an argument against the gold standard

[Copernicus]

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* I assume you understand that all major currencies would have to be backed by the same basket of commodities and own them in the same proportion. And that the commodity is one that has to be primarily hoarded and not consumed.

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I don't understand either assumption. Why can't the market set an exchange rate between two currencies with different backings? Why isn't this a problem today when one currency is backed (you claim) by T-notes, metals and foreign currencies, and another is backed by state-owned oil reserves etc?

I also don't understand why coffee futures or pork bellies or whatever can't be part of the backing of a private currency.

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Then you dont understand the basic attributes of a specie currency. Do some reading (economic, not political) about Bretton Woods, why the gold standard was abandoned, and the history of currency in general.

[mjkidd]

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Then you dont understand the basic attributes of a specie currency. Do some reading (economic, not political) about Bretton Woods, why the gold standard was abandoned, and the history of currency in general.

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You are so full of [censored].

[The once and future king]

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Then you dont understand the basic attributes of a specie currency. Do some reading (economic, not political) about Bretton Woods, why the gold standard was abandoned, and the history of currency in general.

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You are so full of [censored].

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Wow, I was tending to agree with copernicus but given the power of your arguement and the deeply sophisticated way you made it, I am now having second thoughts.

Seriously, I dont care either way. At least copernicus has made an arguement, cant you at least bother to do the same?
Its time we started to try and raise the level of this forum.

[mjkidd]

He said we don't understand and need to read unspecifed stuff about "economics". How is that an argument?

[The once and future king]

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He said we don't understand and need to read unspecifed stuff about "economics". How is that an argument?

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How is calling someone full of [censored] an arguement?

[mjkidd]

King -- Brainwater said that he didn't understand two of Copernicus' assumptions. In response, he agreed that Brain didn't understand and left it at that. This is a cop out I called bull [censored].

Of course calling someone full of [censored] is not an arguement. I never said it was.

[Misfire]

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Then you dont understand the basic attributes of a specie currency. Do some reading (economic, not political) about Bretton Woods, why the gold standard was abandoned, and the history of currency in general.

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You are so full of [censored].

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Seriously, instead of calling everyone ignorant, why don't you simply answer their [censored] questions? (I have an idea...)

[TheEkim]

Basically the reason you dont want to use any one substance or commodity is because you forfeit your control of money supply. If this substance becomes plentiful you have monetary inflation, if the substance is consumed or supplies do not grow in pace with the economy you have deflation.

As a response to this someone suggested using a "basket" of commodities to distribute these fluctuations. As more commodities are added you theoritically reduce the importance of any one item. The problem here is still the same though, currency is now tied to this basket of goods. If there is a sudden increase in supply of one or more of these commodities you get uncontrolled inflation, shortages lead to deflation.

By using a fiat currency you have essentially tied a nations currency to its entire basket of goods. This is because the currency is backed by the issuing governments ability to tax the economy of the issuing nation. By doing this not only is the currency protected against a run on any one good or commodity it also gives the government flexibility to protect against rampant recession or inflation.

This is because in a fiat system countries usually hold reserves in the form of foriegn currency. This allows them to influence the value of their own currency and also incents them to work cooperatively with other nations to ensure nothing untoward happens with their currencies and economies.

The other advantage of this system is no one good or group of goods is affected by the hoarding that results from having something arbitrarily established as a backing for currencies. As I mentioned earlier, even the degree to which gold is used as a store of wealth currently drastically increases it cost. Copernicus mentioned the Hunt brothers, their attempts to store there wealth in silver resulted in massive spikes in the value of silver. Why waste a useful good/material by keeping it locked away somewhere just to represent money?

[goaljudge]

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Basically the reason you dont want to use any one substance or commodity is because you forfeit your control of money supply. If this substance becomes plentiful you have monetary inflation, if the substance is consumed or supplies do not grow in pace with the economy you have deflation.

As a response to this someone suggested using a "basket" of commodities to distribute these fluctuations. As more commodities are added you theoritically reduce the importance of any one item. The problem here is still the same though, currency is now tied to this basket of goods. If there is a sudden increase in supply of one or more of these commodities you get uncontrolled inflation, shortages lead to deflation.

By using a fiat currency you have essentially tied a nations currency to its entire basket of goods. This is because the currency is backed by the issuing governments ability to tax the economy of the issuing nation. By doing this not only is the currency protected against a run on any one good or commodity it also gives the government flexibility to protect against rampant recession or inflation.

This is because in a fiat system countries usually hold reserves in the form of foriegn currency. This allows them to influence the value of their own currency and also incents them to work cooperatively with other nations to ensure nothing untoward happens with their currencies and economies.

The other advantage of this system is no one good or group of goods is affected by the hoarding that results from having something arbitrarily established as a backing for currencies. As I mentioned earlier, even the degree to which gold is used as a store of wealth currently drastically increases it cost. Copernicus mentioned the Hunt brothers, their attempts to store there wealth in silver resulted in massive spikes in the value of silver. Why waste a useful good/material by keeping it locked away somewhere just to represent money?

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And to extend the commodity currency one step further, those problems are somewhat mitigated by a commodity that is largely immutable, who's consumption is relatively small compared to the total supply, and is likely to remain relatively scarce. Hence gold was the closest thing to solving the problems of a commodity currency.

As long as the major currencies are on the same standard (lets call it gold) it doesnt benefit an economy to hoard (or flood the market with) gold beyond its monetary needs. By decreasing (increasing) the supply of gold the value changes for all economies and prices remain stable across currencies. If a major currency is on a standard other than gold, it can flood the market with gold, devaluing the other currencies while maintaining its own. Thus cooperation is needed to maintain balances of the same standard across currencies. Discount rate policy of the agreeing countries was supposed to help maintain approporiate gold balances. Raising interest rates attracts capital, reversing an outflow of gold. However it also devalues the local currency and raises prices. Britain largely cooperated in this, while France didnt.

One of the problems gold faced in the 70s is that the Bank of England, in the face of depleted gold reserves, refused to raise interest rates, highlighting those problems with the gold standard.

Another facet of the gold standard that hasnt been mentioned is the cost of maintaining it and producing increased supplies to accomodate monetary growth. Paper currency isnt free but it is a lot cheaper than the (as I recall) 1 1/2 to 2% of GDP that it cost to maintain the gold standard.

[pvn]

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Basically the reason you dont want to use any one substance or commodity is because you forfeit your control of money supply.

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Exactly. In a free market, individuals will favor commodities that others can't control.