Does a gold standard work?

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kevinh's picture
kevinh
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Does a gold standard work?

Given the excesses seen in the 1920's occured with a curreny with gold convertability and this time it is happening with a fiat currency, is the problem something besides a fiat curreny?

srbarbour's picture
srbarbour
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Re: Does a gold standard work?

[quote]Given the excesses seen in the 1920's occured with a curreny with gold convertability and this time it is happening with a fiat currency, is the problem something besides a fiat curreny?[/quote]

Historical boom and bust cycles go back at least to the 1600s.   While our history quickly falls apart much past that point, I wouldn't at all be surprised if similar events could be found even several thousand years ago.

Marx would have it that these kind of problems are the direct result of capitalism itself.   There are merits to this claim, but as seen in the USSR, different systems hardly grant immunity to economic failures.

Many Austrian Economists would say booms and bust are all the result of central banks manipulating the market.   I'd say that it takes an awful lot of doctoring, cherry picking to make that theory fit nicely.   Central banks probably had a hand in at least 1/3rd of all these events though.  Even then, most of these events were brewing long before overt interference -- the Fed stroked the recent housing boom, but the rampant short sighted consumerism and poor economic pursuits can be dated all the way back to the 80s. 

Lots of other economists would say that these events are inevitable, but correct fiscal policy can always solve them without any pain or sacrifice.  They are idiots, ignore them. 

Me?  I'd say that booms and busts are likely a direct result of an economy less based on fundamental needs.   As human production has veered further away from "Food" and "Shelter" and became increasingly dependent on machines/infrastructure, and thus massive labor injection prior to production, it became increasingly easy for production (what is being made) and demand (what people want) to become detached.  The fact that the economy has been essentially reinventing itself on a constant basis due to a continual technological revolution has hardly helped.

This view is ugly however, because it forbids a neat solution to the problem.   It'd help to have clear and more forwarding thinking economic policy however. 

How this all ties into a gold standard?   A gold standard only defeats a hyper inflationary destruction of a currency -- period.  This achievement isn't without its own costs and associated problems however.    In otherwords, a gold standard wouldn't do shit to stop the events that have happened thus far.  It would however, stop an end game 'death of the dollar' via devaluation that seems to be brewing.

Of course, this all assumes that a country on the gold standard actually bothers to stick to that standard.   Which, I'm pretty sure has never happened in all of history.  Even the Romans happily debased their coins.

--

Steve 

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joe2baba
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Re: Does a gold standard work?

just got this the other day. you might find it interesting.

OOPS could not paste it it is from money and markets

if you go to the archive at monay and markets there is an article 

about the g-20 solution for the debt problem.

basically the estimate for gold's value if we go to a 20% gold  standard will be about 10k an ounce

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drb
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Only a return to Irresponsibility will restore 'prosperity' O_o

Central bankers would like to believe that they can resolve the current financial crisis using the same tools they applied prior to the crisis.  However, this first presumes that their actions prior to the crisis were both substantive and beneficial, secondly - that there are 'actors' in the market that will use the liquidity injections provided by the central banks to happily acquire the excess housing,  automobiles, and (more importantly) long term debt obligations we've racked up without shackling the consumer with excessive commitments on their future, and (thirdly) that that these actions will then lead to hundreds of millions of consumers restoring their pre-crisis irresponsible consumption behavior.

The first premise I won't touch since I am not knowledgeable enough on monetary policy to make an informed comment.  

The second premise might happen in a parallel universe - but is highly doubtful in this one.

The third premise is largely dependent upon the success of the second but, as Chris has clearly pointed out, is still not sustainable forever even if consumers could (and would) continue to be irresponsible.  The bankers can propose any solution they like - a Gold Standard, Palladium standard, 'sea shell' standard - but in the end we must deal with the fact that we've spent too much for too long and must now spend less, save more, and pay off our accumulated debts (while also working to improve our crumbling infrastructure, migrate to post oil/coal energy solutions, care for our aging population, etc.....) 

For an interesting article by Paul Krugman in today's New York Times refer to:

http://krugman.blogs.nytimes.com/2008/11/15/macro-policy-in-a-liquidity-trap-wonkish/#more-1037

 

Daniel

 

 

 

mainecooncat's picture
mainecooncat
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Re: Does a gold standard work?

One word response, Kevinh, (with more to come later):

Financialization

Ray Hewitt's picture
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Re: Does a gold standard work?
Many Austrian Economists would say booms and bust are all the result of central banks manipulating the market.   I'd say that it takes an awful lot of doctoring, cherry picking to make that theory fit nicely. 

That's a misstatement. There is no cherry picking. Srbarbour doesn't have a full grasp of Austrian Theory.

The boom and bust cycles we know today began with the Bank of England 1694 when the bank issued credit notes and inaugurated fractional reserve lending. The boom and bust cycles are an outgrowth of artificial credit expansion and contraction. Before the Bank of England, stable banks had a hundred percent reserve banking; there was no artificial credit stimulus. It was not uncommon for those banks, after earning the trust of depositors, to issue credit not backed by 100% savings.That's when they eventually went bust.

As human production has veered further away from "Food" and "Shelter" and became increasingly dependent on machines/infrastructure, and thus massive labor injection prior to production, it became increasingly easy for production (what is being made) and demand (what people want) to become detached. 

The Luddite Theory that machines cause mass unemployment has long been discredited. Artificial credit has the effect of stimulating consumption at the expense of production. Real savings transfers money from consumption into investment in production, thereby lowering the cost of goods and expanding the market for labor into new industries.

A gold standard only defeats a hyper inflationary destruction of a currency -- period.  

If the gold standard was preserved from the beginning, there wouldn't have been a destruction of the currency. Once abandoned, there is no limit to how much money government can create.

This achievement isn't without its own costs and associated problems however. 

That's not the fault of a non-existent gold standard. Once the damage is done, there is no painless way back to a stable monetary system.

Of course, this all assumes that a country on the gold standard actually bothers to stick to that standard.   Which, I'm pretty sure has never happened in all of history. 

It will continue to happen as long as the masses trust the State as a monetary god.

I challenge sbarbour to name one bust that can't be explained by Austrian Theory. He's confusing effect for cause.

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mainecooncat
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Re: Does a gold standard work?

Going off what you’re saying here, Steve, would, perhaps, a more incisive description of economies and monetary policies be as an evolutionary process (a verb) that pass through multiple phases, two of which would be the gold standard and a fiat regime.

"As human production has veered further away from "Food" and "Shelter" and became increasingly dependent on machines/infrastructure, and thus massive labor injection prior to production, it became increasingly easy for production (what is being made) and demand (what people want) to become detached."

This is critical because it shines a light on one of the biggest myths perpetuated by free-marketeers: that corporations are somehow the slaves (or at the very least humble servants) of "the consumer" and simply "respond"(market signals BS) to their needs by making exactly what "the consumer" wants. (An analog of this is that popular culture simply gives people what they really want to listen to, read, or watch.)

I’ve always found more or less the opposite to be true. As I’ve mentioned in other threads, I’ve found a decline in quality, utility, and durability in practically everything that is manufactured, regardless of the country of origin. I worked at a retail store for years and one of the primary complaints made by customers (one made more than once a day) is that companies continually change their product and make it worse. Why can’t they just arrive at the best way to make product x and then keep making it that way forever? Well, one of the reasons is that the marketplace has become a place where companies have convinced themselves that continually changing their product is the only way to continually "sell" it. And since the quality of a product has very little to do with if people buy it or not, the marketing of something is more important than the product itself. This makes sense to me from a macro-cultural perspective because we are such a superficial people.

I see corporations as working primarily to decrease the value given to the consumer while maximizing profit. And making the best possible product rarely, if ever, coincides with maximizing profit.

The only sphere in which I see an incentive to actually make a superior product is with start-ups and smaller companies out to prove themselves or shift market share to themselves. But once companies reach a certain size or have established a brand and corresponding market share, the product inevitably begins to decline.

It is within this context that I see no difference between the state and the market. Both exist primarily for their own self-aggrandizement and do very little for the human race except oppress people. And neither ever works in the way their staunch advocates claim they should work on paper or in theory. Moreover, when reality is pointed to as a counter-example, the staunch advocates further claim that, "well, that’s really not what I’m talking about. That’s not the real free market."

Though I think both methods/directions are useful, I think we should start with reality and then move into theory and not the other way around.

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Ray Hewitt
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Re: Does a gold standard work?
This is critical because it shines a light on one of the biggest myths perpetuated by free-marketeers: that corporations are somehow the slaves (or at the very least humble servants) of "the consumer" and simply "respond"(market signals BS) to their needs by making exactly what "the consumer" wants. (An analog of this is that popular culture simply gives people what they really want to listen to, read, or watch.)
Please please with this free market bugbear! It doesn't exist in modern society.
I see corporations as working primarily to decrease the value given to the consumer while maximizing profit.

I see I see says the blind man. He should trade his Model T for a new Ford, then he'll feel the improvement in value, that is unless he values Model Ts more. Of course Ford is almost bankrupt, but that's another story. 

mainecooncat - the problem your logic is that you are treating the effects of government meddling in the economy as if there was a free market. A true free market and government intervention are mutually exclusive. It's fear of a free market that got us into this mess.

Though I think both methods/directions are useful, I think we should start with reality and then move into theory and not the other way around

Without a viable theory, reality is incoherent noise. That's a very basic principle in scientific thinking.

This article is a good read for free market phobics. http://www.cato-unbound.org/2008/11/10/roderick-long/corporations-versus-the-market-or-whip-conflation-now/

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DurangoKid
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Re: Does a gold standard work?

It is what it is.

If there's a gold standard, someone somewhere will cheat.

If it's a fiat currency, someone somewhere will cheat.

If the treasuries take control of the currencies, the banks will begin the process of taking it back.

The concept of fractional reserve lending and compound interest are always bumping into reality and retreating.  Even the end of the oil age won't change that.

The current systems of finance have more to do with accruing wealth without work than the facilitation of commerce.  When speculation and banking become analogous with child molesting, we might have a chance at a sound currency that is a unit of accounting, a store of value, and a medium of exchange.

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Re: Does a gold standard work?

Just for the record:

Rome did ineed debase its currency used for internal purposes (the bronze and silver coins) but mantained a high standard for its gold coinage that was used in international trade. Why? I would submit that trade would not have been possible if Rome's trading partners (the ones that Rome was unable or unwilling to conquer that is) could not rely on a gold coinage of high standards.  While the weight of an aureaus gradualy decreased over a period of several hundred years, the purity did not. Thus trading partners could always easily calculate the amount of gold their goods were worth. Here is an interesting example of the stability of gold to a debased currency in ancient times:

"Due to runaway inflation caused by the Roman government issuing base-metal coinage but refusing to accept anything other than silver or gold for tax payments, the value of the gold aureus in relation to denarii grew drastically. Inflation was also affected by the systematic debasement of the silver denarius which by the mid-third century had practically no silver left in it."

In 301 AD one gold aureus was worth 8331/3 denarii; by 324 AD the same aureus was worth 4,350 denarii. In 337 AD, after Constantine conve'ted to the solidus, one solidus was worth 275,000 denarii and finally, by 356 AD, one solidus was worth 4,600,000 denarii." from http://en.wikipedia.org/wiki/Aureus.

 

 

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Septimus
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Re: Does a gold standard work?

I should note that I have not fact checked the wikipedia article and Rome did not use a denarius in the 300s. But, if one looks at the smallest of Roman bronze coins in the 350s AD (very small pieces less than half the size of a dime) and compared that amount of bronze to hard to find gold, I'd say it is conceivable for the ratio of these coins to a gold solidus (the aureus replacement) to be incredibly large as the wikipedia article points out.

Ray Hewitt's picture
Ray Hewitt
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Re: Does a gold standard work?

There are plenty of episodes where a gold standard kept monetary systems stable. One is the Byzantine Empire. Their solidus or bezant was never tampered with for 800 years and circulated freely throughout the world. Counterfeiters were severely punished.

800 years. Think about that. It enjoyed trust and confidence until about 1100 when the emperors started devaluing it to pay debts. It was never the same since.

In science, units of measurement are defined in ways that can't be tampered with. Otherwise, it would be impossible for scientists and engineers to get consistent results from calculation. It's the same with money. With fiat money, its rapidly expanding quantity makes calculation a guessing game. It's like trying to measure with a rubber scale. This crises was brought about by an accumulation of bad calculations.

A stable monetary system MUST have a universal standard of measurement. The lessons of history could not be more clear.

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