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Guest Post: Myths and Realities of Returning to a Gold Standard
Submitted by Terry Coxon of Casey Research
Myths And Realities Of Returning To A Gold Standard
The gold standard, under which any holder of paper dollars could redeem them for gold at the US Treasury, is now within the living memory of just a few million Americans, nearly all of whom would be dangerous behind the wheel. But thanks to the money printing and the federal deficits that have grown to astounding scales since 2008, and thanks also to the clashing pronouncements of Ron Paul and Ben Bernanke, the idea of a gold standard has resurfaced in the public's consciousness.
I'm happy to see the concept enjoying a revival. Reading about it in the mainstream press and hearing it mentioned on the cable news shows makes me feel a little less like a Martian. It has almost made me feel avant-garde.
Despite my enjoyment of the revival, I've noticed that the idea seldom is presented as a clear and definite proposal or as an invitation to revisit an institution that worked well in the past. Too often, it shows up as little more than a slogan or a taunt aimed at central bankers or as just a political fashion statement. So let's take a closer look at what it really means. It's not that complicated.
What Isn't at Stake
The abolition of the gold standard has been the source of considerable mischief, but it hasn't been the source of all mischief.
I've heard the lack of a gold standard indicted as part of a government scheme to force the public to use paper money. It isn't.
The legal-tender laws are usually part of the story, but the story doesn't hold up. Declaring irredeemable paper dollars to be legal tender merely defines what a creditor may be forced to accept in satisfaction of a debt that is denominated in dollars. Operating under that regime is entirely voluntary; if you don't like it, you can avoid it by declining to accept anyone's IOU or other promise denominated in dollars. Despite the legal-tender laws that define what is a (paper) dollar, you are free to buy and sell and enter into contracts without using dollars.
The legal-tender laws amount to no more than the government's claim that it owns "dollar" as a trademark that it can apply to pieces of paper or to anything else it decides to – just as General Motors owns the trademark "Chevy" and can apply it to any piece of machinery or any other product it chooses. GM and GM alone is free to serve up Chevyburgers, and you are free to eat one or not.
Any two parties are free to use gold coins (or silver coins or strawberries) as a medium of exchange if they agree to. Pesos, francs and Canadian dollars are permissible as well. A return to the gold standard wouldn't alter that situation or expand the range of your choices.
I've also heard the lack of a gold standard blamed for overall economic instability. Defenders of the current system of fiat money do just the opposite – they blame the gold standard of the past for preventing the Federal Reserve from stabilizing the economy. It's quite a debate – little economic logic and much cherry picking from the big tree of history. It all comes down to which system gets stuck with responsibility for the Great Depression of the 1930s, which occurred at a time when US citizens couldn't redeem dollars for gold (no confidence-building gold standard to help the economy recover) but foreign governments could redeem dollars for gold (that old gold standard, still causing so much trouble).
What It Wouldn't Fix
A return to the gold standard wouldn't make you any freer than you are now. You'd still be filing tax returns and still be getting massage therapy from TSA employees; Congress wouldn't reform its big-spending ways, it would merely switch from taking and wasting fiat money to taking and wasting gold-backed money; and the Supreme Court, the guarantor of your liberties, would continue making things up as it goes along.
A new gold standard wouldn't be an elixir of stability for the economy. A severe depression in 1919-1920 demonstrated the Federal Reserve's ability to engineer financial train wrecks even when the dollar is redeemable for gold by anyone and everyone. And before the advent of the Federal Reserve, the US Treasury demonstrated the same ability through its borrowing operations, as did Congress on a few occasions simply by creating uncertainty about possible changes in the monetary system.
And a return to a gold standard wouldn't ensure long-term preservation of purchasing power for the dollar and dollar-denominated obligations – because, as we've seen, a gold standard adopted one day can be abandoned the next.
What It Would Fix
Now that we've dampened expectations, here's what a gold standard would do: threaten the individuals who run monetary institutions (such as the Federal Reserve) with embarrassment for bad behavior. It narrows their opportunities for dodging responsibility.
Every issuer of money promises to protect its value. The promise is the same whether it is made on behalf of a fiat currency or for a currency backed by gold, silver, copper, other currencies or seashells or pelts. A gold standard doesn't prevent an issuer from breaking the promise. It merely makes it difficult for the issuer to pretend that it is keeping the promise when year after year it isn't.
With a fiat money system, you don't need any special talent in order to deceive the public with insincere talk about avoiding inflation and protecting the money's purchasing power. The years-long lag between printing and the effect on prices makes deception easy.
If you print more money this year, well, it's only a temporary measure and only because of the recession you're trying to avoid. Next year, you'll slow down the printing or maybe not print at all – you'll have to wait and see what conditions are next year. And don't forget to mention the odd years of rapid monetary growth that coincided with almost no price inflation at all. And when price inflation does pick up, there's always someone or something to blame – OPEC or terrible growing conditions for the soybean crop in Brazil or a war. You'll think of something.
Short of the complete destruction of a fiat currency, there is nothing that can demonstrate beyond doubt the shallowness of the promise to protect purchasing power that is being made on any day. There is no bright line separating performance from talk.
With a gold standard, deception is much more difficult. Creating too much money will lead to redemptions that drain away the official gold stockpile. Everyone can see the inventory shrinking. If it shrinks to zero, then the managers of the system have failed, period. There is no ambiguity about it, and the politicians in charge at the time have little room for denial.
The formal adoption of a gold standard holds no magic. It's just another promise. But it is a promise that carries an assured potential for egg-on-face political embarrassment if it is broken, and the only way for the people in charge to avoid that embarrassment is to refrain from recklessly expanding the supply of cash. That's why a gold standard protects the value of a currency, and that is why the politicians don't want it.
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good stuff. one of the most lucid discourses on the topic to date.
but I'm not convinced that it will discourage cheating by the CB.
when was the last time you were allowed to waltz into fort knox ?
so the premise only works if we have transparency and rule of law,
under which of course so too would fiat currency or anything else.
unless of course the author means that added to a gold standard,
there would be gold redemption, that physical delivery would force
honesty. perhaps. it would also greatly increase storage and carry
costs and reduce the velocity of money. let's not even begin to talk
about liquidity.
as mentionned above limited total global supply may pose a problem,
but more importantly, it's about predictable future supply and the
speed and cost of extracting ore and smelting and minting.
money's role first and foremost is to bring trade price stability by
removing the basis bias from one end. if you were a village buying
steel in goats and you had a sudden wolf problem, this would mean
that you would have lower purchasing power than the fishermen
downstream who were graced with abundant shoals, than another
village with abundant goats, or than you did last week. Your survivor
goats would be worth more to you, but not to the seller. Conversely,
the seller could all of a sudden be overrun by a flock. the fungibility
of money means that we now deal in the aggregate instead of the
specific, ie it's a store that represents and abstracts average value
of goods, all sheep and fish and wotsists combined, so it's resiliant
to spontaneous local lupine promiscuity or blue green algae bloom.
now like fiat paper or coinage, gold's marginal (in)utility fits that purpose.
but the other side of the coin, if you will, is that prices, or money's value,
have to match growth. if they don't, our sense of fairness gets vexxed and
it seriously hurts our ability to predict budgets and thus the business cycle.
how would you reconcile this slow steady supply with geometric growth?
if you bought a bushel for a different price every day it would make life
very frustrating. this is where gold fails as a modern instrument. it can't
possibly keep up on a physical redemption basis with the speed of modern
economies. sure it can be used as an index and backing to sovereigns and
institutions, but it should never be a circulation item again, unless we hit
luddite doomsday scenarios.
With all the billions more people there are in the world now, producing more stuff more efficiently over the last 100 years, there is vastly less gold to go round and represent the fruits of their labours.
If we had stayed on a gold standard we would have had massive price + wage deflation which people don't like.
return to gold standard would ensure starvation of millions if not billions of poor (with no capital) people.
Gold standard is only good AFTER WE WRITEOFF ALL THE DEBTS AND REDISTRIBUTE CAPITAL IN MORE UNIFORM WAY (not the current 1% haves vs 99% have-nots)
A return to the gold standard wouldn't make you any freer than you are now. You'd still be filing tax returns and still be getting massage therapy from TSA employees; Congress wouldn't reform its big-spending ways, it would merely switch from taking and wasting fiat money to taking and wasting gold-backed money; and the Supreme Court, the guarantor of your liberties, would continue making things up as it goes along.
Absolutely correct. The debasers of the usa fiat currency would just become the debasers of the gold backed currency. Afterall, who will be the one guarding the henhouse? That's right, the fox.
fiat is currency
gold is money
we don't need a "gold-backed currency" imo; we simply need to take away the legal and tax disadvantages to using theReal
let gold and silver circulate freely "at market"
let fiat circulate freely "at market"
FREELY
gold and silver! NOT gold backed anything
this is about two steps from where we are right now; there is so much deflection: i have said the same thing here for over a year and nobody gets it!
apparently this is just too simple for the fuking brainiacs to want to try
rather than trying to leap the fence, they wanna try to jump over a big tree
what a crock!
slewie, it already does, provided it's ingots or minted bullion.
gold, silver, other metals already float up and down.
Are you saying we should be able to pay taxes directly in gold?
that retail vendors should be obliged to accept it as legal tender?
that would kind of cool, get your food stamps in nuggets. but
in any case I don't think it can be done on a pure weight basis.
note the US already had this during the gold rush, and people
were quick to convert their lodes into mint or papaer. there were
too many purity, storage and carry headaches. in some ways the
unfair duty on gold that is charged tn consumers versus banks
reflect these complexities.
some have floated around the idea of allowing individuals to
get their physical ore minted by the treasury. that's not a bad
idea, but I think the most important problem is liquidity. there
really isn't all that much gold out there, so the addition if an
even modest amount represents a larger fraction of the total,
which really affects the pricing. This means ironically that gold
pricing is unstable. quite volatile. this means, imho, that it's
more of a commodity financial instrument rather than typical
fixed-income interest bearing money or an alternative currency.
but hey, I see nothing wrong with letting the free market run
its course with gold. I'm not convinced it's a panacea or that it
will fix anything, but how could it possibly make things worse?
We are not going back on a gold standard. Such talk is folly. Why would TJTB end their fiat rule?
That being said, though we are not on an official gold standard, I say and I maintain that we are on an international gold standard and we have never left it.
What happens when countries like Weimar Germany, Brazil in years past, Zimbabwe hyper-print and inflate their currency? Their currencies crash and or collapse against other currencies and gold. Gold standard remains.
What was the only real effect of Rosenveldt's theft of the sheople's gold? The price of gold went up, from 20.67 per ounce to 35US per ounce after the theft. And it has gone up ever since. I also believe TJTB can control the price of gold to any level they want to, but they don't even care about that. They also have all the gold too, so it's win/win for them.
I say that the gold bugs in US and the Indian and Arab and Chinese people who use gold as their personal wealth show that the gold standard remains in place and ever will. Also if we don't have a gold standard why do central banks, fort knox and Rothchilds have so much tons of gold?
If I had tons of gold.... in my home...
Theoretically I am a small Nation. Quite possible.
Now 300,000,000 people collectively owning more wealth than a single nation? that will not be allowed to happen.
I like the idea of fixing the worlds money supply to the mass of the sun. Pity any poor fool who tries to get his hands on and manipulate that.
"Gold standard would not make you any freer than you are now" thats because our government is on the stupid standard!
It always comes back to power to simply say, “Because I said so”. Just like the bully on the third grade playground.
My favorite definition of Tyranny is, the exercise of a power over others that no one should have.
There are many opinions about just what a gold standard is and the writer of this article assumes that we would still have a central bank with a gold standard. The preferred gold standard would be one with no central bank and no government-issued paper money - just gold coins (and gold-alloyed coins for small denomination). Financial institutions could still issue credit cards, traveler's checks, etc.
The only 'drawback' of such a system is that the amount of gold mined might not be enough to keep up with population and productivity growth which would mean gradually falling wages and prices. A 30-year fixed rate mortgage would be a disaster if one's wages declined over 30 years. But 30-year fixed rate mortgages are a bad idea anyway as they push up the price of real estate. Labor unions are loathe to accept nominally lower wages even when prices fall commensurably, so labor unions wouldn't work very well with such a system. A gold standard, with no central bank, would require price/wage flexibility, making long-term borrowing a risky bet for both lenders and borrowers. Indeed, long-term contracts of any type would be risky.
Going back to a gold standard, however, is different from maintaining one as you get to set the price of gold - or the price of the dollar in gold. To make the dollar 100% convertible and guard against deflation, the price would have to be set very high - say $5k-$7k/ounce. This would initially cause price inflation as those holding gold would suddenly have a lot more dollars and miners would go into overtime to dig up more 'dollars'. Other prices and wages would probably rise to catch up with gold which might take a few years with high interest rates for new borrowing. But it would make the suffocating debt we have incurred much easier to service. So lets do it.
So lets do it.
I already did. Back in 2000 I put myself on a personal Gold Standard. As long as they will trade paper for Gold, it's your choice.
The article addressess only a single slice of the problems in the financial system pie. Looking at tidbits in isolation does not show the big picture. The main problem plagueing the planet is a Fiat Money System controlled by a small group of parasitical Sociopaths. Get rid of the Central Banks. Get rid of the Fed. The use of Gold or other PMs may be a component of a new financial system, but it is only one piece of a puzzle.
This article is misleading to the extent that it presents the reversion to a Gold Standard as a stand-alone issue.
" Congress wouldn't reform its big-spending ways, it would merely switch from taking and wasting fiat money to taking and wasting gold-backed money;"
This is obviously false, and the whole point of the debate, you just can't print them and waste them when you need gold to back them.
The biggest myth is that it will ever happen.
The author seems to forget that there is only one currency--US$-- to pay our taxes with, and the IRS will have no other.
This being the case, all other "debts public and private" will be payable with the same US$.
The old Fiat must, unfortunately, be destroyed--probably through Hyperinflation--which will happen for a Gold Standard to emerge.
I believe that any attempts to kick the debt can down the road will be for naught.
Re-inflating the currency to prevent debt collapse is going on right now.
We are buying our own debt, and we are backing the ECB to support the Euro.
Just how long does one expect this to last before we run out of dollars, and are thus forced to print more, and more?
Hyperinflation destroys currency regimes, hyperdeflation starves Governments of their revenues.
The only other option is a Jubilee Year wherein all debts are zeroed out.
Fat chance!
So, we will dance until the music stops, and the lights come on, and the cleaning people enter the hall.
This future will not be televised.