Should we Restore the Gold Standard?

By JP Koning, originally published on BullionStar.com

 

Would it make sense to rebuild an international gold standard like the one we had in the late 1800s? Larry White says the idea has merit, David Glasner believes it isn't worth the risk. Over the years I've followed the back-and-forth between these two blogging economists, each of whom has done an admirable job defending their respective side for and against the gold standard. Let's look at one or two of the most important themes running through the White v Glasner debate.

Like a ruler measures distances, a nation's monetary standard serves as a measuring stick for the value of goods and services. People need to be able to set sticker prices with the unit, calculate profit and loss, negotiate labour contracts, and establish the terms of long-term debts using it. If the measuring stick is faulty, then all these important tasks becomes unnecessarily difficult.

 

Gold as Unit of Account

Since 1971 we have been on a fiat money standard in which all currencies float against each other. Central banks try to ensure that, within the confines of their nation, the general level of domestic consumer prices stays constant, or at least rises at a constant rate of around 2-3%. And while the first decade of the fiat standard was a disaster characterized by high and rising inflation, central bankers in developed nations have generally managed to keep inflation on track for the last thirty or so years.

To re-establish a modern gold standard, each nation's unit of account—say the $ or ¥ or £—would have to be redefined as a certain fixed number of ounces of gold. Banknotes and central bank deposits, which are currently inconvertible to gold, would be made convertible into an appropriate amount of gold. It is important that all nations return to the gold standard rather than just one, because one of the big advantages of an international gold standard is that with all currencies pegged to gold, it is much simpler for citizens of one nation to make calculations using another nation's unit. And this makes cross-border trade and investment easier to engage in.

Should banknotes and electronic fiat currency once again be made convertible into gold?

 

In Favour of the Gold Standard: Larry White

How well have the two standards served as measuring sticks? As the chart below illustrates,  year-to-year changes in U.S. consumer prices were quite variable during the classical gold standard era, rising some years and falling the next. The source for this chart is from this paper that White has coauthored with George Selgin and William Lastrapes. The classical gold standard from which the authors draws their data lasted from 1880—when the majority of the world's major nations defined their currency in terms of the gold—to 1914 when the gold standard was dismantled on the eve of World War I. Data shows that the fiat standard that has been in place since 1971 demonstrates more predictable year-to-year price changes. Citizens of developed nations are pretty safe assuming that next year, domestic prices will rise by 2-3%.

Quarterly US inflation rate, 1875 to 2010

 

However, it is over longer periods of time that gold pulls ahead of fiat as a measuring stick. In the chart below, the authors show that the quarterly price level during the gold standard tended to deviate much less from its six-year average rate than during the fiat era. Because the general level of prices was more predictable under a gold standard, this provided those who needed to construct long-term debt contracts with a degree of certainty about where prices might be in ten or twenty years that is lacking under a fiat standard. White points out that this may be why 100-year bonds were common in the 1800s, but not so much now.

6-year rolling standard deviations of the U.S. quarterly price level

 

According to White, the main reason for the long-term stability of gold is the tendency for higher prices to encourage gold miners to increase the supply of metal, thus tamping down on the price, and conversely lower prices to encourage them to reduce production, thus buoying prices. In other words, prices under a gold standard were mean reverting. This mean reversion was generated "impersonally", or automatically, by the market, a superior sort of stability compared to that generated by a fiat standard, which depends on the skills and wherewithal of technocrats employed by the central bank.

 

Against the Gold Standard: David Glasner

David Glasner is skeptical about the gold standard because he doesn't agree that it mean-reverts fast enough. All of the gold ounces that have ever been mined continue to exist in vaults or under mattresses or around necks. Compared to this extant gold stock, the flow of new gold production is tiny. So if there is an increase in people's demand for gold, it is unlikely that new flows will be able to satisfy it, at least not for some period of time. Likewise, reduced gold production on the part of gold miners won't be able to vacuum up enough of the slack should people suddenly want less of the stuff. In either case, the price of gold will have accommodate shifts in demand by rising or falling quite a bit.

One thing that most monetary economists agree on is that fluctuations in the value of the item used as the standard—gold or fiat money—should not interfere with the "real" economy, say by causing unemployment or gluts of unsold goods. While many prices in an economy are incredibly flexible, like the price of stocks or gold or bitcoin, there are also many prices that are sticky, in particular labour. Under a gold standard, if there is a sudden increase in the demand to hoard gold, then there will be pressure on price of gold to rise. The rise in the gold price means that the general level of prices must fall. Goods and services, after all, are priced in terms of gold-backed notes. But with wages and many other prices locked in place, the response on the part of employers will be to adjust by announcing mass layoffs. Rather than cutting the sticker prices of goods, retailers will suffer though gluts of unsold inventory. This is a recession.

Glasner's favorite example of this occurred during the late 1920s. After WWI had ended, most nations attempted to restore the pre-war gold standard with banknotes once again being redeemable with fixed amounts of gold. But then the Bank of France, France's central bank, began to buy up huge quantities of gold in 1926, driving the gold price up. The U.S. Federal Reserve was unwilling to counterbalance what was viewed as insane purchases by the Bank of France, the result being the worst recession on record, the Great Depression.

 

What Type of Gold Standard?

Given that various commodity standards have been in place for centuries, why did it take till 1929 for a massive monetary mistake to finally occur? White blames this on large government actors, specifically central banks. In the initial international gold standard that ran from 1880-1914, nations such as Canada, Australia, and the U.S. didn't have central banks. Commercial banks in these nations chose to link their privately-issued banknotes to gold, the goal of these competing banks being to to earn profit rather than enact social policies. So earlier versions of the gold standard functioned far more naturally, without the meddling of large actors who refused to abide by the typical rules of a gold standard. It is for this reasons that White prefers that any return to the gold standard be packaged with an end to central banks, thus precluding episodes like the Great Depression from occurring.

David Glasner remains skeptical. According to Glasner, even the classical gold standard that ran from 1880 to 1914 required management, the Bank of England leaning in such a way as to counterbalance large demands for gold from other central banks and thus preventing anything like the Great Depression from occurring. And even if central banks were to be dismantled under a 21st century version of the gold standard so as to preclude an "insane" Bank of France scenario, there remains the problem of "panic buying" of gold by the public—and the resulting gold-driven recession this would cause.

 

So Where does that Leave us?

As I hope you can see by a quick exploration of the debate between Larry White and David Glasner, restoration of the gold standard is a complicated issue. I'd encourage readers who are interested to dive a bit deeper into the subject by reading David's posts here and Larry's here.

As for myself, White's work on the 1880-1914 gold standard has been helpful in removing many of the preconceptions I had of the gold standard, no doubt passed off to me by commentators who were never very familiar with the actual data. Nevertheless, I tend to agree with Glasner that under a global gold standard (with no central banks) a sudden spike in the public's demand for gold would impose large costs on the global economy. With citizens of the globe being so connected through the internet and free capital markets, these sorts of episodes might be more common nowadays than they were in the 1800s. I'm not sure the benefits of a gold standard, including exchange rate stability, make up for this risk. Given that Western central banks have done a fairly decent job of keeping inflation under control for the last thirty or so years, I'll give them the benefit of the doubt... for now.

This blog post is a guest post on BullionStar's Blog by the renowned blogger JP Koning who will be writing about monetary economics, central banking and gold. BullionStar does not endorse or oppose the opinions presented but encourage a healthy debate.

 

Comments

Hail Spode Wed, 02/07/2018 - 13:23 Permalink

No. That doesn't go far enough. You can't have centralized money and decentralized government. You must pick one or the other. Governments consistently cheat on their obligations in money. It has been happening since Rome took increasing amounts of silver out of their coinage.

The lasting solution is that proposed in Localism. Government should not be in the business of issuing money, or granting a private banking monopoly the power to do so. Instead, honest money will be made (by private mints) of monetary metals - that have value even if they are not being used as money.

The government's only role in such money is enforcing contracts- the holder's of the private coins could sue if the mint lowers the metal content or purity in their line of coins. How does the government enforce that contract when they are a party to it? The part that "wins" when it defrauds the money?

DownWithYogaPants Hail Spode Wed, 02/07/2018 - 13:28 Permalink

No.

  • Abolish the Fed and institute United States Note. 
  • Allow complete monetary freedom for individuals to use gold / silver et al as money
  • repeal the 16th amendment - thereby making the income tax disallowed by the constitution.
  • legalize drugs - thereby help kill the CIA Deep State by virtue of low prices - they are the biggest traffickers of drugs.
  • What have I missed?  I am sure there are other good ideas.

As Bill Still notes in his classic documentary history  "The Money Masters" the gold standard is always coopted by the powerful.  There is a good reason why William Jennings Bryant made his "Crown of thorns cross of gold" speech.
 

 

In reply to by Hail Spode

Luc X. Ifer east of eden Wed, 02/07/2018 - 15:35 Permalink

Deporting jobs is economical and social terrorism and it qualifies by any rational analysis as conspiracy and treason against the social enclave where the business entity and the shareholders have residency registered and enjoy the benefits and safety provided by the respective enclave. If you decide to hurt and weaken the social enclave by moving their source of prosperity and safety to another social enclave you should renounce to the benefits of being member of that social enclave and move to the social enclave where you decided to move your resources, or you should be stripped by your social enclave membership and ostracized the good old style.

In reply to by east of eden

atomic balm DownWithYogaPants Wed, 02/07/2018 - 15:26 Permalink

Government Money Masters: Anti-Gold Videos that Thousands of Tea Party Voters Think Are Conservative

Gary North

 

Oct. 6, 2011

The conservative movement is filled with well-meaning people who do not understand free market economic theory. They believe that they hold to free market economics, but they in fact hold to a crude Keynesianism: economic salvation by fiat money.

Inside the conservative movement for over a century has been a hard-core cadre of left-wing promoters of big government. They present themselves as enemies of fractional reserve banking. They use this to get a hearing for their cure-all for banking: a fiat money monopoly that is completely managed by tenured, unaccountable bureaucrats operating under the authority of (((Congress))).   [((())) added]

These people are part of a movement called Greenbackism. It has been around ever since the 1870s. 

 

https://www.garynorth.com/public/8574.cfm

In reply to by DownWithYogaPants

JIMSJOE2 DownWithYogaPants Thu, 02/08/2018 - 04:40 Permalink

         Going back to a gold standard is fantasy land nonsense and is mostly promoted by those who market metals to consumers. First of all the total amount of gold ever mined is only around $7 trillion at today's prices and most of this is unavailable. The amount of liquidity sloshing around the planet is actually in the hundred of trillions so where are they going to get the gold?

         Those that promote this nonsense claim gold would be "reset" much higher but in reality this causes more problems as countries under this system need to constantly buy gold to back the new liquidity an economy needs to grow and to restock what went out the gold window. There is no major country on the planet that can afford this at even today's prices so forget much higher prices.

         If China or Russia went to this the currencies would strengthen and collapse their exports then their economies. Russia's gas and crude would no longer be competitive letting the US to take over their markets. Simply not going to happen. 

         Folks this is ECON 101! This also again is fantasy land bullshit!

In reply to by DownWithYogaPants

ReturnOfDaMac Wed, 02/07/2018 - 13:34 Permalink

Put the pipe down Koning.  Took the rat bastards almost two centuries to get us OFF the gold standard, which the world has used for almost 5 millennium.  Now they rape the world with ease.  Why in the hell would banksters ever give that up?  And without a world war?  Tell yourself the truth, if you were a top notch bankster, would you?  There you have it.  Yep, puff puff pass, Koning, you been hittin' that by yourself for way to long.  You dreamer you.

Greenspazm Wed, 02/07/2018 - 13:55 Permalink

"Given that Western central banks have done a fairly decent job of keeping inflation under control for the last thirty or so years... "

What a fucking joke. How to disqualify oneself in a single sentence from any serious economic commentary. Go back to elementary school.

east of eden Wed, 02/07/2018 - 14:21 Permalink

I used to believe that a new gold standard was the solution, but I am not so sure anymore. My original thoughts centered on the ability of individual governments to adjust the currency 'float' according to economic circumstances, but then, if that was instituted, it wouldn't be much different than what we have now - i.e. governments that are free to print however many paper notes they want to.

Conversely, limiting national governments to a fixed amount of currency based on the gold price/holdings, would throw the entire world into a deep, deep depression, that would likely go on for years. Millions would lose out, be forced back into poverty and inevitably, all the gold would, as fiat has done, end up in the hands of the very few.

The land I come from has engaged in income 'levelling' for a good many years now, and it seems to have worked for us. Undoubtedly, there are a bunch of greedy FUCKS out there who will rant and rave and yell and scream that anything they 'produce' should be theirs alone, but, that is not the way you build a nation.

So actually, now, I don't think that either the CB or gold standard model will suffice.

We need new thinking, thinking that is outside the box.

FIAT CON east of eden Wed, 02/07/2018 - 20:19 Permalink

Pure socialism is what your asking for and that won't work, so forget about that.

 A return to the gold standard is what is needed, with some crypto gold to pay for things from afar, but I do not trust any crypto, unless it is insured by let say a bank.

currently big corp's borrow (create out of thin air) fiat currency to buy your families business etc and rinse repeat. If there was no creation out of thin air this would slow the rich from getting richer at the expense of the poor.

I don't have all the answers but this fiat con will end with pitchforks against the rich.

In reply to by east of eden

Bemused Observer Wed, 02/07/2018 - 14:34 Permalink

Why is it so hard to stay within the lines here? Why is there this INSISTENCE that we be able to 'borrow' the difference between what we have and what we want?

Honestly? I don't believe it when people claim that the borrowing allows us to progress faster. How would it even DO that? Since when do people invent and develop new things strictly because they want to sell them at ever-inflating prices?

The truth is that the borrowing allows the PRICES of those things to rise, that's it. It doesn't have any effect on the inventing, the creating...by the time we get to pricing it, it's already invented. Without all the borrowing, those things would still be created, they just wouldn't sell at artificially inflated prices. Great for the customer, great for the seller, not so great for the skimmers and leeches looking for a revenue stream.

In order for the financial industry to skim, the prices must be artificially padded. This requires borrowing, and loading economies with debt. Only fiat currency has this flexibility, which is sold as a 'good thing' because it allows the economy to 'grow'. But what they do isn't 'growth'. They are just 'frothing up' the economy with nothing but air, which makes everything bubble over the top, giving the glass holders the illusion that their glasses are so full they are overflowing. They scarcely notice when big finance skims off much of that froth.

Until things settle a bit, and they realize that not only were their glasses NOT full, but now they have been left with even LESS actual liquid in those glasses.

Fractional reserve lending is a LIE, it is FRAUD. And only fiat currency allows the fraud to 'work'. Since big finance is largely built on fraud and contributes no ACTUAL value to the economy they artificially inflate, everything they skim off the top is TAKEN FROM someone else, someone who actually DOES add value. The 'work' they do is solely to enable this one-way draining to continue, and the so-called 'value' they add is numerical only. And since they immediately drain it anyway, what good does it do for everyone else, except drive the prices they must pay to live ever upwards?

An economy one fifth the numerical size of ours would scale down beautifully if big finance were relegated to its proper place...a decentralized banking system whose job is to facilitate larger transactions, and provide a safe place for people to 'store' their savings at a modest interest rate. (International banking is and should be totally separated from your domestic bread and butter economy!) If we did that, and also ended all the govt. subsidies that have been HIDING labor's true value and skewing the natural wealth distribution that would normally occur, we wouldn't NEED pensions and Social Security and all the other shit to make up the difference. Employer-provided health insurance is a great example of a 'benefit' given to labor in lieu of the rise in wages they should have gotten. Diverting it through 'health insurance' simply allows leeches to fasten on and drain some of that paycheck (that is already smaller than it ought to be!) before it gets to the worker who earned it. In return, he gets crappy, over-priced 'health care' that he is now told is too expensive to continue...(yet no one suggests restoring those funds to the paychecks, do they?...Funny that.)

Same thing with Social Security...they want to end the program, but keep the money that gets deducted for it. Because their parasitism has bled the economy dry, enabled largely by the banking industry being allowed to 'whip up and skim' economies and call it 'growth'.

AnimalSpirits Bemused Observer Wed, 02/07/2018 - 22:12 Permalink

Fully enjoyed reading your post!
"We the people" vote, yet Glass-Steagall exists today still....and let's not even mention the "Too big to fail" in our face transfer of public funds into private pockets, yet we the people vote.
Consider Iceland after the CDO debacle; they took to the streets and demanded change.
But here in North America...we did nothing.
Essentially, it is futile to assume we can reduce greed; the only effective strategy is to increase our fight against it. But, we watch the Super Bowl instead. We only have ourselves to blame.

In reply to by Bemused Observer

Posa Wed, 02/07/2018 - 14:43 Permalink

No role for the barbaric relic controlled by London based cartels. The "real bills doctrine" and a revived Bank of the US along with branch banking are the ways to go...

InnVestuhrr Wed, 02/07/2018 - 15:07 Permalink

"Should we Restore the Gold Standard?"

Cannot be done. Humans will not accept ANY limits or constraints on spending, will ALWAYS circumvent, undermine, cancel ANY attempt to implement controls on spending, which is why ALL historical monetary standards based upon precious metals - ALL - have failed, no longer exist, and will never exist again, because humans will always unlock their own prison cell.

sam site Wed, 02/07/2018 - 15:42 Permalink

Let's examine the panics during the gold standard from 1865 thru 1914.

1873 - Railroads defaulted of risky bank loans.

1896 - US government nearly defaulted on excessive gold backed Treasury Bonds. 

1907 - NY Knickerbocker bank issued excessive risky bank loans.

In every case it was excessive loans made by government or banks that created the crisis that was the justification for the Fed and it's fiat paper currency.

 

Remember banks were originally vault services until they figured out they could temporarily steal deposits. 

Later they figured out they could use those stolen deposits as collateral in a counterfeiting racket in collusion with governments.

It all started with simple vault services and ended up with a $1500 trillion dollar scam called derivatives that are basically fake insurance policies.  70% are policies protecting borrowers from interest rate hikes. 

But unlike auto insurance, there's only a 10% treasury bond as collateral in the bank to pay losses.

There's always a scam using fake money when you examine the globalist's rackets.

 

 

 

 

 

 

Radical Marijuana Wed, 02/07/2018 - 16:04 Permalink

Money is measurement backed by murder. Gold standards are the measurements of gold backed by murders. Some sort of commodity backed money has more material basis derived from the principle of the conservation of matter, which is most exemplified by gold. Hence, the relative degree of the "ring of truth" implicit in gold, which can not be created out of nothing.

The conservation of matter has been demonstrated to be a special case of the conservation of energy, due to the empirical confirmation of the special theory of relativity. Therefore, the relative "ring of truth" demonstrated by precious metals is a special case of the principle of the conservation of energy.

Theoretically, what would be better is an energy standard for money. However, when one more thoroughly and rigorously pursues understanding human beings and civilization as manifestations of general energy systems the results become that there is only one political system, organized crime, because the murder systems back up the money systems, and everything else regarding how groups of human beings live as reproducing gangs of robbers.

From a more sublime and abstract overview, the deepening dilemmas of Globalized Neolithic Civilization are that being able to back up legalized lies with legalized violence never stops those lies from still being fundamentally false. Therefore, although the laws of nature never stop working, natural selection pressures have driven the development of artificial selection systems to become as dishonest as humanly possible, as demonstrated by political economy becoming almost totally based on the powers of governments enforcing frauds by private banks, and the big corporations that have grown up around those big banks.

At the present time, and for the foreseeable future, it is politically impossible to develop any better money systems because that would require developing better murder systems to back those up. Since the most socially successful murder systems were selected to become the most deceitful and treacherous, those then backed up the most socially successful money systems to become about exponentially more fraudulent: MAD Money As Debt, backed by MAD Mutual Assured Destruction, where globalized electronic monkey money frauds are backed by the threat of force from apes with atomic weapons.

Some corollaries of Civilization operating according to the principles and methods of organized crime are that the biggest and best organized gangsters have been able to make and maintain that Civilization, which have become the ways that there is the central core of bankster dominated governments, surrounded by layers of controlled "opposition" groups, which stay within the same frames of reference of the biggest bullies' bullshit, which became the banksters' bullshit.

Nobody knows what will happen to the established systems based on electronic money frauds backed by the threats of force from weapons of mass destruction. But nevertheless, one can be quite confident that returning to any approximation of some relative "ring of truth" based on the principle of the conservation of matter is not sufficient.

Questions such as

Should we Restore the Gold Standard? 

are relatively ridiculous in a world which has already applied quantum mechanics and the special theory of relativity in order to achieve electronic money frauds backed by the threat of force from atomic weapons. "Debates" regarding the nostalgic notions about "gold standards" are ridiculously old-fashioned. Instead, what ought to be done is to develop better understanding of the overall ways that human beings and Civilization operate as manifestations of general energy systems. However, doing so is automatically becoming more politically impossible every day, since sociopolitical systems ACTUALLY based on enforcing frauds have been enabled by about exponentially advancing technologies to ACTUALLY become about exponentially more fraudulent.

Although the laws of nature are never going to stop working, that now necessarily includes the excessively successful domination of Civilization by increasingly integrated and sophisticated enforcements of frauds, which must continue to become about exponentially more fraudulent, in ways which effectively mean that Civilization will become about exponentially more psychotic. The currently entrenched political economy is manifesting runaway criminal insanities. Everything has been built on  being able to back up legalized lies with legalized violence, whose most important forms are symbolic robberies accomplished by the public powers of governments, such as taxation, backing up private banks making the public "money" out of nothing as debts, which fraudulent form of "money" then has "value" because that is deemed to be the legal tender in which taxes must be paid.

In order to have a better energy standard for money, inside the context of better understanding of human beings and Civilization as manifestations of energy systems, it would be necessary to stop using DUALITIES of false fundamental dichotomies and the related impossible ideals, such as various notions regarding "what money should be."

Instead, UNITARY MECHANISMS would be required to understand how groups of human beings actually live in their environment. However, since doing so requires recognizing that Civilization became dominated by the biggest and best organized gangsters, the banksters, it remains practically impossible for political science to catch up with the series of intellectual scientific revolutions and profound paradigm shifts already achieved in physical science.

Sociopolitical systems ACTUALLY based on enforcing frauds are operated by those who are ACTUALLY the best available professional hypocrites. Paradoxically, the most socially successful people are those who are becoming the most psychotic regarding the ways that they perceive themselves making "money." Almost everything that Civilization does is based on triumphant bullshit, which has inverted and perverted the perception of everything in the most absurdly backward ways possible, due to thousands of years of larger and larger scales of triumphant organized crime developing the dominate natural languages and philosophy of science to enable enforced frauds to operate as if those were NOT doing that, because sociopolitical systems which are ACTUALLY based on enforced frauds achieving symbolic robberies are publicly presented in ways which NECESSARILY deliberately ignore the principle of the conservation of energy, as well as deliberately misunderstand the concept of entropy in the most absurdly backward ways.

In that overall context, articles like the one above amount to indulging in old-fashioned nostalgic nonsense, while the prodigious progress in physical sciences dismally FAILS to be reconciled with any matching progress in political science, BECAUSE what political science really boils down to is the principles and methods of organized crime, while BECAUSE of that, Civilization remains almost totally dominated by the biggest and best organized gangsters, the banksters, to the degree that there is no publicly significant genuine opposition, but only layers of controlled "opposition" groups, which propose and promote bogus "debates" regarding the merits of idealized versions of "what money should be," that mostly continue to deliberately ignore and misunderstand how and why money is measurement backed by murder.

OF COURSE, that has become as deeply buried under bullshit as humanly possible, while those who present superficially correct analysis of the accumulating apparent anomalies usually do not engage in any more profound paradigm shifts. Both measurement and murder should be perceived in radically different ways, guided by how there have been radical transformations in the perception of the world achieved by physical sciences developing deeper understanding of some energy systems, by using UNITARY MECHANISMS, rather by continuing to use old-fashioned DUALITIES.

Despite that the world ACTUALLY has globalized electronic money frauds, backed by the threat of force from weapons of mass destruction, combining to have become trillions of times more capable and powerful than anything which previously existed in human history, nevertheless, articles like the one above continue to present "debates" that are not remotely close to being in the same orders of magnitude of that which ACTUALLY EXISTS.

Every day, in every way, the paradoxical political problems due to money based on backing up measurement with murder, in ways which are generally NOT publicly admitted or addressed, automatically get worse, faster ... while those who think that they are making "money" within those systems match that by automatically becoming even more psychotic.

The relative few who begin to notice those accumulating apparent anomalies then still tend to collapse back to bogus "solutions" which deliberately ignore and misunderstand what the problems ACTUALLY are, because of the long history of natural selection pressures driving the development of artificial selection systems to become as dishonest about themselves as possible.