Explain the deal with the Gold Standard to me

No-Quarter

My friend constantly jabs Ron Paul shit at me and I'm sick of hearing about the gold standard. He refuses to post a thread himself or look into the 500+ pages of Ron Paul threads. Please explain it to me and why it's such an empirically provable bad or good idea. Clear concise arguments please. Thanks. (This is for his benefit, I think it's a shit idea but gotta be fair...) *sigh*

Thanatos

Let me put it to you very simply: China holds more gold than we do currently by a couple of orders of magnitude. How much *more* influence do you want them to have over our economy?

stilist

As I understand it, the gold standard refers to a government keeping an amount of gold that’s equal to the value of all its currency in circulation. The idea is that you’ll have something real backing up the coloured paper, rather than the ‘magic’ of competing currencies of however things work now. Which sounds nice because hey, it’s good to know your currency is worth something.

Unfortunately, there are some major flaws:
- the value of gold can fluctuate quite a bit, meaning that the idea of ‘real’ value is pretty illusory
- Wikipedia indicates that the value of all known mined gold is less than the value of circulating currency in the US

Thus, backing our currency with gold (or other single thing, really) is easily imbalanced by changes in the supply or rate increase thereof, which can lead to inflation when the economy grows more quickly than the gold market.

I’m far from an expert on this sort of thing, but that’s the basic idea. Others can explain it better, and it’s probably worth reading Wiki’s summary of the flaws.

No-Quarter

I believe you, but could you go further? He's thick-skulled like you wouldn't believe.

SkyGheNe

From Wikipedia...

Disadvantages
Beyond the difficulty in transporting, storing, and preventing the debasement of gold, one of the main disadvantages of a gold standard is that it might artificially increase gold's value, due to the additional demand as a monetary medium, and thus increase the cost of items and industrial processes in which it is used.[3] The total amount of gold that has ever been mined is estimated at about 142,000 tonnes.[4] At a gold price of US$800 per Troy ounce, or around $26,000 per kilogram, the value of this entire planetary stock would be $3.65 trillion, which is less than the value of cash circulating in the U.S. alone, where more than $7.3 trillion is in circulation or on deposit.[5] Under a U.S. gold standard, the price of gold would be more than proportionally higher, because all the gold in the world can not be brought in to U.S. bank vaults.

Under the gold standard, gold mined at a different rate than the economy grows can produce both inflation, when deposits are discovered and extracted, and deflation when they are mined to exhaustion.[6] In practice, the production of gold has usually trailed economic growth, resulting in periods of deflationary pressure, including contributing to the cause of the Great Depression[7] and events during it.[3] During the gold rushes in California and Australia, soaring gold output contributed to a 5% yearly increase in wholesale prices during the period between 1850 and 1855.[8][9]

Using a fixed commodity as a monetary standard gives central banks fewer options with which to respond to economic crises and stimulate economic growth.[10] In particular, gold-backed currencies prevent tailoring the money supply to the economy's demand for money, and are subject to speculative attacks when the government's financial position looks weak; attacks which often require punitive economic measures to counter. Such measures exacerbated the Great Depression when the U.S. raised interest rates in the middle of a recession in order to defend the credibility of its currency.[7] Finally, since commodity currency devaluations produce sharp changes in their values, rather than smooth declines, their effects are magnified.[11]

fjafjan

Thinatos wrote: »

Let me put it to you very simply: China holds more gold than we do currently by a couple of orders of magnitude. How much *more* influence do you want them to have over our economy?

Outside of the "gun powder" or whatever website, do you have any reliable source that confirms this claim? Because during my short research that was the only source I could find that claimed anything like this.

Thanatos

I love that Ron Paul is insanely pro-business, and supposedly *so* intelligent, yet doesn't *at all* understand the concept of an "intangible asset," which is business 101.

Thanatos

fjafjan wrote: »

Thinatos wrote: »

Let me put it to you very simply: China holds more gold than we do currently by a couple of orders of magnitude. How much *more* influence do you want them to have over our economy?

Outside of the "gun powder" or whatever website, do you have any reliable source that confirms this claim? Because during my short research that was the only source I could find that claimed anything like this.

I posted it in a Ron Paul thread awhile ago. At the moment, however, I'm on the bus, using a Pocket PC, so can't pull it up.

SkyGheNe

Also...

Gold standard from peak to crisis (1901–1932)

[edit] Abandoning the standard to fund the war
The British government ended the convertibility of Bank of England notes to gold in 1914 to fund military operations during World War I. By the end of the war Britain was on a series of fiat currency regulations, which monetized Postal Money Orders and Treasury Notes. The government later called these notes banknotes, which are different from US Treasury notes. The United States government took similar measures. After the war Germany, having lost much of its gold in reparations, could no longer coin gold "Reichsmarks" and moved to paper currency, although the Weimar Republic later introduced the "rentenmark" and later the gold-backed reichsmark in an effort to control hyperinflation.

In the UK the pound was returned to the gold standard in 1925, by a somewhat reluctant Winston Churchill. Although a higher gold price and significant inflation had followed the WWI ending of the gold standard, Churchill returned to the standard at the pre-war gold price. For five years prior to 1925 the gold price was managed downward to the pre-war level, causing deflation throughout those countries using the Pound Sterling. This deflation reached across the remnants of the British Empire everywhere the Pound Sterling was still used as the primary unit of account. The British government abandoned the standard again on September 20, 1931. Sweden abandoned the gold standard in October 1931, the U.S. in 1933, and other nations were, to one degree or another, forced off the gold standard

.


As a history lesson. I bet your friend doesn't know anything about this.

Another important part...

Perceived stability offered by gold standard
The gold standard, in theory, limits the power of governments to inflate prices through excessive issuance of paper currency. It is also supposed to create certainty in international trade by providing a fixed pattern of exchange rates. Under the classical international gold standard, disturbances in the price level in one country would be wholly or partly offset by an automatic balance-of-payment adjustment mechanism called the "price specie flow mechanism." At the time of the Bretton Woods agreement, it was believed that markets were always internally clear; Say's Law. However, in practice, wages, not capital, depreciate in price first.

Aegis

Thinatos wrote: »

fjafjan wrote: »

Thinatos wrote: »

Let me put it to you very simply: China holds more gold than we do currently by a couple of orders of magnitude. How much *more* influence do you want them to have over our economy?

Outside of the "gun powder" or whatever website, do you have any reliable source that confirms this claim? Because during my short research that was the only source I could find that claimed anything like this.

I posted it in a Ron Paul thread awhile ago. At the moment, however, I'm on the bus, using a Pocket PC, so can't pull it up.

This site? http://www.globalfirepower.com/list_gold_reserves.asp

Only issue I see about that site is that according to Wikipedia:

http://en.wikipedia.org/wiki/Official_gold_reserves

It's off by quite a bit.

No-Quarter

SkyGheNe wrote: »

Also...

Gold standard from peak to crisis (1901–1932)

[edit] Abandoning the standard to fund the war
The British government ended the convertibility of Bank of England notes to gold in 1914 to fund military operations during World War I. By the end of the war Britain was on a series of fiat currency regulations, which monetized Postal Money Orders and Treasury Notes. The government later called these notes banknotes, which are different from US Treasury notes. The United States government took similar measures. After the war Germany, having lost much of its gold in reparations, could no longer coin gold "Reichsmarks" and moved to paper currency, although the Weimar Republic later introduced the "rentenmark" and later the gold-backed reichsmark in an effort to control hyperinflation.

In the UK the pound was returned to the gold standard in 1925, by a somewhat reluctant Winston Churchill. Although a higher gold price and significant inflation had followed the WWI ending of the gold standard, Churchill returned to the standard at the pre-war gold price. For five years prior to 1925 the gold price was managed downward to the pre-war level, causing deflation throughout those countries using the Pound Sterling. This deflation reached across the remnants of the British Empire everywhere the Pound Sterling was still used as the primary unit of account. The British government abandoned the standard again on September 20, 1931. Sweden abandoned the gold standard in October 1931, the U.S. in 1933, and other nations were, to one degree or another, forced off the gold standard.


As a history lesson. I bet your friend doesn't know anything about this.

Of course he doesn't, if he can't control a conversation he runs from it. Which is most likely why he won't post here. He ran to a Rondroid/ 911 conspiracy buff to back him up for christ's sake.

Quid

Making Money was a great book to teach the pointlessness of having a gold standard.

No-Quarter

Aegis wrote: »

Thinatos wrote: »

fjafjan wrote: »

Thinatos wrote: »

Let me put it to you very simply: China holds more gold than we do currently by a couple of orders of magnitude. How much *more* influence do you want them to have over our economy?

Outside of the "gun powder" or whatever website, do you have any reliable source that confirms this claim? Because during my short research that was the only source I could find that claimed anything like this.

I posted it in a Ron Paul thread awhile ago. At the moment, however, I'm on the bus, using a Pocket PC, so can't pull it up.

This site? http://www.globalfirepower.com/list_gold_reserves.asp

Only issue I see about that site is that according to Wikipedia:

http://en.wikipedia.org/wiki/Official_gold_reserves

It's off by quite a bit.

Perhaps he's referencing the untapped seams?

moniker

The gold standard makes business into a zero sum game as there's only so much gold existent in the world that is readily available. This means any advancement in the economy, or your own improvement in a company, comes at the expense of someone else by virtue of the currency system. Getting a job takes away the value of someone else's job, etc. FIAT doesn't fall into this trap as the economy is allowed to grow by dint of the monetary producing entities producing more money (or destroying it) as need be.


Ask your friend if he supports the free market. If he says he does, ask him why he doesn't support the free market determined value of our currency.

Satan.

No-Quarter wrote: »

Of course he doesn't, if he can't control a conversation he runs from it. Which is most likely why he won't post here. He ran to a Rondroid/ 911 conspiracy buff to back him up for christ's sake.

It's not worth your time. I have a friend that's the same way and refuses to believe anything I throw at him backed by facts. He can always try and explain it away with a conspiracy thory.

ElJeffe

Thinatos wrote: »

I love that Ron Paul is insanely pro-business, and supposedly *so* intelligent, yet doesn't *at all* understand the concept of an "intangible asset," which is business 101.

Let it be known that this is a gold standard thread, and discussion of Ron Paul will be deemed off-topic and pruned.

jothki

The Gold Standard would ultimately lead to the destruction of the economy.

Free Silver!

Humungus

"Gold Standard" doesn't mean the currency would be tied to gold. It could be tied to any hard asset, or some other measure. As far as I understand it, RP's "Gold Standard" doesn't mean he'd actually tie the dollar to any one hard asset. He would tie the expansion of the currency to some measure that means that it doesn't inflate with respect to the value of real goods. For example, he could tie it to the cost of a well balanced basket of food or maybe a bundle of metals and oil. He could say that a dollar will from now on buy half a pound of good corn, along with a pound of wheat, and a half pound of rice. It's better if they're things that are easy to store, are of uniform quality, and don't fluctuate in price much (gold is nice for these reasons), but you get the idea.

For what it's worth, Gold has been rising in price partly because the dollar is devaluating. Everything else is becoming more expensive too, including the world currencies. Gold has also partly been rising because of a flight from dollars and the various investment markets.

And Mr. Moderator, I beg to differ - this is a RP thread because he's looking for ways to argue against a Rondroid.

Satan.

Humungus wrote: »

"Gold Standard" doesn't mean the currency would be tied to gold. It could be tied to any hard asset, or some other measure. As far as I understand it, RP's "Gold Standard" doesn't mean he'd actually tie the dollar to any one hard asset. He would tie the expansion of the currency to some measure that means that it doesn't inflate with respect to the value of real goods. For example, he could tie it to the cost of a well balanced basket of food or maybe a bundle of metals and oil. He could say that a dollar will from now on buy half a pound of good corn, along with a pound of wheat, and a half pound of rice. It's better if they're things that are easy to store, are of uniform quality, and don't fluctuate in price much (gold is nice for these reasons), but you get the idea.

For what it's worth, Gold has been rising in price partly because the dollar is devaluating. Everything else is becoming more expensive too, including the world currencies. Gold has also partly been rising because of a flight from dollars and the various investment markets.

And Mr. Moderator, I beg to differ - this is a RP thread because he's looking for ways to argue against a Rondroid.

Couple things:

That "well-balanced breakfast" blah blah blah is called a "market basket" and it isn't resistant to market forces. It's more resistant than just one good but it's not bulletproof. How is gold nice for these reasons? It's all over the map.



And further proof, just in case August 1995 didn't do it for you:



This isn't a Ron Paul thread because we've had multiple threads centered around the man himself as well as a libertarianism thread spun off of it. Here is a link to the current Ron Paul thread.

EDIT: View the images separately, I don't feel like putting them onto a white background.

moniker

Humungus wrote: »

"Gold Standard" doesn't mean the currency would be tied to gold. It could be tied to any hard asset, or some other measure. As far as I understand it, RP's "Gold Standard" doesn't mean he'd actually tie the dollar to any one hard asset. He would tie the expansion of the currency to some measure that means that it doesn't inflate with respect to the value of real goods. For example, he could tie it to the cost of a well balanced basket of food or maybe a bundle of metals and oil. He could say that a dollar will from now on buy half a pound of good corn, along with a pound of wheat, and a half pound of rice. It's better if they're things that are easy to store, are of uniform quality, and don't fluctuate in price much (gold is nice for these reasons), but you get the idea.

So you would be a fan of our currency being tied to the free market determined value of a boxed lunch, but you are not in favour of having the free market determine the value of our currency itself directly?

I dare you to make less sense.

Humungus

Satan Himself: Sorry, I wasn't sure what level of Econ education I was dealing with here. I'll call it a market basket next time, instead of explaining it in words. You're right, stability in terms of our floating currency isn't a strong point of gold. It is more attractive in terms of being dense, scarce, storable, and uniform in quality, but I was feeling lazy, so I didn't include an exception for stability. Instead, I noted that gold had been rising in price. Thanks for nitpicking, please read the whole post next time.

Moniker: What's nonsensical about that post? My point was you could define the dollar in terms of a mixture of other goods to average out the fluctuations of single-commodity prices, and get around the other limitations of single commodity ties. Is that too hard to understand? Otherwise what I was describing was very much like the Gold standard tying the currency to a fixed amount of gold per dollar, but in this case, it would be a fixed amount of wheat, as well as a fixed amount of corn, and so on, for whatever arbitrary collection of commodities that the govt. decided it would be. Inflation is measured as the change in "real value" of the dollar versus the "real value" of a market basket, and if you tie the dollar to the value of everything needed to sustain everyday life, you essentially eliminate inflation. This isn't practical, but tying the dollar to a collection of goods is.

DarkPrimus

I just have to comment that it sounds pretty cool to able to say:

"America has enough money to buy all the gold in the world."

Thanatos

What, exactly, is the advantage of using a tangible commodity over an intangible one?

ege02

Thinatos wrote: »

What, exactly, is the advantage of using a tangible commodity over an intangible one?

You can't pretend you have unlimited amounts of it!

I'm only half-serious. The GS is a stupid idea.

Irond Will

I think that the way I described the problems with the Gold Standard to Frankie was:

1) It's retarded

2) No, seriously. It's retarded.

3) It causes deflation, since it's difficult or impossible to add currency to track added value in the economy

4) It takes away a tool of the government to stabilize the economy.

ege02

Irond Will wrote: »

4) It takes away a tool of the government to stabilize the economy.

Something you don't really care about if you're a libertarian, though.

Sami

Irond Will wrote: »

I think that the way I described the problems with the Gold Standard to Frankie was:

1) It's retarded

2) No, seriously. It's retarded.

3) It causes deflation, since it's difficult or impossible to add currency to track added value in the economy

4) It takes away a tool of the government to stabilize the economy.

5) Really, really retarded.

wazilla

ege02 wrote: »

Irond Will wrote: »

4) It takes away a tool of the government to stabilize the economy.

Something you don't really care about if you're a libertarian, though.

Which, interestingly enough, has fuck-all to do with the Gold Standard

(sorry, I just really wanted to say "fuck-all")

KevinNash

Irond Will wrote: »

I think that the way I described the problems with the Gold Standard to Frankie was:


4) It takes away a tool of the government to manipulate the economy.

Fixed.

Elki

KevinNash wrote: »

Irond Will wrote: »

I think that the way I described the problems with the Gold Standard to Frankie was:


4) It takes away a tool of the government to manipulate the economy.

Fixed.

Yes, that is a synonym for it. Oooooh, scary.

ege02

wazilla wrote: »

ege02 wrote: »

Irond Will wrote: »

4) It takes away a tool of the government to stabilize the economy.

Something you don't really care about if you're a libertarian, though.

Which, interestingly enough, has fuck-all to do with the Gold Standard

(sorry, I just really wanted to say "fuck-all")

I thought libertarianism was all about zero government intervention in markets and letting the "free market" determine everything?

wazilla

ege02 wrote: »

wazilla wrote: »

ege02 wrote: »

Irond Will wrote: »

4) It takes away a tool of the government to stabilize the economy.

Something you don't really care about if you're a libertarian, though.

Which, interestingly enough, has fuck-all to do with the Gold Standard

(sorry, I just really wanted to say "fuck-all")

I thought libertarianism was all about zero government intervention in markets and letting the "free market" determine everything?

You are correct. However, in a discussion as to the ins and outs of the Gold standard... this means nothing. You were getting into a discussion that only had merit if libertarianism were valid that is to say... if the premises of Libertarianism led to the desired outcome of Libertarianism. It is not clear that simply by following the tenants of Libertarianism that we would actually arrive at an ideal society. So, it is very much debatable. Since this is not a thread about the merits of Libertarianism I decided to nip that one in the bud.

With my mind

ege02

wazilla wrote: »

ege02 wrote: »

wazilla wrote: »

ege02 wrote: »

Irond Will wrote: »

4) It takes away a tool of the government to stabilize the economy.

Something you don't really care about if you're a libertarian, though.

Which, interestingly enough, has fuck-all to do with the Gold Standard

(sorry, I just really wanted to say "fuck-all")

I thought libertarianism was all about zero government intervention in markets and letting the "free market" determine everything?

You are correct. However, in a discussion as to the ins and outs of the Gold standard... this means nothing. You were getting into a discussion that only had merit if libertarianism were valid that is to say... if the premises of Libertarianism led to the desired outcome of Libertarianism. It is not clear that simply by following the tenants of Libertarianism that we would actually arrive at an ideal society. So, it is very much debatable. Since this is not a thread about the merits of Libertarianism I decided to nip that one in the bud.

With my mind

What I was saying is that if I was a libertarian and thus did not want government intervention in markets, that would mean that the gold-standard removing one of the government's tools to stabilize the economy is not going to weigh very much in my mind. In fact, if I wanted to remove that tool, switching to the gold standard would be wonderful in my mind.

If.

KevinNash

ege02 wrote: »

wazilla wrote: »

ege02 wrote: »

Irond Will wrote: »

4) It takes away a tool of the government to stabilize the economy.

Something you don't really care about if you're a libertarian, though.

Which, interestingly enough, has fuck-all to do with the Gold Standard

(sorry, I just really wanted to say "fuck-all")

I thought libertarianism was all about zero government intervention in markets and letting the "free market" determine everything?

That's anarcho-capitalism. Libertarianism just wants "as little as possible". There is a large gray area there.

wazilla

the fact that it would not weigh on your mind is a feature of Libertarianism... not of the Gold standard. The relevant fact, namely what Irond Will stated, IS a feature of the Gold Standard. Again, you're completely right about the position you're explaining, but I guess I'm just not seeing how it's relevant to what the Gold Standard is... and in the process have hijacked another thread. Doh.

Elki

Back the gold standard, people.

KevinNash

Elki wrote: »

Back the gold standard, people.

Can we talk about the less precious second place silver standard?

fjafjan

Thinatos wrote: »

fjafjan wrote: »

Thinatos wrote: »

Let me put it to you very simply: China holds more gold than we do currently by a couple of orders of magnitude. How much *more* influence do you want them to have over our economy?

Outside of the "gun powder" or whatever website, do you have any reliable source that confirms this claim? Because during my short research that was the only source I could find that claimed anything like this.

I posted it in a Ron Paul thread awhile ago. At the moment, however, I'm on the bus, using a Pocket PC, so can't pull it up.

no I know which page you mean, I am implying that it is not reliable. Basically I havn't found a single site that backs that claim, according to wiki china is not a major producer of gold, and they do not have a massive gold supply either.

wazilla

KevinNash wrote: »

Elki wrote: »

Back the gold standard, people.

Can we talk about the less precious second place silver standard?

What are you? A 19th century farmer? No... Get your own thread.

I have no desire to see the collapse of American currency, neither does any other country in the world. Except maybe a REALLLY evil one. Anyways... How is the OP fairing in wading through this nonsense to actually learn something? Are there any outstanding questions at the moment? Points of clarification necessary?

Elki

As D&D's most hated economist once wrote, "inflation is always and everywhere a monetary phenomenon." This affects fiat currency just as it does gold. When there's more supply of it, the prices rise. It has happened during the Gold Rush, or any time there's influx of paper or metal, so gold's inflation-proof properties are greatly oversold.

Too much inflation is bad, yes. No need to cite the Weimar Republic. But a little of it can be pretty good. There's a short-run trade-off between inflation, and sometimes it's a good idea for policy makers to raise it a bit.

On the other hand there's deflation, which it's pretty terrible, and starting at lower percentages than inflation. It can result in liquidity traps that central bankers can deal with the with the help of the very elegant helicopter money. Economies respond to deflation by lowering their outputs. Nice isn't it?

But at least gold is stable, right? No, it isn't. Gold is predictable, but it doesn't act like other commodities do. It goes up when the dollar is down, and down when the dollar is up. If we revert back to the gold standard, it will go back to the being the unstable commodity that it is.

There is only one area that a gold-standard is superior to fiat at. Preventing hyper-inflation. But if what you want are optimal results, making sure recessions stay short, and that the economy has just the right amount of currency, a gold-standard fails miserably.

Hope that helps, Quarter.

wazilla

Elki wrote: »

No need to cite the Weimar Republic.

Dude... that was a *totally* different thread...

Edited because apparently I'm "A" idiot.