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Guest Post: The Unadulterated Gold Standard

Tyler Durden's picture




 

Authored by Keith Weiner,

The Unadulterated Gold Standard

The choice of the word “unadulterated” is not accidental.  There were many different kinds of gold standard, including what we now call the Classical Gold Standard, the Gold Bullion Standard, and the Gold Exchange Standard.  Each contained flaws; each was adulterated.

 

For example, in the Coinage Act of 1792, the government forced the price of one thing to be fixed in terms of another thing.  The mechanism was in Section 11:

And be it further enacted, That ”the proportional value of gold to silver in all coins which shall by law be current as money within the United States, shall be as fifteen to one…”

 

Of course, people respond to such distortions.  When the government fixes the price of something too low, then people will hoard or export it.  If the price is fixed too high, then they will flood the market with it.

 

According to Craig K. Elwell, in his 2011 Congressional Research Service Report:

 

“Because world markets valued them [gold and silver] at a 15½ to 1 ratio, much of the gold left the country and silver was the de facto standard.”

 

Subsequently, the government changed direction.  Elwell notes:

 

“In 1834, the gold content of the dollar was reduced to make the ratio 16 to 1.  As a result, silver left the country and gold became the de facto standard.”

 

If the law dictates the ratio between gold and silver, then only one metal—the one that is undervalued—will be used.  It would be extremely difficult for the government to get the ratio exactly right.  And even if so, as soon as the market value changed the ratio would be wrong and only one metal would circulate.

 

The government should not attempt to force a price onto the market.  In the unadulterated gold standard, the market is allowed to set the price of silver, copper, oil, wheat, a fine wool suit, and everything else.  It allows people to use gold, or silver, or seashells as money if they wish (the market has not chosen seashells in modern history).

 

Throughout the 19th century, there were various state laws to impose new kinds of restrictions on the banks.  One popular restriction was that in order to obtain a charter (permission to operate as a bank), the bank had to buy state government bonds.  This theme—forcing banks to buy government bonds—was to recur later.

 

This is a pernicious idea.  Banks must have an earning asset to match the liability of the deposit accounts.  Why not make them buy some government bonds as a condition for permission to operate?  Because this is obviously blackmail.  In a free country, one should not need to ask permission to be in business and one should not be forced to do something in exchange for that permission.

 

This policy has two economic effects.

  • First, it pushes the price of the government bond higher than it would otherwise be, which means it pushes down the rate of interest.  This distortion ripples throughout the entire economy.
  • Second, it exposes the state-chartered bank to the fiscal irresponsibility in the state capitol.  And of course the state capitol is encouraged to borrow and spend by this very perverse policy, because they know that there is always a market for their bonds.  This lasts until they default, of course.  And when they do, the state-chartered banks become insolvent.  This is not a failure of the gold standard, or of the free market.  It is a failure of a deficit spending policy and central planning.

There is another problem with this scheme.  The bank takes in deposits, especially demand deposits, and it buys bonds, especially longer-dated bonds.  This is called “borrowing short to lend long”, and it is dangerous because if the depositors want to redeem their gold or silver, the bank may be in a position where it has only an illiquid bond.  Obviously, the depositor does not want a government bond, and so the bank can be forced to default in a “run on the bank”.

 

All borrowing short to lend long schemes, also called “duration mismatch”, collapse sooner or later.  This is because the depositor, who is the ultimate issuer of the credit, is signaling that he only wishes to extend credit for short duration.  But the bank has expanded long-term credit.  This is not the bank’s decision to make, and by disrespecting its depositors’ intentions, it makes itself vulnerable to a run.

 

In 1864, the National Banking Act imposed a tax of 10% on notes issued by state banks.  Needless to say, state-chartered banks responded to this threat of mass robbery.  There were 1466 state-chartered in 1863.  Five years later, 83% of them had either gone out of business or become nationally chartered.

 

One of the provisions of this Act was to require nationally chartered banks to hold US government bonds in order to issue nationally standardized bank notes and other liabilities.  One key reason for this was that the federal government was eager to finance the civil war (1861 - 1865).  In later years, when the federal government wanted to pay down its debt, this squeezed the banks and the result was deflation and panics.

 

The problem was exacerbated when the federal government resumed the minting of coins.  The “Crime of 1873" was the name many gave to the Coinage Act of 1873, which demonetized silver.  This was an enormous wealth transfer from the small saver such as the farmer who had silver stored at home into the hands of the wealthy who kept gold in the banks.

 

These problems occurred under the Classical Gold Standard.  Even before the Federal Reserve Act of 1913, we saw the following adulterations:

  1. A fixed gold:silver price ratio in a bimetallic monetary standard.  The unintended consequence was that first gold, and later silver, fled the country.
  2. Laws forcing banks to seek permission to operate.  Big-spending governments, needing a market for their bonds, forced banks to buy their bonds in various schemes in exchange for permission to operate.  This exposed banks to bank runs and bankruptcy when the bonds defaulted, and created a new problem when the size of the banking system was restricted by the value of government bonds outstanding.
  3. Demonetizing one metal shifts wealth from one class of saver to another.
  4. Duration mismatch causes the business cycle.  The boom occurs due to credit expansion beyond the intent of the savers.  The bust begins when there are significant redemptions by depositors who need their money.  A full panic occurs when other depositors realize that the bank is not holding either money or short-duration assets such as Bills.  The bank holds illiquid long-term bonds and cannot pay depositor redemptions.  The run turns into bankruptcy.  The panic turns into a wide scale depression.
 

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Tue, 10/30/2012 - 16:53 | 2932737 Newsboy
Newsboy's picture

Maple Leaf Standard.

Tue, 10/30/2012 - 17:00 | 2932752 I am more equal...
I am more equal than others's picture

Canuck

Tue, 10/30/2012 - 17:05 | 2932766 knukles
knukles's picture

A "Yah, hey dere, gotta smoke, eh?" standard?

Tue, 10/30/2012 - 19:16 | 2933062 Frozen IcQb
Frozen IcQb's picture

Habs

Tue, 10/30/2012 - 19:39 | 2933099 SafelyGraze
SafelyGraze's picture


Monopoly (Gold Standard Version)

"Sorry, the page you were looking for in this blog does not exist"

 

Tue, 10/30/2012 - 17:40 | 2932873 trentusa
trentusa's picture

I don't know about the maple LEAF, but maple SYRUP is certainly an expensive & tradable commodity. Unadulterated Maple Syrup Standard anyone?

In 'Hitchhikers Guide to the Galaxy' remember the citizens tried to make leafs the national currency, after crashing landing on prehistoric earth... long time since I read it but i believe there was rampant inflation, but people never learn. Somehow McDonalds keeps their dollar menu alround (and it's not by adding sawdust!!)

Tue, 10/30/2012 - 18:06 | 2932930 m0w0g
m0w0g's picture

They "ran into a small inflation problem" which had five major deciduous forests buying one ship's peanut. So in an effort to re-value the Leaf, they embarked on an aggressive defoliation program and burned down all the forests.

Whereupon Ford Prefect called them a "bunch of raving nutters" and shouted "How can you have money if noe of you actually produce anything?"

Tue, 10/30/2012 - 23:06 | 2933587 fuu
fuu's picture

<pours one out for Doug>

Wed, 10/31/2012 - 11:11 | 2934496 BigJim
BigJim's picture

 ...Whereupon Ford Prefect called them a "bunch of raving nutters" and shouted "How can you have money if noe of you actually produce anything?"

Thus proving once and for all that Douglas Adams had a sounder grasp of monetary theory than ('Nobel prize winning'!) Paul Krugman.

Mon, 11/19/2012 - 08:49 | 2995472 Ayn NY
Ayn NY's picture

Think of Krugman and his ilk as if they were a religious cult - which they are.

My Keynsian Econ professor was shocked when I proved to him that there was never a Clinton surplus - he's a PHD, I'm an art student.....

Tue, 10/30/2012 - 17:40 | 2932874 Silver Bug
Silver Bug's picture

A lot of people don't realize that we have never been on a TRUE gold standard.

 

http://schiffblog.blogspot.ca/

Tue, 10/30/2012 - 17:41 | 2932877 Motorhead
Motorhead's picture

Sure, why not?  Better than what we got now...much better.

Tue, 10/30/2012 - 20:00 | 2933133 CH1
CH1's picture

Screw the "standard" - let peopole use whatever currencies they damn well please.

Tue, 10/30/2012 - 18:34 | 2932976 dermus
dermus's picture

The answer is very simple. No more currency units. Gold should be denominated in - wait for it - weight. If all nations coin to an agreed to standard, say, 9999 purity, and denominate in say, grams, you would have a gold standard in which nobody can cheat by playing with the currency unit to weight ratio, because there would not be one.

1 US Dollar would no longer mean (for example) 1 Dollar x (1 oz Gold / 35 Dollar) = 1/35 Oz Gold.

1 g Gold US Dollar would mean 1 g of Gold as minted by the US.

Currency units must be eliminated. It's the only way to fix the system.

Tue, 10/30/2012 - 19:36 | 2933094 stirners_ghost
stirners_ghost's picture

Or simply have no standard currency, i.e. no legal tender laws. Let bank notes live and die and compete with each other on their merits (including, but not limited to, how many tons of gold are locked up in the vault).

Tue, 10/30/2012 - 20:56 | 2933246 DoChenRollingBearing
DoChenRollingBearing's picture

Yes, and see freegold post under here by lasvegaspersona...

Tue, 10/30/2012 - 18:47 | 2933012 lasvegaspersona
lasvegaspersona's picture

Freegold standard...coming...

Tue, 10/30/2012 - 18:59 | 2933034 dlmaniac
dlmaniac's picture

You are in free gold RIGHT NOW. Free gold is nothing but another banker scheme to create money outta thin air and therefore steal from the public. 

Wed, 10/31/2012 - 07:46 | 2933976 Zero Debt
Zero Debt's picture

Freegold looks like pro-gold but is actually a horrific paper scam. Read between the lines.

Tue, 10/30/2012 - 16:58 | 2932748 JPM Hater001
JPM Hater001's picture

This is why you need to have your next country of residence already picked out.  If we dont get it right when this BS is over I'm outta here.

Been hearing really good things about Chile and Argentina.  I hear they have gold in reserve...in their country.

Tue, 10/30/2012 - 17:01 | 2932756 A Lunatic
A Lunatic's picture

Mars is unsullied too.........

Tue, 10/30/2012 - 17:21 | 2932812 RacerX
RacerX's picture

Plus, Mars needs women.

Tue, 10/30/2012 - 17:36 | 2932852 negative rates
negative rates's picture

You heard wrong, actually many country's are considering taxing the real estate bought by foreigners an extra 10% to strengthen their currency against a hyperinflated dollar. You can run, but you can not hide.

Tue, 10/30/2012 - 17:01 | 2932757 CashIsTrash
CashIsTrash's picture

How about having a MARKET STANDARD???

Tue, 10/30/2012 - 17:18 | 2932804 Poor Grogman
Poor Grogman's picture

How about the law just makes it illegal for the government to interfere at all in what people freely choose to use as currency.

In fact why don't governments just take a leaf out of Belgiums book and go on holidays for a while.

Tue, 10/30/2012 - 17:03 | 2932763 goldenboy
goldenboy's picture

Freegold or death... 

Tue, 10/30/2012 - 17:21 | 2932816 dlmaniac
dlmaniac's picture

Free gold = another paper scam.

Tue, 10/30/2012 - 18:49 | 2933017 lasvegaspersona
lasvegaspersona's picture

maniac

get edumicated before you rant

Tue, 10/30/2012 - 18:54 | 2933025 dlmaniac
dlmaniac's picture

Put down the cult crack to grasp some econ 1-2-3 so that you would not be conned by something like free gold. 

Wed, 10/31/2012 - 07:48 | 2933978 Zero Debt
Zero Debt's picture

Beware of freegold, Fofoa is just trying to fool you to accept another paper standard. And we all know how that will work out.

Wed, 10/31/2012 - 07:51 | 2933984 Ghordius
Ghordius's picture

I feel you should beef up your point of view. I understand what you want to say but some of it is scenario-dependent and quite debatable

Tue, 10/30/2012 - 17:24 | 2932826 waviator
waviator's picture

"Freegold or death... "

Can I have your stereo?

Tue, 10/30/2012 - 17:04 | 2932765 SWRichmond
SWRichmond's picture

In a free country, one should not need to ask permission to be in business and one should not be forced to do something in exchange for that permission.

The licensing and regulatory state disagrees with you.

Tue, 10/30/2012 - 19:53 | 2933116 donsluck
donsluck's picture

As do I. You should not be free to polute my air or water. It goes on from there. The absence of regulation is barbarism, or at least barter, which is very inefficient and eliminates the incentive to produce things of value, such as cars. How many chickens to buy that car?

Try and think of all the "businesses" you could be in without regulation. Such as protection. Such child prostitution...

Wed, 10/31/2012 - 08:26 | 2934040 SWRichmond
SWRichmond's picture

No libertarian is unfamiliar with the tragedy of the commons.  What does that have to do with professional and business licensing?

Wed, 10/31/2012 - 11:15 | 2934512 BigJim
BigJim's picture

 ...The absence of regulation is barbarism, or at least barter, which is very inefficient and eliminates the incentive to produce things of value...

Er, what? You can't have money without 'regulation'? Are you using 'regulation' to mean enforcement of contract?

Cause if you are... no one else here is, in the context of this thread.

 

Wed, 10/31/2012 - 11:55 | 2934665 Mr. Magniloquent
Mr. Magniloquent's picture

Why does abolishing The State's licensing monopoly permit personal damages of private property?
Why would removing barriers to entry in any industry result in less production and competition?
What evidence do you have that governments predate money?
Does prohibition (regulation) of drugs and prostitiution prevent these trades in any meaningful way?

Sun, 12/23/2012 - 09:48 | 3091152 ListLincolnBism...
ListLincolnBismarkRoosevelt's picture

"Why would removing barriers to entry in any industry result in less production and competition?"

(1° Private compagnies own Europe for centuries during the middle age. The venitian private empire did well totaly control finance, PM and army power, not any state. Wath happen then in de 14° century ? So at least there is an opposition to full private economy an free market.)

2° The protectionisme movement like Hamilton, List, Lincoln, Bismarck and their succes tell us that in a first time you need barrier to have à thrue competition ! You can compare Germany before an after Bismarck if you want ?   

Tue, 10/30/2012 - 17:10 | 2932785 SILVERGEDDON
SILVERGEDDON's picture

Brass, copper, lead, charcoal, sulphur, saltpetre, fulminate of mercury.

Gooberment doesn't care about these strategic elements - now.

Stock up on yours today, prior to Nov. 15th.

National Buy Ammo Day.

Seriously.

Google that shit up, bitchez.

Tue, 10/30/2012 - 17:15 | 2932795 PUD
PUD's picture

Money should not be tied to a nearly useless metal that causes great environmental destruction in its mining. Money should be tied to a basket of real world goods...a unit of corn, wheat, soy, a unit of oil and gas, a unit of labor or some measure of service...real things that are needed and valued by real human beings. The basket should be broad and diverse and comprised only of things that are actually required for basic survival. The money unit would never be subject to the ravages of inflation then, at least so far as basic needs are concerned.

Tue, 10/30/2012 - 17:19 | 2932806 Joebloinvestor
Joebloinvestor's picture

It is called the CFTC.

 

See how well that works?

Tue, 10/30/2012 - 17:22 | 2932822 Poor Grogman
Poor Grogman's picture

Show me where that ridiculous idea has ever worked without the use of state sponsored force?

Tue, 10/30/2012 - 21:02 | 2933259 DoChenRollingBearing
DoChenRollingBearing's picture

Check.  Another green.

Tue, 10/30/2012 - 17:24 | 2932825 UnpatrioticHoarder
UnpatrioticHoarder's picture

Actually having an otherwise useless metal as money is a great idea. It means when demand for real money takes off, the inflationary effect is felt in the price of a metal no-one eats, lives in or otherwise really needs. Commodity speculation is actually dampened.

Tue, 10/30/2012 - 17:29 | 2932833 PUD
PUD's picture

If money was tied to the real world needed goods then there could be no inflation regardless of speculation...if ags doubled for example the money would still be worth the same unit of measure.

In addition, I would outlaw all "speculation" in all critical commodities. They are the essence of life and should not ever be speculated upon. Trading between farmers and processors would be allowed as it was originally intended but there would be no outside gambling on the stuff people depend on for their very existence

Tue, 10/30/2012 - 17:44 | 2932884 Poor Grogman
Poor Grogman's picture

This system would be gamed to death in about 30 seconds flat.

As usual the squid would milk it, while the people starved.

Try separating trading and speculating, especially as they often represent two sides of the same trade. ...

Tue, 10/30/2012 - 18:54 | 2933024 lasvegaspersona
lasvegaspersona's picture

Grogman

try separating  the medium of exchange from the store of value. Whatever the MoE is it will be lent and therefore debased. That is fine if the MoE is fiat and everyone knows it is just a MoE to be held a short period. The store of value should be unlent. It will not get debased...that is freegold in 4 sentences.

Tue, 10/30/2012 - 19:06 | 2933046 Poor Grogman
Poor Grogman's picture

Even holding the MoE while you make various exchanges is plenty of time for you to get "inflation taxed" on it. Therefore why not just exchange the store of value itself?

This is why free-gold will not work, in two sentences.

Tue, 10/30/2012 - 20:08 | 2933146 Bullionaire
Bullionaire's picture

 

Poor grogman dumbass troll. Gesundheit.

 

 

Wed, 10/31/2012 - 04:14 | 2933874 Poor Grogman
Poor Grogman's picture

.....Yawn.....

Wed, 10/31/2012 - 02:13 | 2933830 lasvegaspersona
lasvegaspersona's picture

grog

because what you just said is ridiculous. So I hold fiat for a few weeks...what did I loose? nothing measurable!!! Meanwhile I have put my savings else where. That is why FG is coming...and I won't waste any more effort here....just watch..if you know where to look it is already coming...

Wed, 10/31/2012 - 04:15 | 2933858 Poor Grogman
Poor Grogman's picture

Instead of " free gold" why not call what's happening " the coming price dislocation of gold and loss of faith in FIAT currency."

Clothing this quite obvious coming event with fine sophistry and clever catch phrases doesn't make much sense to me. Much less pretending that it is somehow beneficial to the Euro- peon monetary system.

there will be plenty of " losers" to go around whatever name you give to coming events....

Wed, 10/31/2012 - 10:05 | 2934288 goldenboy
goldenboy's picture

They have no idea where to look, nor would they want to if they knew where to look. The depth of failure to grasp even the most elementary freegold tenets is particularly disappointing, but quite amusing to read the spurious arguments arising from such lack of illumination. Guess who's going to be smiling as all paper, led by the paper gold market, burns. The BIS knows!

Wed, 10/31/2012 - 07:49 | 2933982 Zero Debt
Zero Debt's picture

Well, to make a judgment call of what constitutes "speculation" we need to staff a commission which is non-corruptible and free of corporate influence. I am calling Goldman Sachs alumni network right now to get a short list of names.</sarc>

Tue, 10/30/2012 - 17:31 | 2932835 Bay of Pigs
Bay of Pigs's picture

Hey PUD whacker,

You've asked that question before and been answered every which way possible. Are you dense or a troll?

Tue, 10/30/2012 - 17:36 | 2932859 PUD
PUD's picture

I did not ask a question. I made a statement. One of the few thoughtful rational statements ever made here.

Tue, 10/30/2012 - 18:10 | 2932936 fuu
fuu's picture

BWAHAHAHAHAHAHA!

Tue, 10/30/2012 - 21:06 | 2933278 DoChenRollingBearing
DoChenRollingBearing's picture

Yes, I started laughing RIGHT BEFORE I saw your post as well.

Tue, 10/30/2012 - 22:09 | 2933446 fuu
fuu's picture

It just burst right out.

Tue, 10/30/2012 - 19:56 | 2933127 donsluck
donsluck's picture

Down 1 for you. You just insulted me and everyone on this board, except for you and "the few".

Tue, 10/30/2012 - 17:39 | 2932868 Lets_Eat_Ben
Lets_Eat_Ben's picture

Money must be many things. The need for money exists to facilitate trade from very big transactions to very small ones.

One can no more put a down payment on a house with a unit of corn than they can buy a unit of corn with a flake of gold. Money must contain many attributes and versitility is an important consideration.

I say let the markets pick what money is. That's the way it has always been until it becomes "adulterated" which seems to always be the way it goes.

Tue, 10/30/2012 - 17:45 | 2932890 PUD
PUD's picture

You're right. Money is needed for those things. The difference is between "faith" "debt" money and money that is equivalent to something real. It is foolish to tie money to a single item or material especially a yellow metal. Money has to relate to something other than debt or faith. The most rational money would be backed by a basket of real world goods that are required for human survival. Regardless of the supply of those commodities the money would always adjust to be able to procure the same amount of said commodities...no inflation. Ban speculation in those items that back the money and you would have a stable and unshakable monetary system.

Tue, 10/30/2012 - 18:08 | 2932915 Lets_Eat_Ben
Lets_Eat_Ben's picture

"Ban speculation in those items..." You can't do that. You can't ban betting. Gold would fix itself on this anyway. No need for more laws. 

We agree that debt based, fictional money, is a bad thing. Something real must be used as money. On this point we agree also, but I am of the opinion that we must use the best money we have available and food is not it.

One of the attributes of Au that make it sound money is it's stability. If you're thinking gold is volatile, guess what: you don't know what the fuck you are talking about. The dollar, and other currencies by which gold is measured, is volatile. When there is a stable currency a lack of arbitrage interest will be evident in those FX "markets".

Money is necessary. It should be something not used for anything else; stable, rare, fungible, long lasting and money other attributes. Gold fits the bill well I should think. We to have sound money. Gold is the best money.


Tue, 10/30/2012 - 17:59 | 2932918 XitSam
XitSam's picture

As we recall from previous classes, money itself is a comodity with sometimes more demand and sometimes less. So Pud, how does the money "adjust to be able to procure the same amount of said commodities"?  

Tue, 10/30/2012 - 18:32 | 2932975 PUD
PUD's picture

It is fixed to the basket of agreed upon commodities. One unit of money procures a given number of units of corn, soy, oil, an hour of labor, iron, pork..whatever makes the most sense to include in the basket. One commoditiy could soar one could crash but the money unit would always be able to procure the same basket of goods. It would be broadly diversified so that a crop failure for example would be balanced by an increase in some other component. I really fail to see what all the resentment towards this is other than it pisses you off that you would no longer be able to gamble for your own personal gain

Tue, 10/30/2012 - 19:05 | 2933045 Bay of Pigs
Bay of Pigs's picture

Can you read or is it a comprehension issue?

 

Tue, 10/30/2012 - 21:09 | 2933289 DoChenRollingBearing
DoChenRollingBearing's picture

He cannot or will not understand that a useful metal, but much desired for 5000 years is PERFECT for the "Store of Value" function of money.  Basket of commodities is hoarding USEFUL stuff that the Superorganism needs.

+ 1

Wed, 10/31/2012 - 02:16 | 2933832 lasvegaspersona
lasvegaspersona's picture

DCRB meant useless not useful...it is because gold has no real uses that its removal from the system by hoarding hurts no one.

Wed, 10/31/2012 - 02:01 | 2933822 squexx
squexx's picture

Instead of gold or commodities, lets use magic fairy dust as our money system. Better yet, the rainbows that unicorns fart!

Wed, 10/31/2012 - 07:59 | 2933999 Zero Debt
Zero Debt's picture

Which brings us the not-so-trivial question of what makes sense to put in a basket.

The problem with putting things like "an hour of labor" in a basket is that it, well, can't be put in a basket, because, it is not portable, divisible and uniform. An hour or labor sounds like a unit measure straight out of the communist manifesto, and considering that even the two oldest professions, hooker and politician, aren't paid at the same hourly rate, you could never get an agreement on that. And try to sell a pork basket to a few Middle East countries. And the fact that you did not put any precious metal there is either an uneducated omission or it shows a bias.

Which is why it tends to be that those "baskets" converge to contain 100% gold among reputable monetary scholars, "national currencies" (whatever that is) among the pretenders and 100% debt among the 1%.

Wed, 10/31/2012 - 11:37 | 2934576 BigJim
BigJim's picture

 @PUD ...It is fixed to the basket of agreed upon commodities. 

Chum, that's what we have now, except instead of your currency being tied to 'a basket of commodities', our overlords use CPI measurements of inflation, and then add 2% monetary inflation for 'growth' (at least, at the base money level). The actual money floating around in our economy is generated by commercial bank lending levered off the base money pool.

Looking at how a currency is valued relative to a basket of commodities is a useful way of measuring inflation/deflation, but if 'you' are tying it to that same basket of commodities, you are granting enormous power to whichever authority decides how much money is to be issued; no matter what superficial measurement is used  (basket of commodities, CPI, whatever), it creates irresisible incentives to be hijacked and then gamed.

The same applies to a 'gold standard', unfortunately, because here the citizens are entrusting their overlords with keeping the units of currency vs. weight of gold the same. Have a look at 1933 to see how that worked out.... when FDR confiscated the citizens' gold and then devalued their paper reciepts by ~70% (rot in hell, FDR, you fascist c!nt)

As the article implies, a gold standard works best (for us, the average schmoe) when you haven't got a central bank or government gaming things and depositors are thus incentivised to keep a wary eye on the creditors' (ie, banks') credit creation. However... governments seem to have the whole fiat currency and central banking thing constellated in 'their' citizens 'minds' as being essential services of the State, so I can see freegold happening (ie, a collapse of the fractional-reserve paper gold market) before a return to a gold standard.

Tue, 10/30/2012 - 18:38 | 2932991 PUD
PUD's picture

Fiat money "adjusts" Debt money "adjusts" a fixed money unit based on neither does not need to adjust. Your money unit gets you the same amount of staples today, tomorrow, next year. You may accumulate though your efforts more money units entitling you to more resources. You may extend your money units to others if you wish for their use. The base money and its intrinsic value remains forever constant.  No gambling allowed. Fair. Honest. Equal for all. No hoarding no speculation no manipulation

Tue, 10/30/2012 - 19:31 | 2933084 fuu
fuu's picture

"You may accumulate though your efforts more money units entitling you to more resources."

"No hoarding"

Tue, 10/30/2012 - 21:05 | 2933276 PUD
PUD's picture

Not the same as the hoarding you are thinking. To accumulate more money units you would have to exchange some service ie earn them by some productive means not by owning/cornering the actual resource.

Wed, 10/31/2012 - 08:09 | 2934010 Zero Debt
Zero Debt's picture

You're just running away by trying to redefine every single term to something different every time someone calls you out for inconsistency.

For example, you use speculation in a negative sense, which is typical of leftist propaganda. The term is more subtle than that. Speculation is a neutral term which is a deliberate search for a price. Not all speculators make money, there must be two parties to a speculative trade. It happens every day in commodity markets and is called open interest. If you are against speculation, you are implying that all cash settled commodity trades (or in fact any cash settlement of a physical trade) should potentially be banned. Besides, it is impossible to distinguish between hedging and speculation use of derivatives, so you probably have to ban futures and options as well. Try again...

Tue, 10/30/2012 - 20:49 | 2933233 mvsjcl
mvsjcl's picture

No. It doesn't work that way.

Wed, 10/31/2012 - 02:20 | 2933834 lasvegaspersona
lasvegaspersona's picture

PUD the system that is coming will not require rules. It will thrive on the lack of effort it takes to enforce it. One law: gold must not be lent,...The law: no debt can be presented for payment in gold...must be settleable in currency..that's it...no complicated system of merits and demerits...and with it Socialism dies...what's not to love???

Wed, 10/31/2012 - 03:44 | 2933860 Poor Grogman
Poor Grogman's picture

"gold must not be lent"

So say the fofoans......

Glad we cleared that up.

EDIT.

Arbitrary rules such as that enforced by the state is what has destroyed almost every previous monetary standard.

No more needs to be said about free gold except that it requires the heavy hand of state sponsored force to maintain it.

Let the market decide fofoans..

Wed, 10/31/2012 - 05:27 | 2933888 boogey_bank
boogey_bank's picture

The difference is between "faith" "debt" money and money that is equivalent to something real. It is foolish to tie money to a single item or material especially a yellow metal. Money has to relate to something other than debt or faith.

So Money has to relate to something real and other than gold !?!

Money is something that has INFINITE demand Do you know what happen if you tie money to oil? You will go to work by foot

Do you know what happen if you tie money to wheat? You will starve

pud You are a dumbass no doubt about it

Tue, 10/30/2012 - 18:19 | 2932953 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

Half the gold ever mined was done so before the year 1900. 

It happened, deal with it.

Tue, 10/30/2012 - 21:11 | 2933298 DoChenRollingBearing
DoChenRollingBearing's picture

Some of them are slow learners, L. H.

Tue, 10/30/2012 - 18:21 | 2932956 Pairadimes
Pairadimes's picture

MDB? Is that you?

Tue, 10/30/2012 - 19:23 | 2933072 The Malamute Kid
The Malamute Kid's picture

Your handle says it all.

Tue, 10/30/2012 - 21:06 | 2933279 decon
decon's picture

Sounds good on paper but you're bucking thousands of years of cumulative wisdom in the real world application of these principles.

Tue, 10/30/2012 - 21:12 | 2933302 PUD
PUD's picture

The negative ratings on my post shows how truly similar you are to those your criticize. On the one hand you all cheer for the notion of a backed currency (as I propose) but you rail against it being anything other than the yellow crap you all drool over. Which is it? Do you favor sound money backed by real things or do you favor sound money only backed by your things? Tying money to a unit of gasoline wouldn't bother you would it? You would be able to get the same number of gallons for your suvs and atvs. But tying it to rice wouldn't suit you because it would only keep millions from starving and provide no pleasurable benefit to yourselves...think on this if you're capable

Tue, 10/30/2012 - 21:29 | 2933350 Bay of Pigs
Bay of Pigs's picture

What part about golds properties dont you get?

Corn, oats, wheat, soy, quinoa, etc....wont work because of what they are. They are not functional as money. Neither is oil or gas.

Good grief man. How many times do you have to be told the same thing? 

Tue, 10/30/2012 - 22:41 | 2933517 fuu
fuu's picture

...one of the benefits of being human, is the joy of being humane, especially to those who need it most...

Wed, 10/31/2012 - 11:42 | 2934625 BigJim
BigJim's picture

PUD, here's some homework for you.

What is the one, single key attribute that gold has that no other 'commodity' shares (not even silver), that makes it so perfect for use as a stable money? 

Hint: it has to do with stocks vs flows. 

Tue, 10/30/2012 - 17:19 | 2932805 larz
larz's picture

How about a titanium standard?

Tue, 10/30/2012 - 18:24 | 2932964 Zero Govt
Zero Govt's picture

How about a free market?

Tue, 10/30/2012 - 17:21 | 2932818 UnpatrioticHoarder
UnpatrioticHoarder's picture

An informative article, thanks to Keith, and Tyler for posting it

Tue, 10/30/2012 - 17:23 | 2932824 MFLTucson
MFLTucson's picture

How about a standard that does not involve this goverment?  Dont give a damn if the doller is pegged to dog shit, it is still better if this goverment is out of the equasion.

Tue, 10/30/2012 - 17:31 | 2932837 vix is for kids
vix is for kids's picture

As a gold bug, I am happy that my stack is measured in fiat currency. 

 

The property that I own does not sit over a gold deposit.  No matter how hard I work, or clever that I may be, I have to obtain my gold by buying it from someone lucky enough to control it's production.  That person might be a South African or Russian oligarch, and not an altruistic neighbor. 

So, I can use my skill and/or hard work to first obtain the easily obtainable $, then convert that $ to gold.  That suits me fine.

Tue, 10/30/2012 - 19:00 | 2933036 lasvegaspersona
lasvegaspersona's picture

vix

you do not need further production. There will always be 170,000 tons for sale. The world just needs to set the price. I will always sell you some, just ask. the price will vary depending upon what you are offering and what I need. If I don't need what you are trading...someone will.

Even gold in the ground is already owned.

Tue, 10/30/2012 - 20:19 | 2933173 donsluck
donsluck's picture

Sitting on a gold deposit is not always "lucky" for the natives. Like oil, gold tends to either enrich or devastate the natives sitting on it, it seems to be a catalyst.

Back to gold, which is difficult to mine, impossible to make, practically indestructable, easy to assay, has few industrial uses, is effectively hoarded and strored, etc. Sounds like good substance for money. If ONLY gold is money, then it can be minted by ANYONE and it's circulation will be based on the good reputation of the minter. The cent is 2.5 grams, so the gold cent would be worth $1,700/28g x 2.5 or $151.80. The value of silver would fluctuate, and is what most people would use. The dime weighs 2.2 grams. The silver dime would be $31.87/28 x 2.2 or $2.51, until recently a gallon of gas. Hmm, maybe the price of gas HASN'T REALLY CHANGED except recently.

Tue, 10/30/2012 - 20:33 | 2933200 Cui Bono
Cui Bono's picture

Bad Luck.. Bad.... 31.1 grams not 28

back to remedial bitchez school for you today.....

Tue, 10/30/2012 - 21:17 | 2933310 DoChenRollingBearing
DoChenRollingBearing's picture

+ 1

Right, a troy ounce.  More basic info on gold:

 

http://tinyurl.com/9a2fves

Wed, 10/31/2012 - 11:53 | 2934666 BigJim
BigJim's picture

 ...The cent is 2.5 grams, so the gold cent would be worth $1,700/28g x 2.5 or $151.80...

I doubt even the most ardent gold-standard advocate is suggesting we wander around with infinitesimally gold coins to pay for things like a loaf of bread. You would have different denominations of bank notes that would be backed 100% by some amount of physical gold in a vault somewhere, or electrons transmitted over bank payment systems representing the same. As such you could have a USD$1 note that would only be backed by 18 hundredths of a gram.

The big problem with silver - and, indeed, every other commodity - is that the stock:flow ratio is wrong for use as money. It can still be a store of value, or even a good speculative investment, but because there is (and has been) so much industrial demand for silver the ratio of existing:production is all wrong.

Tue, 10/30/2012 - 17:34 | 2932848 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

I am going to read the article, and appreciate the discussion, but first I would like to write:

GOLD IS MONEY.

Tue, 10/30/2012 - 18:18 | 2932945 Mr Lennon Hendrix
Mr Lennon Hendrix's picture

And upon reading the article I have this to state as well:

SILVER IS MONEY.

Tue, 10/30/2012 - 20:21 | 2933181 donsluck
donsluck's picture

It would work if silver didn't have a fixed value, since it has industrial uses and money needs to have no other use. The coins would be stamped with their weight and fineness only. Only the gold "penny" would be minted by the State at around $151.

Tue, 10/30/2012 - 20:54 | 2933244 mvsjcl
mvsjcl's picture

"...money needs to have no other use."

 

Are you suggesting a politican/banker-backed currency? "Your purchase comes to three Timmys, sir."

Wed, 10/31/2012 - 01:54 | 2933817 squexx
squexx's picture

Tungsten is money!

Tue, 10/30/2012 - 18:14 | 2932942 Zero Govt
Zero Govt's picture

Thanks for the very interesting history lesson Mr Weiner

The Goon Squad (Govt) and its meddling through time... much changes, much improves, Govt never.

Tue, 10/30/2012 - 19:02 | 2933040 lasvegaspersona
lasvegaspersona's picture

check out RP's very intellegent debate with Charles Partee, 2 smart honest guys. I think Partee will win in the end with gold un-fixed in price , used as an indicium.

 

http://www.youtube.com/watch?v=kcm8VvBcUdE

Tue, 10/30/2012 - 22:35 | 2933500 fuu
fuu's picture

Who is that dark haired man with the near pompadour?

Tue, 10/30/2012 - 20:22 | 2933182 buckethead
buckethead's picture

I almost didn't read after clicking the link... It was worht the effort. Thanks.

Tue, 10/30/2012 - 18:55 | 2933026 ziggy59
ziggy59's picture

Relics-R-Us

Tue, 10/30/2012 - 19:12 | 2933054 Marco
Marco's picture

"All borrowing short to lend long schemes, also called “duration mismatch”, collapse sooner or later."

And yet, this is the definition of a bank ... which evolved not from government, but market forces.

Tue, 10/30/2012 - 19:18 | 2933068 Poor Grogman
Poor Grogman's picture

Albeit under the cover of what can only be described as fraud.

Tue, 10/30/2012 - 19:34 | 2933090 grid-b-gone
grid-b-gone's picture

We regularly hear political arguments that the business sector needs steady policy to feel confident enough to expand, invest, and hire workers, but there is not a lot of short-term investment opportunity in steady policies.

The next big government contract, the next significant monetary move, the next bubble, or the next withdrawal of a previous federally-favored status, is where the next big windfall opportunity awaits. These artificially created opportunities have, and always will, draw an audience.

We get angry when powerful, connected men pull strings to make these situations come to fruition, but we are often very similar in our actions - speculatively stacking, repositioning our health care sector bets based on our prediction of the election outcome, or buying orange juice futures when a cold front heads toward Florida.

Even outside investing, few appreciate low-scoring baseball pitching battles anymore. We either want to see the base-clearing powerhitter, or we've switched to the big body-crunching action of football.

Great pitchers can still pitch a decent game into their 40s, but we gravitate to the action that chews up players and discards most of them within five years and leaves many limping through life between sportscards signings and jock itch commercials. Call them 'stars' or call them 'whales', it's the action that draws the crowds, and crowds drive markets.

 

Tue, 10/30/2012 - 22:50 | 2933531 Monedas
Monedas's picture

Any person or company or country should be free to issue gold (or silver, copper, Pt, Pd, Tungsten, crude oil or whatever) backed notes, coins, tokens, bonds, traverlers checks and electronic money !  Let the buyer beware !     Freedom is so simple and prosperity is the natural result and is our right !    All government < 10% of GNP .... period !   Constitutional amendment ?

Tue, 10/30/2012 - 23:05 | 2933577 Cosimo de Medici
Cosimo de Medici's picture

An unadulterated Gold Standard is, in the end, merely replacing one faith for another.  Granted one entity is finite, but it is still a faith.  Yes gold has some adherents, but at the moment far far fewer than those whose faith is in government printed fiat.  Convincing the 7 billion who are quite comfortable in their current faith is merely telling them the equivalent of Mohammed trumps Jesus or Moroni trumps Mohammed.  Some will be convinced, most won't.

If we assume the world will somehow adopt an unadulterated Gold Standard, can anyone predict the approximate number of currently unemployed Greeks or Spaniards who will wake up to find gainful employment?  My own model, though no doubt faulty, says:  zero.

Maybe I am making the problem bigger than it is, but it seems arguing about a means of exchange for an economy addresses a symptom of a much larger problem for which their might not be an answer.  People here love to believe in hidden hands and grand conspiracies, but sometimes I think that TPTB are far more aware of what actual problems global society faces (as opposed to those who think they know) and that fiat and endless printing of it are merely a way to postpone the inevitable realization that most of us are completely redundant.  Fiat allowed us to create new needs which others found gainful employment filling.  Think iPads or Louis Vuitton bags.  Formerly poverty-stricken Chinese, who produce the first and counterfeit the second, say thank you.

People can argue forever about the Golden Age of, well, gold, but the fact is more humans, and a greater percentage of them, live a safer and more comfortable life in 2012 than than in 1971, 1913, 0r 1792.  Fiat (and fractional reserve banking) hardly got in the way of the technological advancement that brought so many out of poverty.  Malthusians argued that there was a limit to the numbers who could expect a life of comfort, and---though Malthus could never have anticipated the pace of technological advancement---they may eventually be proven correct.  Gold will not prevent a Malthusian end nor postpone it, because gold is hardly the only finite element on the planet.  Thus, if gold won't create any jobs in Greece or Spain, and won't increase the store of natural resources on the planet, then what is the point of having it as our faith?  If it has value, it is only on an individual basis.  For us to base an entire society or economy on it is just adding a fresh coat of paint on a termite-ridden house.

Wed, 10/31/2012 - 13:51 | 2935098 Amagnonx
Amagnonx's picture

You see gold as a fresh layer of paint on the termite ridden house, however half of the value of almost every transaction is based on money - the difference between gold and fiat is the elimination of counter party risk. 

 

If the economy is purely composed of transactions, and half of the value of each of those transactions is currently exposed to counter party risk - and lets face it, the risk posed by those who spend other peoples money with intent to extract as much private benefit from it as possible, poses an extreme risk - if that risk is eliminated by the use of money which does not carry that risk, then a great deal of the economic adveristy will be diminished over time.

 

This is not to say that a gold standard alone, is the sole cure for the economic ills of the modern world - the basis for those ills lies not only in the constant abuse by the counter parties of fiat currency, but also from the process fixing the price of capital through interest rates. Doing so distorts the value of assets, causing missallocations and ultimately destruction of capital - destroying capital reduces everyones wealth.

 

Additionally the fractional reserve banking results in the steady theft of value from the productive system, to the money lenders (non productive - plunderers).  Wealth in the hands of plunderers does nothing to advance the living standards of the average peron.

 

Finally, rent seeking behavior, through charging of intertest on capital and rental of real estate are both ways of destroying value.  They create a drag on productive persons, and direct it into the hands of those who do nothing.

 

If you want to reform the world, and create a bettger place then you will need money with no counter party risk, you will also need to recognize that fractional reserve banking is illegal, and also that renting real estate and lending money for interest are both illegal and immoral processes that ultimately lead to oligarchy.

Sat, 12/22/2012 - 14:03 | 3089760 shovelhead
shovelhead's picture

Finally, rent seeking behavior, through charging of interest on capital and rental of real estate are both ways of destroying value.  They create a drag on productive persons, and direct it into the hands of those who do nothing.

You were doing fine up until this unfounded statement.

How does renting destroy value? What drag is created? Do these persons with investment capital really do nothing vs. those that consume all their production?

You insist that money has no time value which is demonstratively not true.

If I take my excess production from labor (gold), pool it with another(s) and build an apartment building (create) then why is it 'immoral' to rent those apt.s at a rate that returns my capital to me? If rents are overpriced, then the apt.s remain empty and I lose money, and if rents are too low, I get the same result.

In building the apartments, I give those the opportunity without sufficient capital yet to live in a place other than the family basement until they can accumulate capital to buy/build their own place.

How could this be considered immoral?

I risk my capital and the renter risks nothing. I am, however forgoing the consumption of capital in the present to insure that capital will produce an income stream to allow consumption in later years when I personally lose the ability to produce.

A simple time shift of consumption on my part to which the renter pays a slight premium to enjoy his privacy now instead of waiting for years to accumulate the means to buy/ build his own home should he desire to. Some may choose not to pay the additional costs of building maintenance in lump sums that home ownership incurs over time or do not wish to be encumbered with an illiquid asset for a number of reasons including mobility.

This is a win/win in the free market place.

The cost of credit would be regulated only by the rate of those that have hard capital to lend. No fractional reserve banking to create thin air 'money'. High credit demand= high rates= little to no malinvestment. We tend to be careful with that which cost dear to us. You don't toss the Baccarat crystal in the sink with your dirty coffee mugs.

Human Action in action. In a properly balanced economy, the marketplace itself insures that money has a time value that sends important price signals as to what decisions to make going forward.

That this is somehow immoral or should be illegal is ridiculous Marxist codswallop.

Don't toss the baby out with the bathwater.

Wed, 10/31/2012 - 00:16 | 2933715 strannick
strannick's picture

The best most succinct artlicle I have read on banking v. gold. Thanks

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