The Gold Standard

I like Ron Paul. Although he's not the most charismatic of speakers, many of his libertarian views have resonated with me in a way that I haven't felt since Obama in '08. It feels like real change and makes me believe in the power of politics again. I don’t think I’m alone; he seems to have garnered more attention on campuses than the other Republican candidates.

Stop getting involved in other countries affairs? Fine.
Decriminalise every drug under the sun? No problem!
Return to the gold standard? Really?

Paul and the Austrian School say that it would stabilise the economy, end the Federal Reserve and stop cheap fiat money devaluing the currency; in their minds this is exactly what the fed’s quantitative easing program is doing. According to Paul:
[The gold standard] maintains a stable currency and a stable value. The Fed [should] concentrate more on stable money rather than stable prices."

Ben Bernanke rebuts this, he believes that the gold standard is just as inflation-prone and disarms the central bank’s key tools:
Since the gold standard determines the money supply, there is not much scope for the central bank to use monetary policy to stabilize the economy. Under a gold standard, typically the money supply goes up and interest rates go down in a period of strong economic activity - so that's the reverse of what a central bank would normally do today.

Researchers at the world renowned Chatham House, who were recently asked to consider a return to the gold standard, agree that, while an effective hedge, gold’s formal use is limited:
Restrictions on money supply growth could provoke a severe downturn in the growth cycle of global economies. Gold can therefore have some utility in a portfolio of assets by spreading valuation risk but would not be very effective as a sole reserve asset.

Bernanke and Chatham House aren’t alone; over 90% of economists agree that the US wouldn’t have escaped the clutches of the Great Depression if they hadn’t broken from gold.

Would you support a return to the gold standard?
The US has one of the largest gold reserves; what would be the immediate effects if there was a return to the gold standard?

 
Best Response

The primary drivers of our current economic challenges, too much borrowing, excessive trade deficits, and declining real wages, all stem off the instability and manipulation of the currency. The dollar's decline post Bretton-Woods is predicated on the notion of nominal GDP targeting through aggregate demand and boosting exports. When the Fed lowers interest rates (read: the price and value of money), it changes the currency calculations on the margins to boost short-term U.S. exports abroad. Domestically, lowering the price of credit hypothetically creates more demand for credit. This has been proven true in the last two decades, first with the housing bubble, and now with the federal government budget.. People and institutions will pile on leverage to amplify their standard of living as much as they can. We are now seeing the economic limitations of our borrowing. Needless to say, it's hardly a desirable state of affairs.

When the currency supply is fixed. a trade deficit will result in a rise in unemployment in the country with the deficit so long as the country with the surplus holds the surplus as foreign reserves. If the physical stock of currency is removed from the economy, the remaining liquid stock of currency will appreciate in value due to the negative shock to the supply of currency. This is commonly referred to as deflation. A larger scale reduction in the currency stock would greatly impair the economy. Fortunately, the country with the trade surplus will not sit idly on the cash. They either use their surpluses to purchase goods and services from the deficit nation, resulting in a balancing of trade; or they cycle their money back into the deficit country in the form of financial assets through foreign direct investment. The flow of funds into financial assets will paper over short-term differences in productivity, which is the true cause of a trade surplus/deficit, but cannot eliminate them entirely. If continued to infinite, the surplus country will own all of the financial assets of the economy without gaining any increase in real goods and services. Obviously, this cannot stand.

Central banking post 1930's has been fixed on the singular goal of avoiding "deflation". This is due to the mistakes of the Great Depression. But even as Bernanke has admitted, the deflation in the 30's was CAUSED by the actions of the Federal Reserve. The Fed was created to address the liquidity concerns created by fractional reserve banking. Fractional reserve banking is the use of depositor money to leverage a bank's balance sheet and increase potential returns, with increased risk. This is predicated on the idea that the bank will only have to return very small percentages of total depositor assets at any given time. However, in banking crises large swaths of people withdraw their funds because perceived systemic risk. Pre- (and post-) Glass-Steagall, the banks could and would place depositor funds in risky assets, like stocks. If there was a significant decline in asset value, the bank could be insolvent and depositors would lose money. The Fed is allowed and required to provide short-term funding to banks to address liquidity concerns. This is the "discount window." In the Depression, rather than expanding the monetary base, the Fed allowed it to contract. Each bank failure caused a decrease in the overall capital stock of the economy, because much of it was invested in illiquid or devalued assets. The Fed actually received gold transfers from other country because of trade, which under the standard required that the Fed expand the monetary base. It simply did not do this.

 

doubful. with large debt to china, i feel like the nations plan is to inflate the dollar think about it. If we owe china what like 3 trillion dollars, if we print more money the inflation would mean we would be paying them back a lot less then the 3 trillion. Now inflation is how we run our country,how can we revert to the gold standard.

 
Sham Wow:
doubful. with large debt to china, i feel like the nations plan is to inflate the dollar think about it. If we owe china what like 3 trillion dollars, if we print more money the inflation would mean we would be paying them back a lot less then the 3 trillion. Now inflation is how we run our country,how can we revert to the gold standard.

Of course inflation is our current strategy to decrease our debt burden, but the question is how sustainable is that. Why would the world keep propping up our reserve status when we so clearly are out to trash our own currency? We will not move to a gold standard because Washington thinks its a good idea, in fact the power elite will fight against gold until they can fight no longer, but we will eventually be forced into it once our current monetary system collapses.

 
jsobilo:
The primary drivers of our current economic challenges, too much borrowing, excessive trade deficits, and declining real wages, all stem off the instability and manipulation of the currency. The dollar's decline post Bretton-Woods is predicated on the notion of nominal GDP targeting through aggregate demand and boosting exports. When the Fed lowers interest rates (read: the price and value of money), it changes the currency calculations on the margins to boost short-term U.S. exports abroad. Domestically, lowering the price of credit hypothetically creates more demand for credit. This has been proven true in the last two decades, first with the housing bubble, and now with the federal government budget..Central banking post 1930's has been fixed on the singular goal of avoiding "deflation". This is due to the mistakes of the Great Depression. But even as Bernanke has admitted, the deflation in the 30's was CAUSED by the actions of the Federal Reserve. The Fed was created to address the liquidity concerns created by fractional reserve banking.The Fed actually received gold transfers from other country because of trade, which under the standard required that the Fed expand the monetary base. It simply did not do this.

To be fair, the fed hiked the rate during the boom to try and quell inflation but really fell down on the job of regulation in key areas, as did Congress and the SEC (e.g. in the context of leverage limits; not only did they not reduce them, they actually raised them). Borrowing can be kept under control through regulation as opposed to abandoning key monetary tools. The only danger to this is the lobbies that the US seems to love so much.

Recent studies have said that the Great Depression wouldn't have spread worldwide if it wasn't for the gold standard, and that it was its rigidities that hindered recovery (this is supported by the correlation between recovery and abandoning the gold standard seen below). You say the fed's handling of it prolonged in a domestic context, but look at the results for other countries: They all seem pretty similar.

After leaving the gold standard in the 30s, the US had 40 years of growth without any severe crisis. IMO, two things after this sent it off the rails. The 70s oil crisis, and, to a greater extent, deregulation led by people like Alan Greenspan and Larry Summers.

You seem to support the gold standard, would you want it to be implemented in the absence of financial regulation?

Damn you Rodger! My WSO Blog
 
SynergyWeek:
jsobilo:
The primary drivers of our current economic challenges, too much borrowing, excessive trade deficits, and declining real wages, all stem off the instability and manipulation of the currency. The dollar's decline post Bretton-Woods is predicated on the notion of nominal GDP targeting through aggregate demand and boosting exports. When the Fed lowers interest rates (read: the price and value of money), it changes the currency calculations on the margins to boost short-term U.S. exports abroad. Domestically, lowering the price of credit hypothetically creates more demand for credit. This has been proven true in the last two decades, first with the housing bubble, and now with the federal government budget..Central banking post 1930's has been fixed on the singular goal of avoiding "deflation". This is due to the mistakes of the Great Depression. But even as Bernanke has admitted, the deflation in the 30's was CAUSED by the actions of the Federal Reserve. The Fed was created to address the liquidity concerns created by fractional reserve banking.The Fed actually received gold transfers from other country because of trade, which under the standard required that the Fed expand the monetary base. It simply did not do this.

To be fair, the fed hiked the rate during the boom to try and quell inflation but really fell down on the job of regulation in key areas, as did Congress and the SEC (e.g. in the context of leverage limits; not only did they not reduce them, they actually raised them). Borrowing can be kept under control through regulation as opposed to abandoning key monetary tools. The only danger to this is the lobbies that the US seems to love so much.

Recent studies have said that the Great Depression wouldn't have spread worldwide if it wasn't for the gold standard, and that it was its rigidities that hindered recovery (this is supported by the correlation between recovery and abandoning the gold standard seen below). You say the fed's handling of it prolonged in a domestic context, but look at the results for other countries:

They all seem pretty similar.

After leaving the gold standard in the 30s, the US had 40 years of growth without any severe crisis. IMO, two things after this sent it off the rails. The 70s oil crisis, and, to a greater extent, deregulation led by people like Alan Greenspan and Larry Summers.

You seem to support the gold standard, would you want it to be implemented in the absence of financial regulation?

You seem to have a very distorted view of history, perhaps you paid too close attention to Bernanke's recent propaganda lecture series. Only problem with gold during the GD was that it's price was set too low, there was nothing wrong with the system itself.

 
JeffSkilling:
You seem to have a very distorted view of history, perhaps you paid too close attention to Bernanke's recent propaganda lecture series. Only problem with gold during the GD was that it's price was set too low, there was nothing wrong with the system itself.

haha I wish I could be as frank and unbiased as your avatar. Im not saying that Bernanke's a genious, but please dont tell me that you're the sort of person who blames massive occurences on a few key people (in your case Bernanke?) I know I said Alan Greenspan led deregulation but he had a lot of help and people like him still do.

IMO, human nature caused the crisis, we're greedy assholes. So the natural conclusion in my mind is to find a system which restrains any actions by us which could throw the economy into jeapoardy (to do this we need to get past the lobbyists and finally regulate). To that end, I dont believe that the gold standard is a suitable system. The vast majority of economists disagree with what you just said, so maybe everyone except a handful of people have a distorted view of the GD?

(Just so you know I didnt get Ben Bernanke to draw that graph for me, nor did I draw it myself - Its based on fact and it seems to scream something; look closely).

Damn you Rodger! My WSO Blog
 
SynergyWeek:
jsobilo:
The primary drivers of our current economic challenges, too much borrowing, excessive trade deficits, and declining real wages, all stem off the instability and manipulation of the currency. The dollar's decline post Bretton-Woods is predicated on the notion of nominal GDP targeting through aggregate demand and boosting exports. When the Fed lowers interest rates (read: the price and value of money), it changes the currency calculations on the margins to boost short-term U.S. exports abroad. Domestically, lowering the price of credit hypothetically creates more demand for credit. This has been proven true in the last two decades, first with the housing bubble, and now with the federal government budget..Central banking post 1930's has been fixed on the singular goal of avoiding "deflation". This is due to the mistakes of the Great Depression. But even as Bernanke has admitted, the deflation in the 30's was CAUSED by the actions of the Federal Reserve. The Fed was created to address the liquidity concerns created by fractional reserve banking.The Fed actually received gold transfers from other country because of trade, which under the standard required that the Fed expand the monetary base. It simply did not do this.

To be fair, the fed hiked the rate during the boom to try and quell inflation but really fell down on the job of regulation in key areas, as did Congress and the SEC (e.g. in the context of leverage limits; not only did they not reduce them, they actually raised them). Borrowing can be kept under control through regulation as opposed to abandoning key monetary tools. The only danger to this is the lobbies that the US seems to love so much.

Recent studies have said that the Great Depression wouldn't have spread worldwide if it wasn't for the gold standard, and that it was its rigidities that hindered recovery (this is supported by the correlation between recovery and abandoning the gold standard seen below). You say the fed's handling of it prolonged in a domestic context, but look at the results for other countries: They all seem pretty similar.

After leaving the gold standard in the 30s, the US had 40 years of growth without any severe crisis. IMO, two things after this sent it off the rails. The 70s oil crisis, and, to a greater extent, deregulation led by people like Alan Greenspan and Larry Summers.

You seem to support the gold standard, would you want it to be implemented in the absence of financial regulation?

The financial economy only serves as an efficiency gain to real economy production. No lasting wealth is created through the financial economy except by more efficiently allocating the real economy's scarce financial capital. The financial industry developed for that specific and sole purpose. That is completely corrupted when frontrunning central bank printing on T-Bills is "making a profit." Any and all arguments about the prowess of academic management of the money supply are wrongheaded. The Fed has been wrong on every single crisis since its inception. Yes, the 40 years of Bretton-Woods were economically successful. The US was also the only remaining industrial power not under communist control so we were exporting massively. There was also incredible amounts of growth under the classic gold standard from 1870 to 1914. There has also been no real growth after the Nasdaq bubble burst. I would prefer that my profession earn a living off being good at their jobs and finding more productive uses for capital, rather than arbitrage trade Fed Funds rate money into government bonds to rip off the US tax payer endlessly.

 
jsobilo:
The financial economy only serves as an efficiency gain to real economy production. No lasting wealth is created through the financial economy except by more efficiently allocating the real economy's scarce financial capital. The financial industry developed for that specific and sole purpose. That is completely corrupted when frontrunning central bank printing on T-Bills is "making a profit." Any and all arguments about the prowess of academic management of the money supply are wrongheaded. The Fed has been wrong on every single crisis since its inception. Yes, the 40 years of Bretton-Woods were economically successful. The US was also the only remaining industrial power not under communist control so we were exporting massively. There was also incredible amounts of growth under the classic gold standard from 1870 to 1914. There has also been no real growth after the Nasdaq bubble burst. I would prefer that my profession earn a living off being good at their jobs and finding more productive uses for capital, rather than arbitrage trade Fed Funds rate money into government bonds to rip off the US tax payer endlessly.

Obviously the fed have been on the wrong side of every crisis since its inception; anything prudent management would have avoided wouldnt have been crises. Furthermore, I'm not saying the people that have been in charge of the Fed the SEC or Congress have been the best people either. The point of this article was not to say the status quo needs to remain, I just dont believe in the gold standard.

While I respect your opinion as well as that of JeffSkilling, there are some things I dont understand:

  • In the gold standard system you guys propose, would the rest of the world have reverted to the gold standard also? If not, how would they integrate their monetary policies with other central banks, who would foreign central banks communicate with?
  • Couldn't other central banks demand that the US exchange their dollars for gold? The US has a large reserve but not that much.
  • Which brings me onto my next point. The US doesnt own enough gold to pay its debts, even at current rates. At least the evil fed bueraucrats have a chance of inflating to erode debt levels.
  • While I felt that your part about the productive uses of capital and honest work were amicable, I cant help but think that the US' entrepreneurial spirit would be crushed by a fixed money supply. The GMs and McDonalds of tomorrow wouldnt even get a chance (emotional, I know).
Damn you Rodger! My WSO Blog
 

Gold is a worthless, meaningless asset. It has almost no productive or industrial uses. This makes it an ideal currency because it won't be subject to other economic forces, unlike silver which has industrial demand. The market needs to set the price of money through supply and demand. Any attempt to manage interest rates tips the economic scales in one way or the other. It is the most pure form of government interventionism, the desired outcome is immediately attained, some asset holders win and the others lose. Physics is based on certain laws and the math only works when those laws are held. Economics is no different. When you artificially change the price of money it is the economic equivalent of changing the definition of the centimeter. It would create chaos at the margins of every rational financial decision. Because the currency is held by an entire economy, these changes hit literally everyone, in all different ways. It complete distorts our marginal economic incentives. In a globalized world, it also affects every other country that does business with us directly and everyone that does business with anyone that does business with us, first and second derivatives economic relationships. The gold standard is a way to try to make the value of the currency as stable as it can be because stability is the only thing that matters for a currency in the long-run. The gold standard has a lot of its own incarnations. Some people argue that Bretton-Woods was the gold standard. Others say the "classical gold standard" was the last time it was used. I am a believer a gold flows economy. A currency can be thought as a liquidity trade between real economic actors. With this perspective, the flow of currency matters significantly more than the stock of currency. In modern day terms, we can see that although the Fed's balance sheet is now nearing $3 Trillion, there is not rampant hyperinflation because $1.6 Trillion is parked at the Fed's deposit window to ensure that it stays out of the consumer economy. In purest terms, the stock of currency is about $2 Trillion above pre crisis levels (near 200% increase), and yet the inflation rate has been between 0 - 3% the entire time. The flow of gold would allow price discovery to happen in the credit markets. The following like should be helpful in understanding this. The writer is much smarter than I haha.

Link: http://www.zerohedge.com/news/advance-gold-standard-thought-experiment-…

 

And start-ups are more harmed by financial subordination to the oligarchical corporate world than they are by the perceived price of money created by monetary intervention. The main beneficiaries are the companies with the most access to liquidity, mainly the banking sector and large public corporations. As I mentioned before, the Fed's purpose and power is liquidity, so the Fed's benefits go to those who can access liquidity earliest. I can guarantee you that isn't poor people or start-ups.

 

But, despite being useless, it is still the subject of speculation? So, in your incarnation, there is a fractional reserve system (allowing for growth and lending), and every country accepts the gold standard? That article seems to be domestically focused. Unless its talking about the world in which case it takes place after apocalypse haha.

According to the article, the monetary system would have to collapse before we reverted to this, so would that eliminate the US debt? The article seems to talk about things in a very post-apocalyptic way.

Call me crazy, but I think the only way the gold standard is happening is if someone decides on it (which seems unlikely), because, no matter how shitty the solution, there is a solution to the credit crunch.

That said, if everyone were to start believing things as they were written in the article, gold would become king purely because of paranoia. As bad as it may seem with the Fed in charge, what we would have to go through to get to the gold standard seems worse.

JeffSkilling:
SynergyWeek:
  • While I felt that your part about the productive uses of capital and honest work were amicable, I cant help but think that the US' entrepreneurial spirit would be crushed by a fixed money supply. The GMs and McDonalds of tomorrow wouldnt even get a chance (emotional, I know).
  • What are you talking about? Do you realize this country was built on a gold standard?

    Yes, I do realise that. What sort of reserve system would you be talking about in your vision, the same one as jsobilo? Would lending be affected?

    jsobilo:
    As I mentioned before, the Fed's purpose and power is liquidity, so the Fed's benefits go to those who can access liquidity earliest. I can guarantee you that isn't poor people or start-ups.

    There are always going to be financial economies of scale, but interest rates change for everyone when they change.

    Damn you Rodger! My WSO Blog
     

    A currency is only as good as a the trade and interdependent complex economies it fosters. Competing currencies would allow people to create their own lines of credit. If one person owes another across currencies, the payment would be in gold. Gold would not need to be owned or stored. Banks would have to have access to gold whenever they needed to redeem their liabilities to other banks. I would like to emphasize that this would not require every transaction to be in gold, only the option of gold payment. A currency is a credit derivative. Right now the US dollar is derived from the faith in the Fed. Just like many very wealthy people move their money into many different countries and currencies, competing currencies within one country allows people to manages their interactions in any way they please. Think of this like a casino. A casino issues currency, chips, which people use to take risk. All of the risks are managed by the private company issuing the currency. Risk takers are allowed to cash out of the system and convert their currency into a different one, US cash, to use for other purposes besides gambling. For additional understanding try this: http://www.realclearmarkets.com/articles/2012/03/30/monetary_malfunctio…

     

    Rofl @ a gold standard bringing price stability, throughout the 1800s and early 1900s there was massive currency uncertainty and inflation, the gold standard also made us a victim to sharp boom/bust cycles due to gold inflows and outflows, not to mention huge spikes of inflation whenever the pegged exchange rate was changed under Bretton Woods (basically a gradual price change that would've occurred in a flexible system becomes more sudden, leading to further deadweight loss). Most hilarious part is there was never really a gold standard because other countries (like the UK) used central banks (which shouldn't exist in a gold standard) to game the system. Please give it a rest with the gold standard, if you're calling for it you either have no idea about monetary theory or you've been drinking too much Ron Paul kool-aid. There are many real issues to solve in our economy, our exchange rate system is not one of them.

    p.s. lol Jeffskilling, I can guarantee you we won't be going back to the gold standard in the next 50 yrs, not to speak of 5

     
    BigBucks:
    Rofl @ a gold standard bringing price stability, throughout the 1800s and early 1900s there was massive currency uncertainty and inflation, the gold standard also made us a victim to sharp boom/bust cycles due to gold inflows and outflows, not to mention huge spikes of inflation whenever the pegged exchange rate was changed under Bretton Woods (basically a gradual price change that would've occurred in a flexible system becomes more sudden, leading to further deadweight loss). Most hilarious part is there was never really a gold standard because other countries (like the UK) used central banks (which shouldn't exist in a gold standard) to game the system. Please give it a rest with the gold standard, if you're calling for it you either have no idea about monetary theory or you've been drinking too much Ron Paul kool-aid. There are many real issues to solve in our economy, our exchange rate system is not one of them.

    p.s. lol Jeffskilling, I can guarantee you we won't be going back to the gold standard in the next 50 yrs, not to speak of 5

    I'll bet you $10,000 we will return to some sort of precious metals backed currency within 50 years.

     

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