Dollars and gold

[DanTheEldest]

As I was motoring home from work today (slowly) I was thinking about the different candidates that popped up this election cycle, and RP was one of them. Can someone explain to me both the pros and cons of going back to the gold standard for backing our currency? Once and for all I'd like to have this question answered in simple English with a minimum of partisan vitriol.

[FrankRizzoXD40]

Sure thing, buddy.

Unfortunately, there are several disadvantages to the gold standard--some of which Judge has already touched on.

Gold exists in a finite amount. While it's value can grow, it's numbers cannot once sources are exhausted. This means that wealth will be in the hands of fewer people. Think what would happen if we changed to the gold standard tomorrow. Most of us on this board would be broke--our money and much of our credit could be worthless (unless banks started exchanging our money for gold, but that's not likely since banks own less and less gold these days. They simply wouldn't have enough gold. They can't even insure deposits for over 100k. An immediate switch to the gold standard would result in what is called a "run on the banks". Look it up in your history books; it's not pretty.

The other problem with gold existing in a finite amount and only increasing in supply as we can mine it, is that it's value would would artificially start increasing due to the additional demand that would be generated by switching to a gold standard. This would cause an increase in the cost of items and processes.

There is also another related problem: According to the US Federal Reserves estimate of M2 money supply (FRB: H.6 Release--Money Stock and Debt Measures--March 6, 2008) and the US Geological Survey (http://pubs.usgs.gov/of/2002/of02-303/OFR_02-303.pdf), the total amount of gold ever mined is 142,000 tons. At the current price of gold, the value of all the gold in the world would be about $3.65 trillion. The total amount of cash circulating in the US is over 7 trillion dollars. If we switched a gold standard, the price of gold would have to be inflated even higher because the US cannot seize all the gold in the world and put it in our bank vaults.

Furthermore, why can't we learn from our own history of trying the gold standard Remeber the great depression, anyone? Gold mined at a different rate than the growth/decline of the economy can produce inflation and deflation, depending upon if more gold is being discovered or if mining is slowing because we are running out (or can't find more at the time). Historically, the production of gold has usually lagged behind economic growth. The deflation experienced because of this, helped usher in the Great Depression.

Let's look at other examples of the gold standard being used or not used in history.

Bernanke and James' data for the average growth rate of industrial production for these countries (plotted in the top panel above) was positive in every year from 1932 on. Countries that stayed on gold, by contrast, experienced an average output decline of 15% in 1932. The U.S. abandoned gold in 1933, after which its dramatic recovery immediately began. The same happened after Italy dropped the gold standard in 1934, and for Belgium when it went off in 1935. On the other hand, the three countries that stuck with gold through 1936 (France, Netherlands, and Poland) saw a 6% drop in industrial production in 1935, while the rest of the world was experiencing solid growth.

Econbrowser: The gold standard and the Great Depression
There you have it--a fiat currency outperforms gold, historically speaking.
The other problem is that during uncertain times, people will start hoarding gold, which will lower the money supply. Unfortunately, the old way to prevent a drop in the money supply was for prices and wages to drop instantly. Sounds great, doesn't it?

Using a fixed commodity also gives central banks fewer options to combat recession and inflation. Some argue that this is a good idea. Gold prices usually do not rise and decline gradually, which means the effects of its changing value are magnified.

I think that the main reason people promote the gold standard is to prevent inflation, due to the sometimes irresponsible printing of money. They definitely have a point. I agree that too much money is printed sometimes. However, instead of returning to an archiac monetary policy that has been shown time and time again to fail a growing economy, we should pass laws that restrict the government's ability to simply print more money to solve problems. Wouldn't this be a good compromise? We could fix the printing of money to the increase in the CPI, or set a certain percentage of currency that we are allowed to print. I know that there are some rules, but either we aren't sticking to them or they aren't good enough.

Another good idea is to have the government keep a certain amount of it's assets in gold, just in case of some kind of unforseen emergency.

The final problem that I have with the gold standard is that it would reduce the quality of life for many Americans. Since gold exists in a finite amount and less people would have money if we returned to the standard, banks would be unable to extend loans for enough money for mortages and other forms of credit. Gold simply cannot be mined fast enough (and eventually it runs out) to keep up with the booms of our economy. We would be restricting our growth and the ability of our citizens to prosper.

Frank

[DanTheEldest]

Thanks. Now waiting for the pro side to show up....*drumroll*

[FrankRizzoXD40]

Originally Posted by DanTheEldest

Thanks. Now waiting for the pro side to show up....*drumroll*

lol...I had a couple of pro-gold snippets in there

I actually wrote most of that post in the Ron Paul "dollar hegemony" thread.

I reposted it for your convenience.

Frank

[DanTheEldest]

Originally Posted by FrankRizzoXD40

lol...I had a couple of pro-gold snippets in there

I actually wrote most of that post in the Ron Paul "dollar hegemony" thread.

I reposted it for your convenience.

Frank

Shows how much I read in that thread....

[Powerman]

Dan, RP's insistence of going back to the GS was one of my turn offs. For the most part, Americans don't understand the money system. (Me included) So his insistence fell on deaf ears. I believed there was no way he was going to make any headway on that issue as President. So I did not see why it was one of the fundamental bricks in his foundation.

One thing I do want to make clear is the RP did not want to go back to the GS in it's entirty. To his credit he does know it has it's limitations, and he wanted to minimize them. He talk of a partial backing by maybe silver. His key point was to back money with a system instead of printing money out of thin air whenever we wanted.

The more reasoneable consessions he might have gotten, and it is legislation he has proposed before, was to have more transperancy with the FED. He also wanted to stop printing money when ever we wanted. There were proposals by him to better manage the shortcomming of our current system. While I don't see the need to go back to the GS it it's literal meaning, I did support his other reforms offered, and in general agree withhis idea of fiscal responsibilities.

In the end Paul is extreme in his ambitions. Abolishing the FED is a pipe dream. Going back the the GS period will never happen. I love Paul for his convictions, but extremism is not a disirable trait in POTUS. Just look at our current history.

[DanTheEldest]

Thanks, powerman. That sounds reasonable enough--isn't printing too much money one of the major contributors to inflation?

[cucamelsmd15]

Originally Posted by DanTheEldest

Thanks, powerman. That sounds reasonable enough--isn't printing too much money one of the major contributors to inflation?

Depends on which train of thought you subscribe to. Anyone with Econ 101 knows the answer is essentially yes though.

[DanTheEldest]

Originally Posted by cucamelsmd15

Depends on which train of thought you subscribe to. Anyone with Econ 101 knows the answer is essentially yes though.

Heh...that was a long time ago, and it wasn't particularly interesting.

[cucamelsmd15]

Originally Posted by DanTheEldest

Heh...that was a long time ago, and it wasn't particularly interesting.

You are "the eldest" after all.