Explain to an idiot the benefits of going back to the Gold standard

[DcifrThs]

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This is all well and good, but that's not at all what happened in Japan (edit: and, I should say, every other deflationary economy ever, although Japan is the only really recent one).

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Japan's deflation was not a monetary phenomenon, as evidenced by their lowering of the the interest rate to 0 being unable to spur investment. The deflation there was a symptom of an ill economy due to mismanagement during the 80s. The same with deflation in the 1930s, which occurred when there were fundamental issues with the economy (thanks to fiat money and inflation). The deflation in these instances was part of the correction of other economic problems to do with mass mal investment and a lack of savings (the types of things you would NOT expect to see large scale under a gold standard).

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so what would you expect to see under a gold standard?

the "gold standard" i typically hear about from people who share your beliefs is one in which no government can move the price of gold vs. the currency against which it is set, and one that cannot be removed so as to engender complete faith in the standard that would be unchanging.

to my knowledge, this has never occurred in reality. nor could it ever occur in reality given where we are now (it COULD happen but that is the longest shot i can think of lol...the reason is that govts will always meddle with the standard)

so what woudl you expect a true gold standard to be and how would you expect to get there?

also, another question, are you saying that the deflation that occurred in the 1930s was an entirely non-monetary phenomenon?

Barron

[tolbiny]

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the "gold standard" i typically hear about from people who share your beliefs is one in which no government can move the price of gold vs. the currency against which it is set, and one that cannot be removed so as to engender complete faith in the standard that would be unchanging.

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The gold standard that I would hope for would be for no central bank controlling currency, and among the competing banks I would personally choose the bank that I trusted the most to avoid FRL, and used a commodity (most likely gold) as its reserve.
If there is to be a central bank then I would prefer them to be on the gold standard so that when they do get greedy or power hungry you can figure it out/point it out to everyone easier. Then they have to explain why they are breaking their promises to everyone.

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so what would you expect to see under a gold standard?

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I would expect higher savings rates in general, in the long run more goods and services targeted toward those who had saved, and more rigid lending practices. Were you asking for something more specific? I am not very sure where you want to go with that question.

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to my knowledge, this has never occurred in reality. nor could it ever occur in reality given where we are now

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There have been quite a few periods of commodities standards that I know of. The pound sterling in Britain and Roman coinage come to mind. Neither lasted indefinitely (that would be to much to ask) but both currencies were fully backed for significant periods of time.

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so what woudl you expect a true gold standard to be and how would you expect to get there?

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We can get there by private businesses making payments in gold to each other during periods of crisis in currencies. If the problems are big enough and last long enough more and more will flock to stability, once you hit that point a country could become a haven for investment by pegging its currency to gold.

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also, another question, are you saying that the deflation that occurred in the 1930s was an entirely non-monetary phenomenon?

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What I meant to convey was that the depression was not caused by deflation, but that the deflation was one of the symptoms of the problems of the economy created during the 20s.

[adanthar]

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One of the main disadvantages of the gold standard is that it artificially inflates the value of gold. The total amount of gold that has ever been mined is estimated at ~125,000 tonnes.[1] At the current gold price of around USD $640 per Troy ounce, or around $20,000 per kilogram, the value of this entire planetary stock would be USD $2.5 trillion, which is less than the value of currency circulating.

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It's gonna take a whole lot of extra gold mining to get there from here.

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You don't see the fallacy here?

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You (I should say most people on this board, but not necessarily you since I don't know what you want) seem to desire an actual honest to goodness Roman-style gold standard (either physical coins made out of gold, or, more practically, a bunch of dollars representing physical gold bars in a vault somewhere), and that's going to run into a problem. If you want your money only partially backed by gold, the difference between fiat and "a bank must be able to redeem X% of its notes in gold bullion on the spot" is a bunch of bank vaults unless X% is so large that it runs into the same problem again, so I don't see your objection having any practical meaning.

[PLOlover]

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If there is to be a central bank then I would prefer them to be on the gold standard so that when they do get greedy or power hungry you can figure it out/point it out to everyone easier. Then they have to explain why they are breaking their promises to everyone.

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greenspan himself just said that if you have a gold standard you don't need a central bank.

basically the gold standard has the free market replace the central bank manipulation, not by manipulating the currency(gold), but letting the free market prices be manipulated (you know, which is good, by supply/demand) while the currency stays constant.

[owsley]

I think what the libertarians on this board mostly want is a system that wouldn't allow our government to inflate its own currency (ie raise taxes without its citizens realizing it) in order to pay for collectivist social programs and imperialist wars. As I understand it, and I very may well be wrong (unlike everyone else on this board apparently) that doesn't necessarily require a strict gold standard, but a private banking system with competing currencies.

[pvn]

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You (I should say most people on this board, but not necessarily you since I don't know what you want) seem to desire an actual honest to goodness Roman-style gold standard (either physical coins made out of gold, or, more practically, a bunch of dollars representing physical gold bars in a vault somewhere), and that's going to run into a problem. If you want your money only partially backed by gold, the difference between fiat and "a bank must be able to redeem X% of its notes in gold bullion on the spot" is a bunch of bank vaults unless X% is so large that it runs into the same problem again, so I don't see your objection having any practical meaning.

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I mostly agree with this. Some half-assed gold "standard" where currency is inflated is much more like fiat currency than a 100% backed currency.

For the record, I'm for a free market in money, just like I am for a free market in every other commodity. If half-baked ideas like partially-backed inflationary currencies could survive in a free market, so be it.

[DcifrThs]

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the "gold standard" i typically hear about from people who share your beliefs is one in which no government can move the price of gold vs. the currency against which it is set, and one that cannot be removed so as to engender complete faith in the standard that would be unchanging.

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The gold standard that I would hope for would be for no central bank controlling currency, and among the competing banks I would personally choose the bank that I trusted the most to avoid FRL, and used a commodity (most likely gold) as its reserve.
If there is to be a central bank then I would prefer them to be on the gold standard so that when they do get greedy or power hungry you can figure it out/point it out to everyone easier. Then they have to explain why they are breaking their promises to everyone.

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my point was that we have to define a "gold standard." according to you then we have had gold standards in the past. according to the definition i provided in my post, we've never actually had one because govt's always interjected.

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so what would you expect to see under a gold standard?

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I would expect higher savings rates in general, in the long run more goods and services targeted toward those who had saved, and more rigid lending practices. Were you asking for something more specific? I am not very sure where you want to go with that question.

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why are you purposefully misquoting me?

in my initial post i asked under a "true gold standard" and above you took out the word "true." sneaky buy i caught it. i asked because i want to see how we could get to a true gold standard (where nobody has the authority to change the value of the X: gold) and what we could expect to see in times of trouble.

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to my knowledge, this has never occurred in reality. nor could it ever occur in reality given where we are now

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There have been quite a few periods of commodities standards that I know of. The pound sterling in Britain and Roman coinage come to mind. Neither lasted indefinitely (that would be to much to ask) but both currencies were fully backed for significant periods of time.

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so studying what happened during those periods could be instructive (even though they did as you mentioned fall apart). did those govt's or authorities ever change the value of the currency to the commodity? if so then it fails that test.

i was making an observation (fairly trivially though) that no "true gold standard" has ever existed, and positing that it would be extremely unlikely (almost impossible) for it to come into existance now.

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so what woudl you expect a true gold standard to be and how would you expect to get there?

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We can get there by private businesses making payments in gold to each other during periods of crisis in currencies. If the problems are big enough and last long enough more and more will flock to stability, once you hit that point a country could become a haven for investment by pegging its currency to gold.

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who would decide the peg?

how would it be enforced?

who would control flows of gold so as to keep the peg in place and how could it be assured never to break?

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also, another question, are you saying that the deflation that occurred in the 1930s was an entirely non-monetary phenomenon?

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What I meant to convey was that the depression was not caused by deflation, but that the deflation was one of the symptoms of the problems of the economy created during the 20s.

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the depression was obviously not caused by deflation. the economy during the 20s clearly had an impact and created environment which led, in many ways, to the depression and deflation.

i think though that these are trivial observations.

Barron

[tolbiny]

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why are you purposefully misquoting me?

in my initial post i asked under a "true gold standard" and above you took out the word "true." sneaky buy i caught it. i asked because i want to see how we could get to a true gold standard (where nobody has the authority to change the value of the X: gold) and what we could expect to see in times of trouble.


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I quoted the first line of your post, chillax. But I do see the misunderstanding between us. The posts I made were supposed to be about the gold standard under healthy (or normal or whatever) economic conditions. This was in response to adanthar posting things like this

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You'd certainly get your wish in a deflationary economy, because one of the first and surest outcomes of a prolonged period of deflation is that the entire lending cycle would completely collapse. Forget the wave of both personal and business bankruptcies crashing into everyone above the consumer on the food chain and let's just focus on the basic economics. If the future value of money becomes *greater* than the present value of money, why would you ever make a loan - especially at a low interest rate - when you could hang onto the cash instead? Even if you were willing to make that loan, what kind of sucker would it take to accept it?


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Which makes it sound like under normal gold standard deflation you would expect market crashes and perpetual depression, and he was using examples of deflation under fiat systems to support his point.


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so studying what happened during those periods could be instructive (even though they did as you mentioned fall apart). did those govt's or authorities ever change the value of the currency to the commodity? if so then it fails that test.

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I'm not looking for perfection in historical comparisons, you can't ever find perfect ones.

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the depression was obviously not caused by deflation. the economy during the 20s clearly had an impact and created environment which led, in many ways, to the depression and deflation.

i think though that these are trivial observations.


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I was just trying to get across why using the GD, or Japan during the 90s as comparisons to deflation under a gold standard.

[ianlippert]

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If the future value of money becomes *greater* than the present value of money, why would you ever make a loan - especially at a low interest rate - when you could hang onto the cash instead? Even if you were willing to make that loan, what kind of sucker would it take to accept it?


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Would a deflation rate of 2-5% really be that devastating that people wouldnt take on any loans? The rate of deflation would just be calculated into the interest rate that the debtor is receiving. And since all other prices are dropping you have more money to spend maintaining your debt.

[Copernicus]

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If the future value of money becomes *greater* than the present value of money, why would you ever make a loan - especially at a low interest rate - when you could hang onto the cash instead? Even if you were willing to make that loan, what kind of sucker would it take to accept it?


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Would a deflation rate of 2-5% really be that devastating that people wouldnt take on any loans? The rate of deflation would just be calculated into the interest rate that the debtor is receiving. And since all other prices are dropping you have more money to spend maintaining your debt.

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Except for that to work wages would have to fall in order for companies to remain in business, so (if wages were downwardly elastic enough..which they arent) you wouldnt have more money to spend maintaing your debt.

Deflation devalues inventories of durable goods, drivces down stock prices and makes existing non-callable bonds extremely expensive. "moderate deflation" has f^&(ing disaster potential.