be selling us all the gold they have, and we'll lose money on every sale.
J. Ewing | 09.18.09 - 5:52 am | #
Question for "return to gold standard" supporters: If the US returned to the gold standard, and China, which holds $2,000,000,000,000,000 or more of our debt decides to "cash in" - we would have no more gold, right?
Pls clarify.
Thanks
J | 09.17.09 - 11:18 pm | #
Following up on J. Ewing's comment, we need a balanced budget amendment to the Constitution.
But I suspect technology will make paper money obsolete in 30 years or so. Here's an example of one of the technologies that will probably lead to this. Money is basically a medium through which networks are established that allocate resources and enable trust, and if you can do that digitally it becomes impossible to centralize that network.
Ben Samuel | 09.17.09 - 9:04 pm | #
Keep in mind that the great growth of economies occurred largely under the gold standards until this century. Real money is not contrary to growth, but rather promotes it.
It would deter some borrowing, to be sure, and would greatly deflate the money supply. It would also take some getting used to. However, it wouldn't make us all poor.
Bike Bubba | Homepage | 09.17.09 - 4:04 pm | #
No, just that the money that's loaned would have to be saved before it's loaned.
Interest rates would rise to attract saved money for lending. Higher interest rates would discourage borrowing putting downward pressure on rates. Market reaches equilibrium.
Currently, a bank has a reserve deposit which it doesn't loan. No, it loans 9 times that amount, creating money from thin air. This money winds up in others bank accounts and is loaned again while the owners of said bank accounts are currently spending it.
No wonder we have credit bubbles.
Servius | 09.17.09 - 3:41 pm | #
100% reserve banking = banks can't loan out any money. Yes, there would be no credit bubble -- there wouldn't be any borrowing.
. | 09.17.09 - 3:17 pm | #
If the Fed remained independent to congress and political interests, then is could remain. But that is not the case anymore and therefore ending the Fed appears to be the only way to stop government central planning and market manipulation.
An alternative would be to force the Fed to return to independance.
Curt | Homepage | 09.17.09 - 2:49 pm | #
Of course, a commodity standard such as gold is not the whole answer but needs to happen in conjunction with 100% reserve banking and removal of the Fed's controls on interest. Presumably this would happen when the Fed is ended but it helps to say that no one else should take up this task.
This would allow interest rates to reach natural levels and prevent banks from loaning money that has not yet been saved and we wouldn't have credit bubbles like the one we're getting over now.
Servius | 09.17.09 - 2:41 pm | #
I think you have left out the obvious choice: Abolish the Fed and Congress automatically gets back the power to "coin money and establish the value thereof." Talk about the cure being worse than the disease! The problem right now isn't the Fed, it's that Congress influences the Fed both directly, and indirectly by profligate spending.
J. Ewing | 09.17.09 - 1:53 pm | #
