RIP Philo

some thoughts on the gold standard

Should we return to a gold standard?

A loyal MR reader requests:

...your thoughts on fiat currency vs currencies backed by precious metals. could a return to the gold standard for the US dollar, as advocated by US congressman Ron Paul, bring about a superior economic system?

A gold standard has few advantages over a responsibly run fiat currency, as we have had since about 1980.  A real, laissez-faire gold standard involves a pro-cyclical money supply, and who wants that?  Why let the money supply shrink during bad times?  Some prices and wages are sticky in nominal terms, if only because people feel they are being taken advantage of, not "holding their ground," or losing relative status.  Just read Truman Bewley's book.  Nominal stickiness is rooted in human nature.

Maybe we could get used to periodic or ongoing deflation, but it would take some doing.    In the meantime two percent inflation is not so bad.  On the other side of the debate, the resource costs of the gold standard have been overplayed.

The best and indeed only argument for gold is the view that we must, sooner or later, return to rampant inflation.  That has been the rule for fiat money throughout most of human history.  I think today seigniorage is not an important source of government revenue and financial markets punish politicians for inflation pretty quickly.  So I am willing to wait for the "later" to come before making any switches away from fiat money.  Keep in mind, people can already denominate their contracts in terms of gold, and hardly anyone wishes to do so.

#22 in a series of 50.
March 14th, 2007 12:04pm
Advocating the gold standard is probably the number of sign of lack of economic intelligence. It's like saying the world is only 6000 years old.
Permalink Send private email strawberry snowflake 
March 14th, 2007 12:14pm
A lot of discussion has been had on the gold standard over here and back then over at ?off. The archives should have it. Search and read up if you are interested. Take away was, since a whole two generations of Americans have been born with fiat currency, none living today will want to go back. A huge loss has to be borne even though the economics of it should set things right in the long run.
Permalink Send private email Plus ça change 
March 14th, 2007 12:22pm
> A huge loss has to be borne ?

How? Why?
Permalink JOSer 
March 14th, 2007 12:25pm
> It's like saying the world is only 6000 years old.

Good analogy.
Permalink son of parnas 
March 14th, 2007 12:39pm
Why? In what ways does the analogy work aside from pointing out that religious nutters and econmic nutters are both nutters.
Permalink JOSer 
March 14th, 2007 12:40pm
> In what ways does the analogy work

Usually an analogy highlights a particular point. It's not a one-to-one mapping between domains. So if it only works in one way, that's fine.
Permalink son of parnas 
March 14th, 2007 12:46pm
Permalink JOSer 
March 14th, 2007 12:51pm
It works because those advocating for a gold standard believe the gold has intrinsic literal value - rather than the value the community gives it. The same way biblical literalists believe the Bible says the world is 6000 years old.
Permalink Send private email strawberry snowflake 
March 14th, 2007 12:57pm
Gold *does* have intrinsic literal value.

It doesn't tarnish (in fact, it's very nonreactive in general), it's malleable, ductile, very conductive, looks very pretty, is very dense, alloys well with other metals. It's also pretty much nontoxic.

Gold has had intrinsic value for all of human history - I'm not sure any other scarce resource can say the same thing.
Permalink Send private email Philo 
March 14th, 2007 2:20pm
Trying to back the dollar with anything material is like yelling "fire" in a crowded theatre (when there is no fire) - of course the cliche is bad nowadays because the exit lights are always on.
Permalink Send private email LinuxOrBust 
March 14th, 2007 2:29pm
In this context, it is not a case Gold having any intrinsic value. Well, it does as Philo mentioned, but that is not the main point. In this case one has to equate Gold with that metre rod in Paris. Of course it could be anything for that matter. But Gold rather than, say, paper has been chosen for some very pertinent reasons.
Permalink Send private email के. जे. 
March 14th, 2007 2:52pm
Yeah those are aspects of gold. That is correct. Yet while they are intrinsic to gold (durability, etc) they are only valuable in a specific culture. They are valuable in an economy where farmers and small manufactures come together in a town square once a week to trade goods -- portability, durability, authenticity, non-corrosiveness from one week to the next are all important. They are less valuable in an economy of instant wire transactions.

There, gold's durability is meaningless, unless it's used on the memory chips used by the server which houses my bank account.

Gold was also less valuable *before* small towns could bank on tradesheds, either, I imagine.
Permalink Send private email strawberry snowflake 
March 14th, 2007 2:52pm
You are missing out on the actual reason. Supply. Supply of gold was (is?) fixed. Discovery of new gold deposits were far and few between. Hence, the scale was set. Any change in the worth is an increase or decrease in value of one unit of gold. The number of units remain fixed. The value of a unit keeps fluctuating. That value is the economic value. This is advantageous since I cannot create gold to increase my value without a corresponding economic effort. With paper, if I want to be worth 100 instead of the 75 I am now worth, I print 25 more papers. With gold I cannot create that 25. I will have to work towards producing that 25 or I will have to borrow that much gold from you or just plain steal it.
Permalink Send private email के. जे. 
March 14th, 2007 3:19pm
ISTR an analysis once where someone determined that the amount of gold you needed to buy a meal had stayed relatively static over centuries, if not millennia.

Can't really say the same for dollars, euros, deutschmarks, drachma, flanian pobble beads...
Permalink Send private email Philo 
March 14th, 2007 3:37pm
Philo, what is the implication of the information you provided?
Permalink Send private email Rick, try writing better English 
March 14th, 2007 3:39pm
> You are missing out on the actual reason.

You talking to me? You talking ... to ... me? (looks around.)

Anyway, what is this thing that needs a reason? What does the  'fixed' supply of gold explain? Its intrinsic value?
Permalink Send private email strawberry snowflake 
March 14th, 2007 3:51pm

can't find anything.  lost to inflation for a couple decades.
Permalink JOSer 
March 14th, 2007 3:54pm
Strawberry, I did try to explain. I'm sorry I failed.
Permalink Send private email के. जे. 
March 14th, 2007 4:01pm
के. जे.: I just didn't know if you were talking to me or relating to someone else's comment. I see what you mean - gold's intrinsic value is that it has fixed supply (despite all those gold bullions lost by the Spanish in shipwreck after shipwreck, etc) which means it's a natural deterrent against inflation.

That makes sense, a bit. The fixed supply/fixed price hypothesis does seem to rely on gold being completely unused in any other way in the economy. For if it is (such as decorative items or electronics) then the demand jumps and so should the price.

Now the MR quote above points to another interesting tidbit .. people like inflation! Or rather they like inflation more than the like deflation (ie, nominally earning less this year than last). So given that prices will fluctuate a bit there will always be some difference, call this X%. Now the rate of fluctuate fluctuates a bit too, so it will be say X% +/- 3%. In order for this value to be above 0, ie, there not to be deflation (which humans are psychologically antsy about .. see loss aversion), X needs to be around that 3%. Ie, the inflation target central banks try to hit needs to be around the margin of error in their ability to hit this target.
Permalink Send private email strawberry snowflake 
March 14th, 2007 4:19pm
I guess this story about airline landing slots reminds me of the gold standard (reddit) ..
Permalink Send private email strawberry snowflake 
March 14th, 2007 4:29pm
Gold as a standard and gold as a commodity are two different things. I think that the value Philo attributes to gold is irrelevant to the discussion here. The sentiment he echoes is what makes thinking rationally about gold difficult. Though Keynes famously called it a barbaric relic, we still believe in the Midas touch and have proverbs reminding us that all that glitters isn't gold. In fact, it's bad if what it is, glittering or not, is not gold.

It's scarce and it doesn't tarnish. It's malleable. It's ductile. So what? I can keep looking at it but it isn't come in as handy as Silver when it comes to industrial applications.

Though it looks and feels good, Gold as a useful commodity is far behind in the race.

When it comes to a standard, it's a totally different thing. We are talking about something else. It may as well be burgers. I'm suggesting burgers, though it's obviously foolish, to make the fungibility clear. Compared to gold, more can be created. It isn't as heavy as gold. When it comes to storage, gold is heavy but burgers are light. But we'll need cold storage. The problem with the scarcity of gold is solved with burgers but we are able to make more. So we have the problem of deciding on the expiry date and replenshing the stock. We'll have this as a standard and paper money will still be the medium of exchange.

When we talk about a standard, what does it represent? It represents the economy. There is only so much gold and our economy has grown much much more. We have come a long way. We can make it the standard and increase the value of each bar. Based on the standard, we can print money. Or the Fed can take hold of the interest rate. Either people control or we follow a standard, which people can't. People who prefer gold standard, say that Greenspan or Bernake can screw up the economy, so don't give it to them. But we say - that is, the current Fed's control - don't think that some arbitrary commodity will reflect exactly what's happening with the economy, so let people look at statistics on money supply, etc and adjust the interest rates.