Gold Standard

[DeletedUser3]

This has been a recurring topic of economic cringing, with many proponents and even more opponents. So what exactly is the Gold Standard, how would it impact the U.S. economy if we were to switch to it and, finally, what's your take?

I pose this Time Magazine article as a start for discussion ---> <click here>

 

[DeletedUser]

A recent University of Chicago poll of top academic economists found precisely zero who thought that was a good idea.

When all the experts agree that unanimously, it should probably be taken seriously.

 

[DeletedUser1091]

Taken seriously, yes, but I don't much like the logical fallacy of appealing to authority for believing something. Believing something because the Holy Priesthood of Academic Economists say so is not much to my liking. Why do they think it was a bad idea? Do they all think it was a bad idea for the same REASON? What reason did they give? Milton Friedman and the Chicago School would give a very different reason than those in the Austrian School although they probably agree with the thesis and are very close as an economic philosophy in that they both say that governmental manipulation of the money supply leads to economic chaos just as significant as a gold standard. On the other hand, Keynesians oppose it because it prevents them from doing exactly that... namely, governmental economic manipulation. Yet again, it seems that society worries about a symptom rather than the problem.

 

[DeletedUser]

The gold standard definitely has its flaws, but don't try and tell me that backing a currency on thin air is the most wonderful thing since sliced bread. One extreme may be better than the other, or at least so say the economists polled, but that doesn't mean there is no better middle ground...

 

[DeletedUser1091]

Agreed Diggo11. What is a better middle ground? Perhaps a partial gold standard where a percentage of the money supply is backed by diverse durable commodities? By diversifying the durable commodities used for backing the dollar you could minimize the effects of individual commodity price fluctuations. By requiring a certain percentage of the monetary supply to be backed by durable commodity you would prevent government from endlessly printing money because of the incremental cost to purchase the backing might slow down the process. Also, if money is partially backed that would be the floor of the future value of the money in a crash with hyperinflation thus avoiding wheelbarrows of fiat currency to buy a loaf of bread. Frankly, I think I would rather deal with the flaws of a true gold standard, one flaw it doesn't have is that those powerful few cannot manipulate it for their own enrichment or collection of power.

 

[DeletedUser]

Frankly, I think I would rather deal with the flaws of a true gold standard, one flaw it doesn't have is that those powerful few cannot manipulate it for their own enrichment or collection of power.

Sure they can. Gold mines are privately owned and the owners can easily control the flow of gold.

 

[DeletedUser]

While we should not mindlessly accept everything authority figures have to say, when someone is an expert in their field, it is for a reason. I like to ask my doctor about why she thinks what she does, but ultimately I am willing to accept that she knows more about how my body works than I do. Likewise I am willing to accept that these economists have a pretty good idea of what they're talking about. Critical thinking is fantastic, but can only go so far on its own: knowledge and experience are also important, and an expert has a lot more of it than me.

Also I just don't see the point in a gold standard. Currency does not need to be backed up with something material; that is not how currency works. The value of the dollar going up and down is normal and natural. Going back to the gold standard wouldn't solve anything at all and create plenty of problems besides.

 

[DeletedUser]

Also I just don't see the point in a gold standard. Currency does not need to be backed up with something material; that is not how currency works. The value of the dollar going up and down is normal and natural. Going back to the gold standard wouldn't solve anything at all and create plenty of problems besides.

Umm, that's exactly how it works. I give you potatoes from my farm, you give me something shiny that I know will be accepted universally. Traditionally, when you have a bill it is more than a piece of paper, it's essentially a deed entitling you to $x of y backing item stored in the central bank. Backing your currency on thin air is convenient, and so long as people believe "that is not how currency works" it will work, but it's not perfect.

Think of a town on a river that floods. Traditionally the townspeople only build on the hill, since this was above the floodline. A levy was then built, keeping flood waters out and thereby freeing up much land around the hill. That works all well and good, like the USD with no backing, but if a once in a thousand year flood breaches the levy the townspeople are stuffed. Hyperinflation creates a flood of money through the economy, and without backing, you have no lifeboat. (Hmm, unless you could paper-mache your trillion dollar notes into one...) Like all things in economics, it seems to be risk vs reward, and unfortunately at least partial thin-air backing is required to maintain our modern economy. Nevertheless, as Bodine put it, I'd love to hear an expert's opinion on why a "backing floor" at 0% inflation could not be kept.

 

[DeletedUser1091]

Sure they can. Gold mines are privately owned and the owners can easily control the flow of gold.

Gold is a durable commodity. It does not spoil. It has been mined for thousands of years and the reserves are vast. The owners of the mines have very little control on the global supply and even less on the price. But the concern does point to the reason I suggested a diverse backing of durable commodities.

 

[DeletedUser1091]

While we should not mindlessly accept everything authority figures have to say, when someone is an expert in their field, it is for a reason. I like to ask my doctor about why she thinks what she does, but ultimately I am willing to accept that she knows more about how my body works than I do. Likewise I am willing to accept that these economists have a pretty good idea of what they're talking about. Critical thinking is fantastic, but can only go so far on its own: knowledge and experience are also important, and an expert has a lot more of it than me.

Also I just don't see the point in a gold standard. Currency does not need to be backed up with something material; that is not how currency works. The value of the dollar going up and down is normal and natural. Going back to the gold standard wouldn't solve anything at all and create plenty of problems besides.

The problem with accepting the so-called experts in economics is you get widely diverse opinions on the exact same topic from economists themselves. Unlike doctors who even though many get second opinions, have relatively little diversity of opinion about how the biological system of the human body functions. Biology is a hard science, economics is a soft science at best based upon predicting one of the most unpredictable things in the universe... namely human behavior. So the soft science of economics is based upon the soft science of human psychology. Therefore, while doctors may have a pretty good idea of what they are talking about, economist generally do not. Doctors regularly successfully predict the function or malfunction of biological systems and are regularly successful at diagnosing and treating malfunction. The same cannot be said for economist. In fact just the opposite it true. The dismal failure of economists to predict economic malfunction and suggest successful repair is legendary.

The value of the dollar going up and down is NOT usually normal or natural. It is USUALLY the result of governmental manipulation. Contrary to popular belief, the government does not do this by printing money but rather does it by a method called quantitative easing. The effect is essentially the same, though no real physical money is printed. What happens during quantitative easing? The currency supply increases, but the overall assets represented by those dollars (your savings or salary) does not change. Since there is more currency representing the same static level of real assets, then it takes more of that currency to purchase those assets. This is called inflation. Inflation is not a natural phenomena, but rather an artificial result of increasing the currency supply without a corresponding increase in the real assets that currency represents. Who is hurt by this artificial inflation? Namely, those who hold savings accounts with holdings in currency rather than real assets and those who are on fixed income or are wage earners. In other words, the government can use quantitative easing to increase the money supply to stimulate the economy, but in essence the source of that money was grandma's savings account and a sliver of your hourly wage.

This is where a durable asset base (gold standard) comes into play. If all currency is backed by a real asset, then it is then very difficult to artificially inflate the money supply without also supplying the real hard assets rather than secretly forcing wage earners and savers to supply the assets.

 

[DeletedUser3]

Just to correct something here. Medical doctors are, for the most part, technicians relying upon the science discovered by biologists. Not an apt comparison to pose them alongside economists. Likewise, not an apt comparison to pose them alongside psychologists that focus on individual symptoms and behaviors. Probably better to compare them to, say, sociologists.

But meh, one problem with your argument, Deathrow, is that there are not widely diverse opinions on the gold standard within the "so-called" expert economists. As well as I understand, it's virtually unanimous within the "so-called" expert economists that switching to the gold standard is all kinds of bad idea.

Jes' sayin'

 

[DeletedUser1091]

Just to correct something here. Medical doctors are, for the most part, technicians relying upon the science discovered by biologists. Not an apt comparison to pose them alongside economists. Likewise, not an apt comparison to pose them alongside psychologists that focus on individual symptoms and behaviors. Probably better to compare them to, say, sociologists.

But meh, one problem with your argument, Deathrow, is that there are not widely diverse opinions on the gold standard within the "so-called" expert economists. As well as I understand, it's virtually unanimous within the "so-called" expert economists that switching to the gold standard is all kinds of bad idea.

Jes' sayin'

Agreed about doctors analogy. But as I noted before, there are very different reasons for opposing the gold standard by so-called experts. The opinions are diverse, the resulting conclusion is not. This is critical because it dictates how you would solve the problems of a gold standard or the lack of a gold standard. For example... to strain the physician to economist analogy even further... one doctor might say you need to have one of your lungs removed due to a cancerous tumor. Another might say that you need to have one of your lungs removed in order to restore the Ch'i balance within your core. (This example is representative of the Chicago School vs. the Keynesian School.)

Furthermore, it is NOT virtually unanimous regardless of how much one journalist wants to portray it that way. The Austrian School of Economists are almost all unified in support of some form of commodity based standard for currency. Some prominent economists have expressed sympathy with a hard-currency basis, and have argued against politically-controlled fiat money, including former U.S. Federal Reserve Chairman Alan Greenspan and macro-economist Robert Barro. Just because the Keynesian sympathetic mainstream media doesn't want to inform or admit a diversity of opinion among economic experts does not mean that reality is not something very different.

 

[DeletedUser]

I want to acknowledge that you have made some good points, but I don't know enough about the subject to truly debate it. Economics is complicated, which is why I assume people that have spent a long time studying it know more about it than I do. They're not doctors, but I never said they were. I'm only saying they are far more educated on the subject than people that are not economists, and thus have some authority.

I still don't think that's how currency works, though. It is how currency originated, but it does not have to be backed up by gold. The value is in the currency itself, though that value goes up and down. It works because people agree that the currency has value. Gold only ever worked as currency because people agreed it had value, even though it has limited practical application.

You have asserted that inflation not natural, and that the government does it, but I find your explanation insufficient. Do you have a good source I can read?

 

[DeletedUser34]

I think the gold standard is best, but at this point it is unrealistic. There is no way the world or the US specifically could successfully go back to that standard. But that being said, not being on the gold standard is what is making the world bail each other out. If we were based on the gold standard still, we would be dealing in a solid commodity rather than air that we can manipulate. When dealing with a commodity such as gold it runs out.

and now I shall go back to eating my cucumbers.