Asymmetrical Information

Everyone thinks? Was I asleep when this became anything more than a crank issue for old-skool fringe libertarians? Even Hayek was calling bullshit on this stuff 40 years ago.

I'm telling you, free banking is what all the cool kids are into now.

The gold standard can also be destroyed by relatively rapid shifts in the total world wide supply of gold. Shortages of gold can cause investors to suck gold out the reserve while an overabundance creates inflation.

The only advantage that the gold standard ever had over fiat currency was that the necessity of maintaining the physical gold reserve created a limited externally imposed discipline on the part of those who issued the currency. Its really not clear to me at all that a gold backed currency could even function in the contemporary era or world-wide instantaneous commodity trading. Ones currency would be at the mercy of rapid fluctuations in price of gold.

Except that it really isn't-- the dollar is only as good as the government's credibility to stick with the standard. If a government can go on a gold standard, it can go off, and historically countries have done exactly that all the time.

This would seem to be a problem with government, not the gold standard itself. If the government does repudiate its promise to redeem dollars with gold, it's not the holders of actual gold that suffer, but the holders of government promises.

There is no magic about gold beyond its sometime ability to restrict monetary supply inflation by the government to fund both wartime and peacetime expenditures.

Regards, Don

I have been having a multi-year argument with a c-anarchist friend on this very thing. I can't seem to get him to understand the deflationary impact of the gold standard and how that is so very much more difficult to cope with than any bout of inflation may be...

This whole argument assumes that we engage in trade using paper notes that are redeemable for gold by some other authority: a bank or a government. If Gold Dollars are exactly that - gold coins that we spend at the store - how can the government go "off" the gold standard?

It is only when people are foolish enough to let a local or national bank issue them pieces of paper ("good as gold") that they can be screwed out of their gold (think 1934). I can fit enough gold in my pocket to buy a car, or enough in a breifcase to buy a house, so it is not a physical inconvenience.

As for the deflationary effects: there is a LOT of gold out there. Most of it costs more to recover than the current price. As the price rises, more reserves will be developed to meet the demand. Same as with oil.

To me, the only real disruptive possibility is if someone comes up with a revolutionary way to recover gold from seawater (genetically engineered microbes?) - there is more gold in one cubic mile of seawater than has been mined in recorded history.

It is not about governments going off the gold standard, it is about governments DEFAULTING on their gold promisary notes.

Anybody else remember when it was ILLEGAL to hold gold? Thank you Mr. Nixon.

"Anybody else remember when it was ILLEGAL to hold gold? Thank you Mr. Nixon": and Thank you FDR before that, surely?

dearieme-

Perhaps I was not clear. I was thanking Nixon for ALLOWING us to own gold again. Damn FDR for confiscating it and defaulting on existing promisary notes.

Granted, after so long under fiat currency, it would be a hard road back to gold. There is now such a limited supply of gold (on the scale necessary for a global currency) that any move back to it would disrupt global markets in a BIG way. And I don't even know who actually owns most of the gold reserves these days.

The main point I want to make is that, barring any disruptive innovation, the price (cost) of gold in terms of labor, capital, and technological development tends to remain constant. It takes those things to bring it from the ground, and those are the same thing we value, and thus should be the basis of a currency.

The idea of a gold standard was abandoned for political expediencey durring the depression, and we are living with it, and social security, and a whole bunch of other shit that was passed when my parents were kids, that will be exteremely difficult to un-do.

I think metallic standards was one of the smartest things that the Founders put in the constitution (bimetallic gold/silver).

Even back then they accepted copper (pennies) as a tertiary unit of exchange. I wonder of the new libertarian unit of exchange should be poly-metallic: gold, silver, copper, zinc, nickel, chromium, zinc, iron, etc. But the problem then arises as to how to maintain the ratios - and again we fall subject to the risk of paper currency and government fiat. The Founding Fathers attempted to do so based on their assumptions of the relative abundance of gold and silver in the new world, and it worked for over a century.

Yeah, that's exactly what I've thought for years -- the fact that we used to be on a gold standard and now aren't is, itself, proof that the advantages of a gold standard don't exist.

Lab Rat:
Why maintain the ratios? Why not just let them float?

If Gold Dollars are exactly that - gold coins that we spend at the store - how can the government go "off" the gold standard?

A $1 gold coin would be around 1/100th the size of a penny.

I haven't been out of the tower in a while but surely people can't seriously be think a gold standard is a serious option.

Do they think Greenspan is just a quack? All this non-sense about the FED and the money supply worthless. Or perhaps they just think the economy grew so much more smoothely before 1971

Garth: I don't think the deflation is the problem. I think it's a misnomer to refer to deflation when the money supply is increasing, even if prices are overall decreasing. Prices should be decreasing.

Rather, the gold standard is bad because it's an enforcement mechanism that penalizes the whole country instead of the man making decisions. There are rules of central banking that I think central bankers should, in general, follow. The gold standard means that there are nasty consequences of not following those rules. But the gold standard doesn't force the Fed to follow the rules, and if the Board of Governors don't want to follow those rules they're not the ones who'll get hurt. I think we should just advocate for a money supply peg, which is what the gold standard is trying to achieve, and forget about the gold standard itself.

For more, see my blog.

Karl Smith,

You should read the things Greenspan wrote about the gold standard! He was a fierce supporter.

Wasn't Jack Kemp a supporter of the gold standard too? Maybe he still is. Not sure why it's needed-we have low inflation now.

The government could refuse gold coins for payment of taxes. The government's share of the economy being larger than 25% that would reduce the value of gold coins.

I'm not really sure where the notion of gold as a reliable control of inflation / deflation has come from. If you look at the history of gold standards they are, in fact, plagued by periods of rapid inflation and viscious deflation. The fact of the matter is that the growth of the gold supply has, at best, limited relation to real economic growth. Hence periods of strong growth (real growth - like that from technological innovation) get short-circuited by the inability of the gold supply to keep up and periods of modest growth get inflated by new discoveries.

Gold is also a fiat currency. All forms of currency are a stand-in for value, and value is subjective. In the US, at this point in time, the closest things we have to a non-fiat currency are labor and creativity. And for what its worth, this is a very good reason not to worry too much about the future.

Over a period of a few years, there are at least two factors that limit the swing of gold prices. Ore containing gold at low concentrations is widely distributed, but most of those deposits are so low concentration that you can't make a profit from them. Raise the price of gold and some of them become potentially profitable, but it takes years to get into production.

On the other side, gold is nearly corrosion-proof, so many electronic connectors have the mating surfaces plated with a thin layer of gold. Many more use tin-plate instead to save money. In a connector contact I ordered recently, it was $0.16 each tin-plated, and $0.49 gold-plated. When you order 100,000 at a time, the gold premium adds up... At a lower price, there's lots more use for gold plating, but no one is going to change an existing bill of materials just for that, so it would take years before the full effect of a lower price on industrial gold consumption would be felt.

As long as gold is freely available on the market, you can have your own gold standard by buying gold (currently about $520/oz i think).

(I use the zinc/copper standard - now where was that jar of pennies?)

Don't you fools remember what happened on that Turner network TV movie some years ago, when aliens came to Earth and offered to buy all the black people in exchange for an enormous moon-sized block of gold?

Leaving aside the oh-so-genius racial commentary intended, I though it hilarious that it never occurred to the movie makers that flooding the market with an enormous, unprecedented quantity of gold would just render the metal worthless and common. That movie was really a parable about commodity markets and marginal value; not race.

So that's why we musn't have a gold standard: aliens might stoke hyperinflation by trying to buy our African Americans fellow citizens. I warned you.

MikeD, you are a genius!

Does anyone remember the name of that movie? I've heard it mentioned a few times, but always as "that thing where aliens buy all the black people".

The central point made by the gold bugs stands: you do not want central planners setting prices.

Most gold bugs favor private currencies based on gold. Hayek favored private fiat currencies. But either way the important thing is to move the price of money (interest) into the market and away from the government.

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