The Gold Standard

[Hoplite]

The gold standard is something that got kicked around a lot from the 2008 election, especially by Ron Paul and his people. What I cant understand is why this idea is being seriously advanced.

At it's most basic, the gold standard is a system whereby money in circulation is backed up by gold (although in theory any valuable material could be substituted for gold).

I've always rolled my eyes at this because it seems to me to be totally unworkable in this economy where much of what we do is digital where no hard currency actually changes hands. Trillions of dollars change hands in the US every day over digital communication lines without anyone ever handling a check or piece of currency. How do you back up money that only exists in a computer system with gold?

On top of that, you have the problem of supply. So let's do a little math.

The last closing price of gold that I'm aware of is about 1,385 US dollars an ounce.

The US GDP is just under $15 trillion.

There is enough gold currently in circulation equal to about 5.1 billion ounces.

That works out to about $7,063,500,000,000.

You're short by about $10 trillion. Even if you had ALL the gold currently in circulation, you still wouldn't have enough to cover our currency.

Now all this is assuming I'm not being overly-dyscalculic tonight, feel free to check my math.

With this in mind, how can people seriously consider the idea of the gold standard as a viable option in today's economy?

I suppose you could try substituting gold for other materials, but what do you use? You could combine gold with something else, but then you'd needlessly complicate our monetary system.

 

[Kali]

I feel that we should have gold for every single dollar we print. We need to go back to days of when we had it in Fort Knoxx. OK. That is not realistic but why the hell did we not keep up with that? We would not be where we are now if we had stuck by The Gold Standard.

Silver?? I dunno:3oops:

 

[Lord Tammerlain]

cc


File:Components of US Money supply.svg - Wikipedia, the free encyclopedia

A gold standard or precious metal standard is about the best protection against devaluation of the currency by the government. Fiat currencies are extremely vunerable to currency devalution in order to minimize the debt of the country in question. The threat of which is why the USD has been the worlds reserve currency, the currency that many countries have been required to issue debt in (as the US is the only country legally allowed to issue USD. This prevents the country from devaluing its currency and as such causing a loss to the lender if they are not based in that country.

A problem arises however when the reserve currency starts to devalue its currency. When the currency that a large amount of deb world wide is issued in, started to devalue intentionally, a confidence issue arises. As any fiat currency requires confidence in the country that it is issued by, (as paper by itself is wortht little more then toilet paper) such a loss of confidence can lead to a run on the currency, wiping out lots of investments.

Gold and other stable precious metals are unlike paper limited in nature. I can not create gold from just chopping down a tree and pulping it. I can do that with paper money.

Just to note you have a couple of missunderstandings regarding the amount of money USD in circulation


The amount of hard currency (actual dollars, quarters, dimes, nickels and pennies) produced and in circulation is just under 1 trillion USD, with next measure of money (M1) being just under 2 trillion dollars. Not 15 billion which is the measure of the GDP of the US

 

[spud_meister]

But doesn't the gold standard mean other countries can control the value of your currency, say America went to the gold standard, and China discovered and started mining a huge gold deposit, wouldn't that lower the value, and conversely, if China started buying huge amounts of gold, and kept it out of circulation, wouldn't that raise the value.

(economics ain't my strong point, so if I'm completely wrong, let me know)

 

[Kali]

But doesn't the gold standard mean other countries can control the value of your currency, say America went to the gold standard, and China discovered and started mining a huge gold deposit, wouldn't that lower the value, and conversely, if China started buying huge amounts of gold, and kept it out of circulation, wouldn't that raise the value.

(economics ain't my strong point, so if I'm completely wrong, let me know)

Don't they already do that with our money? Other countries do determine what our dollar is worth? Having back up like that means that if we got in trouble we would have something to back it up and that our dollar is worth every CENT!

economics ain't my strong point either as you can tell.. lol

 

[Lord Tammerlain]

But doesn't the gold standard mean other countries can control the value of your currency, say America went to the gold standard, and China discovered and started mining a huge gold deposit, wouldn't that lower the value, and conversely, if China started buying huge amounts of gold, and kept it out of circulation, wouldn't that raise the value.

(economics ain't my strong point, so if I'm completely wrong, let me know)

Yes it can effect the value of your currency. Which is why precious or rare items are the usefull ones for making a Standard. Gold, silver, Platinium are all relatively rare, relatively stable in that they will last a long time (gold realistically forever).

Spain and Portugal were actually very negatively effected by the gold provided by the new world. The massive influx of gold distorted their domestic economies. The gold standard (or equivalent) is far from perfect, but it is a far more stable and long lasting basis for a currency then any fiat system. Overall the biggest threat to a currencies value is domestic in nature rather then foreign (counterfitting excepted)

 

[Lord Tammerlain]

Yes it can effect the value of your currency. Which is why precious or rare items are the usefull ones for making a Standard. Gold, silver, Platinium are all relatively rare, relatively stable in that they will last a long time (gold realistically forever).

Spain and Portugal were actually very negatively effected by the gold provided by the new world. The massive influx of gold distorted their domestic economies. The gold standard (or equivalent) is far from perfect, but it is a far more stable and long lasting basis for a currency then any fiat system. Overall the biggest threat to a currencies value is domestic in nature rather then foreign (counterfitting excepted)

Not that I am saying that a gold standard would be pratical at the moment in the US. Perhaps moving to it over a period of time would be possible

 

[Hoplite]

I feel that we should have gold for every single dollar we print. We need to go back to days of when we had it in Fort Knoxx. OK. That is not realistic but why the hell did we not keep up with that? We would not be where we are now if we had stuck by The Gold Standard.

The problem is when you tie your money to something like gold, you artificially limit your economy. You cant grow your economy beyond a certain point and the gold standard works fine when your GDP is where it was in the 40's and when your economy works the same way it did in the 40's. When you start getting into a digital economy and TRILLIONS of dollars in GDP, you cant grow your economy when you base it in something like gold.

Silver?? I dunno:3oops:

The problem with that is an ounce of gold is $1,400. An ounce of silver is about $30. You'll need almost three pounds of silver to equal the value of an ounce of gold. I mean what the **** are you going to do with three POUNDS of silver? Part of the value of a monetary system backed by valued goods is you can cash in your currency, get those goods, move them, then re-change them into currency. $5000 in hard value would be 10 pounds of silver.

 

[Kali]

What do you mean by artificially limit your economy? If we had gold for every dollar how are you doing that?

 

[spud_meister]

What do you mean by artificially limit your economy? If we had gold for every dollar how are you doing that?

You're limited by the amount of gold either in circulation, or by how much your country has.

 

[Kali]

You're limited by the amount of gold either in circulation, or by how much your country has.

Which is my point. We never should have gave that up? I dunno

 

[phattonez]

The problem is when you tie your money to something like gold, you artificially limit your economy. You cant grow your economy beyond a certain point and the gold standard works fine when your GDP is where it was in the 40's and when your economy works the same way it did in the 40's. When you start getting into a digital economy and TRILLIONS of dollars in GDP, you cant grow your economy when you base it in something like gold.

If your monetary supply can't grow, then your economy can't grow? Mind proving that?

 

[Goshin]

The problem is when you tie your money to something like gold, you artificially limit your economy. You cant grow your economy beyond a certain point and the gold standard works fine when your GDP is where it was in the 40's and when your economy works the same way it did in the 40's. When you start getting into a digital economy and TRILLIONS of dollars in GDP, you cant grow your economy when you base it in something like gold.
.

Nonsense.

First, the price of gold and other precious metals is not fixed. It varies depending on demand and supply.

Secondly, growing the economy means GDP grows. This is chiefly about how rapidly dollars change hands, not about the absolute supply of dollars (or gold).

If production grows and gold supply doesn't, an ounce of gold will buy more X than it did before. Supply/demand.

It isn't nearly as limited as you are postulating.

 

[Lord Tammerlain]

Nonsense.

First, the price of gold and other precious metals is not fixed. It varies depending on demand and supply.

Secondly, growing the economy means GDP grows. This is chiefly about how rapidly dollars change hands, not about the absolute supply of dollars (or gold).

If production grows and gold supply doesn't, an ounce of gold will buy more X than it did before. Supply/demand.

It isn't nearly as limited as you are postulating.

Under a gold standard the price of gold would be fixed ( ie $35 / ounce)

 

[Goshin]

Under a gold standard the price of gold would be fixed ( ie $35 / ounce)

But not the value, ie the purchasing power.

If, as it was historically, $20 = 1 ounce of gold, then the amount of a product (let's say wheat for the sake of argument) that one ounce of gold will buy is how much $20 will buy.

If wheat production rises and the relative price of wheat falls, $20/1ozAu buys more wheat. The same is true of any commodity or product, and of the economy in general. If production rises and the quantity of money/gold is circulation does not rise, the same amount of $/Au buys more product.

In a very real sense, this means the actual value will vary even if it is tied to $20=1ozAU.

The difference is, unlike fiat currency which is almost constantly losing value, the value of gold-standard dollars would go up and down, but over the long term more likely up, because production/GDP will usually rise faster than the gold supply, which is more finite.

 

[Guy Incognito]

The problem is when you tie your money to something like gold, you artificially limit your economy.

I disagree. The problem is the use of the term artificially, which means man-made. The gold standard limits the economy naturally. Fiat money is what creates a literally artificial expansion of the economy. The value of fiat money is not determined by natural market factors, rather its value is the artifice of a government.

 

[Lord Tammerlain]

But not the value, ie the purchasing power.

If, as it was historically, $20 = 1 ounce of gold, then the amount of a product (let's say wheat for the sake of argument) that one ounce of gold will buy is how much $20 will buy.

If wheat production rises and the relative price of wheat falls, $20/1ozAu buys more wheat. The same is true of any commodity or product, and of the economy in general. If production rises and the quantity of money/gold is circulation does not rise, the same amount of $/Au buys more product.

In a very real sense, this means the actual value will vary even if it is tied to $20=1ozAU.

The difference is, unlike fiat currency which is almost constantly losing value, the value of gold-standard dollars would go up and down, but over the long term more likely up, because production/GDP will usually rise faster than the gold supply, which is more finite.

Quite true

 

[imagep]

But doesn't the gold standard mean other countries can control the value of your currency, say America went to the gold standard, and China discovered and started mining a huge gold deposit, wouldn't that lower the value, and conversely, if China started buying huge amounts of gold, and kept it out of circulation, wouldn't that raise the value.

(economics ain't my strong point, so if I'm completely wrong, let me know)

Yes. Just one of the many reasons that the gold standard is impractical and downright stupid.

Of course if we were truely on the gold standard, there would be no gold for China to buy because the US would have already siezed all the gold in the world, including millions of ozs not yet produced.

 

[imagep]

Don't they already do that with our money? Other countries do determine what our dollar is worth? Having back up like that means that if we got in trouble we would have something to back it up and that our dollar is worth every CENT!

economics ain't my strong point either as you can tell.. lol

Yes. But since we need to have money in circulation, our gov would never freely exchange gold for dollars because that would remove our gold from ft knox and our dollars from circulation.

Again, the gold standard sounds cool, but doesn't work very well.

 

[imagep]

...
Spain and Portugal were actually very negatively effected by the gold provided by the new world. The massive influx of gold distorted their domestic economies. The gold standard (or equivalent) is far from perfect, but it is a far more stable and long lasting basis for a currency then any fiat system. Overall the biggest threat to a currencies value is domestic in nature rather then foreign (counterfitting excepted)

Thats somewhat ironic seeing how Spain and Portugal were the countries pillaging other countries for gold the most. I guess it proves the old adage true: "better be carefull what you wish for, you might just get it".

 

[imagep]

Not that I am saying that a gold standard would be pratical at the moment in the US. Perhaps moving to it over a period of time would be possible

I actually don't see how it would be possible at all without siezing everyones gold. If all dollars had to have x units of gold in Ft Knox, then the gov would have to start buying gold. But what would they buy it with? If they spent all our tax money on gold, then how would the gov pay it's bills? In gold? But wouldn't that defeat the purpose of buying gold to begin with?

 

[imagep]

What do you mean by artificially limit your economy? If we had gold for every dollar how are you doing that?

There is not enough gold in the world to back all of the US currency, let along enough to back all currencies. Thus our economic system would be limited by a shortage of money.

 

[imagep]

Which is my point. We never should have gave that up? I dunno

Why not? You still have not pointed out any benefits of the gold standard.

 

[Ikari]

But doesn't the gold standard mean other countries can control the value of your currency, say America went to the gold standard, and China discovered and started mining a huge gold deposit, wouldn't that lower the value, and conversely, if China started buying huge amounts of gold, and kept it out of circulation, wouldn't that raise the value.

(economics ain't my strong point, so if I'm completely wrong, let me know)

In essence yes. The last time we had metal backed currency, the markets for those (notably gold and silver) were nearly completely cornered. You don't even need a China to do it, you just need a Wallstreet.

I think that in theory, metal backed currency is very nice. And for quite a long time we were able to use such a thing as well. There are protections against deflation, a dollar is X amount of gold and no matter what, that's what it represents. It's a nice feeling to have, that there's something real on the other side. However, one thing about having metal backed currency is that your currency becomes "real". In that, it's very easy to manipulate, additionally your debt becomes very real. All the US debt is written in the US dollar; if that dollar were metal backed that debt becomes real. You could demand all our gold as repayment of debt.

In the end, I think things like fiat currency and a Federal Reserve are necessary tools for today's complex global economies. A country MUST have control over their own currency, if you don't you're not really a sovereign country. So in that aspect, I support the fiat system in which our government can control. Now that doesn't mean that there are not problems with the current incarnation of our money supply and Fed. I think there needs to be major overhauls. Including a more open Fed, and a Fed which is directly controlled and "owned" by Congress. Only Congress was given the power to print and regulate the value of our dollar. Thus any and every agency which prints or regulates the value of our dollar belongs to Congress. 100%.

In the end, while there are comforts which can be held with metal backed currency, it is not a perfect system. Additionally, it's just not practical in our current day and age.

 

[imagep]

Under a gold standard the price of gold would be fixed ( ie $35 / ounce)

How can one country individually fix the price of gold? If we did, would that actually be a good thing? The price of gold would still fluxuate in other currencies, would would essentially cause the value of the dollar to fluxuate much more than it does now.

What if the worlds largest gold reserve was found in North Korea or Somolia? They could distroy the US dollar overnight.

Why would we want to affix the value of the dollar to something that is less stable than the dollar? Doesn't that defeat the intended purpose of the gold standard?