Returning to the gold standard

[AnnoyingPony]

My dad seems to espouse the ideas from the book The Creature From Jekyll Island, which says that the Federal Reserve was established as part of a plot to take America off the gold standard. He says the only way to get out of the recession is to get off the gold standard.

Because he's quoting TCFJI, I know he's talking nonsense, but could anyone more economically qualified than me explain the technical reasons why gold standards wouldn't work?

The first thing that comes to mind is that gold is so limited in supply that it can't keep up with quickly growing economies. I don't know if this is true or not, though.

[Ray Brady]

The supply of gold does not increase at the same rate as the population. Thus, tying the economy to the gold supply would ensure that wealth per capita would decline over time.

The "value" of gold is largely arbitrary and artificial. There's no logical reason it should be used as the basis of an economy over any other artificial standard.

[The Central Scrutinizer]

My dad seems to espouse the ideas from the book The Creature From Jekyll Island, which says that the Federal Reserve was established as part of a plot to take America off the gold standard. He says the only way to get out of the recession is to get off the gold standard.

We would have to kill all the Jews too.

[Tippit]

The supply of gold does not increase at the same rate as the population. Thus, tying the economy to the gold supply would ensure that wealth per capita would decline over time.



Wealth per capita wouldn't decline, gold per capita would, to the extent that population grows faster than the gold inflation rate (and only if). Wealth increases as people produce more of the things money can buy, not increases in the supply of money itself, even when it's gold.



The "value" of gold is largely arbitrary and artificial. There's no logical reason it should be used as the basis of an economy over any other artificial standard.

The value of gold is due to a number of its properties, chiefly its scarcity. The value of fiat currency is "artificial", to the extent its circulation is coerced by the enforcement of legal tender, and income tax laws. The logical reason that gold is a superior form of money, is because bankers and politicians cannot loot the economy indiscriminately, as they can by creating and spending fiat money. Having said that, a gold standard is merely a fiduciary standard, which is inferior to a commodity standard.

[The Central Scrutinizer]

Wealth per capita wouldn't decline, gold per capita would, to the extent that population grows faster than the gold inflation rate (and only if). Wealth increases as people produce more of the things money can buy, not increases in the supply of money itself, even when it's gold.

The value of gold is due to a number of its properties, chiefly its scarcity. The value of fiat currency is "artificial", to the extent its circulation is coerced by the enforcement of legal tender, and income tax laws. The logical reason that gold is a superior form of money, is because bankers and politicians cannot loot the economy indiscriminately, as they can by creating and spending fiat money. Having said that, a gold standard is merely a fiduciary standard, which is inferior to a commodity standard.

No

[rjh01]

One problem if the government says that the dollar is worth a fixed amount of gold is that the government would be competing against speculators. No prizes for working out that the government will lose.

[Stylesjl]

The main problem is that there isn't enough gold in the world to cover all the fiat currency, so there would be an immediate and massive deflation (deflation is generally bad as it encourages hoarding of currency instead of investment/consumption and it causes even more deflation, causing the former to get even worse) of the currency and the price of gold would surge, the result being really bad economic dislocation. If the price of currency/gold is unchanged then it could lead to a speculative attack as investors attempt to redeem gold (which was in fact one of the reasons that Richard Nixon removed the US from the gold standard, making the US Dollar a complete fiat currency)

The other problems would include the fact that gold producers would gain a massive amount of political influence over the currency, as opposed to the central bank and government

[Travis]

There's roughly $4 trillion in gold. The GDP of the United States is alone $14 trillion.


You can see the problem.

[Almo]

There's roughly $4 trillion in gold. The GDP of the United States is alone $14 trillion.

You can see the problem.

Depends on which "You" you are referring to. :)

[drkitten]

The main problem is that there isn't enough gold in the world to cover all the fiat currency, so there would be an immediate and massive deflation (deflation is generally bad as it encourages hoarding of currency instead of investment/consumption and it causes even more deflation, causing the former to get even worse) of the currency and the price of gold would surge, the result being really bad economic dislocation. If the price of currency/gold is unchanged then it could lead to a speculative attack as investors attempt to redeem gold (which was in fact one of the reasons that Richard Nixon removed the US from the gold standard, making the US Dollar a complete fiat currency)

Actually, that's not really "the main problem"; it would simply require a one-time massive re-valuation of the currency, something that most national economies (and most currency speculators) have learned to take in stride; if the US decided to peg its currency at $10,000/oz., there would be more than enough gold to support the current economy. And while the economic dislocation would be quite severe, it wouldn't be as bad as the REAL "main problem," which would be that we could only do it once. Whatever countries put themselves back on the gold standard would be at the mercy of speculators as well as external events and unable to keep the economy from crashing.

E.g. a sudden drop in US exports? That's not normally a problem; this means that dollars are being exported instead, the value of the dollar drops, which makes exports cheaper on the world market and the problem self-stabilizes. On the gold standard, there's no such self-stabilization mechanism, and we probably get a full-blown internal depression as the export market (and jobs related to the export market) evaporates.

[NWO Sentryman]

There's a reason Britain got off the Gold Standard: It constricted the money supply, causing deflation and preventing a recovery.

[The True Scotsman]

E.g. a sudden drop in US exports? That's not normally a problem; this means that dollars are being exported instead, the value of the dollar drops, which makes exports cheaper on the world market and the problem self-stabilizes. On the gold standard, there's no such self-stabilization mechanism, and we probably get a full-blown internal depression as the export market (and jobs related to the export market) evaporates.

Hmm...that's an interesting argument. Would you say that the same problem would be present in a system where the entire world used a single currency or am I misunderstanding your argument?

ETA: lol, nevermind. It seems you more or less answered this question already in an actively thread in this forum section.

[drkitten]

Hmm...that's an interesting argument. Would you say that the same problem would be present in a system where the entire world used a single currency or am I misunderstanding your argument?

ETA: lol, nevermind. It seems you more or less answered this question already in an actively thread in this forum section.

Yeah, well, I'll answer it here as well for the benefit of the lurkers.

"Yes."

In fact, the gold standard is a world currency, at least among the part of the world that uses it. The fact that the world abandoned it should be a clue that it didn't work, and why a world currency wouldn't work.

[Kestrel]

Yeah, well, I'll answer it here as well for the benefit of the lurkers.

"Yes."

In fact, the gold standard is a world currency, at least among the part of the world that uses it. The fact that the world abandoned it should be a clue that it didn't work, and why a world currency wouldn't work.

Back when we were on the gold standards, we could count on experiencing a couple of economic depressions during a normal lifetime. Since dropping the gold standard we have had recessions, but not depressions. Allowing central bank economists to regulate the money supply has real advantages.

[Arg9]

Back when we were on the gold standards, we could count on experiencing a couple of economic depressions during a normal lifetime. Since dropping the gold standard we have had recessions, but not depressions. Allowing central bank economists to regulate the money supply has real advantages.

I think it's worse because the central bank keeps knocking down the value of our labor. Say my grandparents worked their butt off and saved $3,000 for future use of the family. My parents inherited this money when my grandparents passed and thought it would be good for my first car when I reached driving age. That $3000 that my grandparents worked their butt off for isn't worth near as much now. That sweat that went into that has been devalued.

Well, that's how I look at it.

[mike3]

Yeah, well, I'll answer it here as well for the benefit of the lurkers.

"Yes."

In fact, the gold standard is a world currency, at least among the part of the world that uses it. The fact that the world abandoned it should be a clue that it didn't work, and why a world currency wouldn't work.

Why wouldn't a "world" currency work, even a fiat one, from the point of view of failure of gold standards?

[Sceptic-PK]

I think it's worse because the central bank keeps knocking down the value of our labor. Say my grandparents worked their butt off and saved $3,000 for future use of the family. My parents inherited this money when my grandparents passed and thought it would be good for my first car when I reached driving age. That $3000 that my grandparents worked their butt off for isn't worth near as much now. That sweat that went into that has been devalued.

Well, that's how I look at it.

Well, your grandparents/parents should have invested it somewhere that ensured a rate of return higher than inflation.

[bjornart]

Why wouldn't a "world" currency work, even a fiat one, from the point of view of failure of gold standards?

The gold standard, like a world currency, makes it impossible to adjust money supplies on a national basis. This is a problem, even on smaller scales than the world.

[elbe]

The gold standard, like a world currency, makes it impossible to adjust money supplies on a national basis. This is a problem, even on smaller scales than the world.

So, hypothetically, it could work if the world's economic structure were more homogeneous?

[drkitten]

So, hypothetically, it could work if the world's economic structure were more homogeneous?

In the short term. After all, a fixed currency works great on a scale of a single city or even a single country. As long as Cleveland and Cincinnati can agree on the value of a dollar, it doesn't matter what the dollar is based on.

In the long run, unless we could produce more gold to match increased production due to technical improvements, we'd end up in a deflationary spiral that would retard future investment and technical improvements.

[elbe]

In the short term. After all, a fixed currency works great on a scale of a single city or even a single country. As long as Cleveland and Cincinnati can agree on the value of a dollar, it doesn't matter what the dollar is based on.

In the long run, unless we could produce more gold to match increased production due to technical improvements, we'd end up in a deflationary spiral that would retard future investment and technical improvements.

I'm not supportive of the gold standard, I was just curious about the single currency idea. I'm mildly obsessed with the concept of a Ecumenopolis and a single currency would seem to go along with that. (Not that I think it could happen or anything)

[The True Scotsman]

I think it's worse because the central bank keeps knocking down the value of our labor. Say my grandparents worked their butt off and saved $3,000 for future use of the family. My parents inherited this money when my grandparents passed and thought it would be good for my first car when I reached driving age. That $3000 that my grandparents worked their butt off for isn't worth near as much now. That sweat that went into that has been devalued.

Well, that's how I look at it.

That seems like more a problem of knocking down the value of savings, rather than of labor. As far as what I know about economics, the value of labor is determined by the purchasing power of the money earned when the labor was performed, not in the distant future.

[drkitten]

I think it's worse because the central bank keeps knocking down the value of our labor. Say my grandparents worked their butt off and saved $3,000 for future use of the family. My parents inherited this money when my grandparents passed and thought it would be good for my first car when I reached driving age. That $3000 that my grandparents worked their butt off for isn't worth near as much now. That sweat that went into that has been devalued.

Well, that's how I look at it.

This is more your parents' fault than the banks'. If your parents had put the $3000 into a CD ladder paying 5% in 1960, it would be worth about $35,000 now. That would buy a very nice car. If they'd put it in a stock mutual fund returning 10%, that would be worth $350,000, which would buy you a car and a house with a garage to park it in.

[drkitten]

I'm mildly obsessed with the concept of a Ecumenopolis and a single currency would seem to go along with that.

Well, the currency issue is one reason an ecumenopolis is unlikely -- our inability to produce enough stuff to support the city being a larger one. In the event that we did see something like an ecumenopolis, I suspect that you'd see differential government policies have something of the same effect, deployed to the same purpose. You already see this in existing urban areas; the price of a hamburger in the borough of Manhattan might be half again what it is in Flatbush or even in Staten Island. In some cases, this is even enforced by tax policy -- i.e. there's a 5% "hospitality tax" in the business district of Gotham City, as a way of shaking more money out of tourists while still allowing the locals to have a beer after the game.

[NewtonTrino]

I'm not supportive of the gold standard, I was just curious about the single currency idea. I'm mildly obsessed with the concept of a Ecumenopolis and a single currency would seem to go along with that. (Not that I think it could happen or anything)

Read up on what's happening with the Euro and then compare that to a one world currency. There would be similar types of issues.

[Arg9]

This is more your parents' fault than the banks'. If your parents had put the $3000 into a CD ladder paying 5% in 1960, it would be worth about $35,000 now. That would buy a very nice car. If they'd put it in a stock mutual fund returning 10%, that would be worth $350,000, which would buy you a car and a house with a garage to park it in.

Yes, investing would have been a solution, but the point I was trying to make was that value is lost from labor. From what I understand with the gold standard (and my knowledge is limited), is that this would be less of an issue vs. fiat money and where it can just get "printed" and lose value more rapidly in a shorter time frame. So therefore the value of the money the value of labor was transferred into is not sustained.

[bjornart]

Yes, investing would have been a solution, but the point I was trying to make was that value is lost from labor. From what I understand with the gold standard (and my knowledge is limited), is that this would be less of an issue vs. fiat money and where it can just get "printed" and lose value more rapidly in a shorter time frame. So therefore the value of the money the value of labor was transferred into is not sustained.

Reductio ad absurdum: Imagine a world where money doesn't change in value. This I'd interpret as everyone getting paid the same and everything costing the same forever. Lets say I develop a method of producing flour at half the cost of previous methods. Ignoring my inability to compete on price, I now earn a lot more so my labour has increased in value.

Of course that requires mandated prices on everything, which is absurd, so let's say pay has to stay the same, but prices can vary. My cheap flour and other goods being produced more efficiently means labour/money is actually increasing in value.

So it's not possible for the value of money not to change. Showing how a small but relatively stable rate of inflation is better than the options is a different but more complex job.

[drkitten]

Yes, investing would have been a solution, but the point I was trying to make was that value is lost from labor.

Right. And your point is wrong. No value is lost from labor, as the "labor" got it's value when your grandparents were paid for their labor. The value is lost from money.

From what I understand with the gold standard (and my knowledge is limited), is that this would be less of an issue vs. fiat money and where it can just get "printed" and lose value more rapidly in a shorter time frame.

Nope. Commodity money can lose value just like fiat money, except it's not under control of the government, and therefore less predictable and less stable. A new gold mine opens up in South Africa, and the value of your grandmother's inheritance plunges.

[Kestrel]

Commodity money can lose value just like fiat money, except it's not under control of the government, and therefore less predictable and less stable. A new gold mine opens up in South Africa, and the value of your grandmother's inheritance plunges.

If all money is based on gold, the most financially rewarding thing a person could do is find gold. Should this really be the focus of human society?

[Merko]

Basing the currency on gold worked back when the total size of the economy was small enough that the value of the available gold roughly corresponded to the amount of money needed for transactions.

While gold production has increased since, the total economy has grown much more.

What would happen if we fixed currencies at the current gold price is that the government would be unable to exchange cash for gold when people demanded it, and the system would crash.

What would happen if we pegged our currencies with an artificially high gold price (so that the available gold would be sufficient for all the dollars etc in circulation) is that gold would become ridiculously expensive, you would be able to use a very small quantity of gold to buy all sorts of other valuable products. The gold peg would be completely useless, because no one would want to have gold anyway. Imagine if you had a million dollars in gold. Then the new government decides to end the silly gold peg. Now your gold is not worth nearly a million dollars anymore.

[Merko]

I believe a common currency is not a good idea for any region that does not also have a common policy. It works (sort of) in the US because there is a large degree of common policy, and because people are moving across states to find work. While this is not necessarily the best solution (there seems to be quite a lot of fractured families in the US due to this) it is workable because everyone speaks the same language and the cultural differences are moderate.

I believe it does not work in the EU because of the lack of common policy. This means that the currency becomes too valuable in some parts (Spain for example) and not valued enough elsewhere (Germany). This is not regulated through migration because the Spaniards usually don't speak German and can't work there very efficiently. The same language problem means that it would be very difficult to have a functional EU-wide democracy, current EU policy has an extremely low democratic influence and there is not any EU-wide popular political debate.

[drkitten]

Basing the currency on gold worked back when the total size of the economy was small enough that the value of the available gold roughly corresponded to the amount of money needed for transactions.

To be fair, this is true by definition. If the world went back on the gold standard, the immediate effect would be tremendous deflation until the economy had collapsed enough to make the gold supply sufficient, or alternatively, the price of gold would shoot up enough in the runup to the switchover (e.g. the US decides to peg the dollar at $10,000/oz) that the amount of gold would be enough.

But that's exactly the problem; we'd have to deal with arbitrary currency fluctuations that have nothing to do with economics and everything to do with the productivity of the mines in East Nowheristan.


While gold production has increased since, the total economy has grown much more.

Fortunately, the deflationary pressures of the gold standard would prevent the total economy from growing that fast. :D

[Sceptic-PK]

Yes, investing would have been a solution, but the point I was trying to make was that value is lost from labor. From what I understand with the gold standard (and my knowledge is limited), is that this would be less of an issue vs. fiat money and where it can just get "printed" and lose value more rapidly in a shorter time frame. So therefore the value of the money the value of labor was transferred into is not sustained.

What’s the point of having a supposedly value-holding currency if nobody has a job or any money (which is the outcome of doing back to gold)?

[Almo]

Nope. Commodity money can lose value just like fiat money, except it's not under control of the government, and therefore less predictable and less stable. A new gold mine opens up in South Africa, and the value of your grandmother's inheritance plunges.

It is this simple thing about a gold standard that I find it so hard to believe people dismiss. Ridiculous (people dismissing it).

[Merko]

If the world went back on the gold standard, the immediate effect would be tremendous deflation until the economy had collapsed enough to make the gold supply sufficient,
That's not a possible scenario. How would this "sudden deflation" be brought about?



or alternatively, the price of gold would shoot up enough in the runup to the switchover (e.g. the US decides to peg the dollar at $10,000/oz) that the amount of gold would be enough.
Yes, but as I wrote above, that would be pointless as no one in their right mind would want to have any gold at such pricing, because the moment a slightly more sane government removed the peg, gold owners would be ruined. Current gold owners would try to sell their gold to the government, but the government probably wouldn't need it so everyone not lucky enough to find some sucker willing to buy gold at sham prices would just hold on to it until the madness ended.

Fortunately, the deflationary pressures of the gold standard would prevent the total economy from growing that fast. :D
The gold standard was abolished not because the lack of gold somehow hindered further economic growth, but because further growth would put the currency system at risk of collapse.

[Merko]

It is this simple thing about a gold standard that I find it so hard to believe people dismiss. Ridiculous (people dismissing it).
Adam Smith spent a good part of his Wealth of Nations to dismiss this very misconception. To be fair, in his day those who believed it were often high government officials, who sometimes let these follies dictate the economic policies of major states.

[drkitten]

That's not a possible scenario. How would this "sudden deflation" be brought about?

Food riots and starving masses eating seed corn and smashing factories in their spare time.


Yes, but as I wrote above, that would be pointless as no one in their right mind would want to have any gold at such pricing,

No one in their right mind would want to return to the gold standard. Therefore, presumptions of sanity are not given.

[Tippit]

So it's not possible for the value of money not to change. Showing how a small but relatively stable rate of inflation is better than the options is a different but more complex job.

A "small but relatively stable rate of inflation" is only better for the banksters and politicians who get to spend or invest the new money first, and it's worse for everyone else. Of course, we have a low rate of CPI inflation only because the index is manipulated in a variety of ways, and more importantly, only because it doesn't reflect the massive subsidy of financial assets via Quantitative Easing.

It is quite possible for the value of money not to change, in an environment with constant productivity. It would also be ideal, in this case. In an environment with growing productivity, it is ideal for the value of money to increase. In an environment with declining productivity, it is ideal for the value of money to decrease. In each of these circumstances, it is nominal spending that remains more or less constant, and this is what is important for economic stability in general.

[drkitten]

And here we have exhibit A for "people who want to return to the gold standard are not in their right minds."

[Tippit]

The gold standard was abolished not because the lack of gold somehow hindered further economic growth, but because further growth would put the currency system at risk of collapse.

The gold standard was abolished because it put a constraint on deficit spending, which criminal politicians like Nixon, and FDR don't like. Economic growth under a gold standard bears no risk of a "currency system collapse", because as more goods and services become available to purchase, the value of gold simply increases, as prices fall for everyone.

The gold standard failed to the extent it is merely a fiduciary standard and not a commodity standard (gold backed paper is still a paper promise, not gold), and to the extent that it was blamed for the consequences of the systemic risk inherent in Fractional Reserve Banking (http://en.wikipedia.org/wiki/Fractional-reserve_banking). The stock market inflation that resulted in the roaring twenties occured under a gold standard, and inflation of the then gold-backed dollar. In fact, in 1937, four years after FDR made the US ownership of gold illegal, the Fed was still tightening the money supply, worsening the Great Depression. History shows that fiduciary and fiat money can be made both artificially plentiful and scarce, with dire consequences.

Even a fiat money standard with strict statuatory requirements against manipulating the supply of money one way or the other would have functioned better than the gold standard, to the extent that the arfiticial boom never would have occured in the first place, let alone the bust. At least until politicians or bankers decided to ignore such requirements.

[Puppycow]

And here we have exhibit A for "people who want to return to the gold standard are not in their right minds."

Anyone bring up Loughner yet? :boxedin:

[stilicho]

The gold standard was abolished because it put a constraint on deficit spending, which criminal politicians like Nixon, and FDR don't like.

The world was so much better when criminal politicians simply borrowed what they needed to finance their adventures and then erased the public debt by kicking the folks who'd made the loans out of the country. Or burning them at the stake.

Ahhh, the good ol' days!

[Arg9]

Right. And your point is wrong. No value is lost from labor, as the "labor" got it's value when your grandparents were paid for their labor. The value is lost from money.

You just basically restated what I was stating except that you missed where I stated that the value of labor is transferred to fiat money. My concern is whether or not this value would be contained better under a gold standard.

[Sceptic-PK]

You just basically restated what I was stating except that you missed where I stated that the value of labor is transferred to fiat money. My concern is whether or not this value would be contained better under a gold standard.

Sure, the value might be contained better but who will care when nobody has any money? Would you say that people were better off during the Depression because milk was so much cheaper than it is today?

It is ridiculous to tie your currency to something that has no relationship to your actual economy. As it stands now, a currency is worth what somebody is willing to pay for it, just like everything else.

[stilicho]

Would you say that people were better off during the Depression because milk was so much cheaper than it is today?

That's exactly what they're saying but they don't have the guts just to spit it out. The paradigm of the all-metals economy was Imperial Spain in the 16th and 17th Century. Although capital markets were nowhere near as developed as they later became, the Spanish had to outsource all their productivity to rivals such as Venice and the Netherlands (which they wound up losing control over in the process).

While we're at it with outmoded economic solutions let's bring back the Physiocrats.

[Almo]

My concern is whether or not this value would be contained better under a gold standard.

It would not because the gold supply is entirely disconnected from anything but whether we find more or not.

[drkitten]

That's exactly what they're saying but they don't have the guts just to spit it out.

I think it's simply good old-fashioned economic ignorance, combined with a side order of trust-fund (or trust-fund wannabe) entitlementism. "My great-grandparents worked hard in the Great Depression; why shouldn't I be able to live indefinitely off their labor?"

Of course, what I think most of them are really saying is "I work hard for my money, and I don't understand enough about investment to be able to make my money work for me, so I want to find an investment that's guaranteed never to depreciate. I just want to make a big pile of money and call that my retirement plan, without having to worry about money management, because that's scary."




The paradigm of the all-metals economy was Imperial Spain in the 16th and 17th Century. Although capital markets were nowhere near as developed as they later became, the Spanish had to outsource all their productivity to rivals such as Venice and the Netherlands (which they wound up losing control over in the process).

And the Spanish economy got wiped out via inflation anyway as they sucked all the specie out of the New World. So even when the world was on the gold standard, making a big pile of money didn't work to solve your money management plans, as the history of the "Spanish" Netherlands showed.

[drkitten]

You just basically restated what I was stating except that you missed where I stated that the value of labor is transferred to fiat money.

By your grandparent's choice; they could have turned around and spent their fiat money on anything they liked, from Alabama farmland through shares of AT&T to loaves of Wonder Bread.

In fact, they could have done that at any time. If in 1980, they decided that AT&T no longer looked like a good store of value, they could have sold the stock and bought Wonder Bread then.

[Merko]

Food riots and starving masses eating seed corn and smashing factories in their spare time.
Why would they do that? I thought we were talking about a scenario where the government decides to reinstate the gold standard.

While any kind of extremely bad political moves could lead to what you're proposing and while this might make the gold standard feasible again, I thought you were talking about a deliberate policy to reinstate the gold standard through deflation. I don't think this is possible.

[drkitten]

Why would they do that? I thought we were talking about a scenario where the government decides to reinstate the gold standard.

Because reinstating the gold standard at anything like present market value for gold would lead to immediate severe deflation as the government was forced to pull more than 2/3 of the existing money supply out of the economy, and cut GNP by more than 3/4. The resulting deflation would bring industrial production to a standstill, as no one would be able to afford to produce anything at a price worth selling. But of course, with no production, there are no goods for sale (including food), and so farmers would be eating their seed corn because it wasn't worth trying to raise a crop to sell, and smashing factories (and stripping them for parts) because that's the only way to get mechanical parts that you need, for example, to make repairs on anything you own.



I thought you were talking about a deliberate policy to reinstate the gold standard through deflation.

Yup. And I'm pointing out the scale of deflation that would be required to do that. Basically, the government would need to abolish 2/3 of the existing money supply to do it.

[Merko]

Economic growth under a gold standard bears no risk of a "currency system collapse", because as more goods and services become available to purchase, the value of gold simply increases, as prices fall for everyone.
Not true. The value of gold is determined by the usefulness of gold. In Adam Smith's time, this was pretty much limited to gold plating. Nowadays we use it for some other things, such as electronics. And, of course, jewellery. But at the end of the day, there is a relation between how much of any other commodity (it may be rice or sports cars) that people are willing to trade for a certain quantity of gold.

Improved productivity does not mean that people will start valuing gold higher to the same extent. Yes, people will be willing to spend more on gold (because they have more resources) but there are so many other things that they also want, that gold, just like all other commodities, will become cheaper. That is, the average person can afford more gold.

As the economy grows, we need more currency. The amount of currency we need is determined roughly by the amount of transactions that is going on at any given time. With increased productivity, the value of those transactions will increase. But the amount of available gold does not increase at the same pace.

A government that backs its currency with gold does not need to actually store enough gold that it can match all of the currency at once. But it needs a certain fraction to avoid the risk that a sudden lack of confidence causes people to start demanding their gold. If the government can't find enough gold, it can do one of two things. The first is to stop creating more currency. That will lead to a lack of currency in the market, the ATMs will be empty and people will have a hard time to buy things. This is not good for the economy. The alternative is worse: the government can keep printing money anyway, hoping that no one will ask for gold. But inevitably people will start doing that when some rumour says that gold is too short, the government will run out of gold, and the whole currency will collapse.

[Merko]

Because reinstating the gold standard at anything like present market value for gold would lead to immediate severe deflation as the government was forced to pull more than 2/3 of the existing money supply out of the economy, and cut GNP by more than 3/4.
Ok, I understand better what you mean. I'm not sure the government could just "pull" the money supply like that though. They would have to destroy basically any funds that pass through government accounts. Even then, though, it would take some time.

[drkitten]

Ok, I understand better what you mean. I'm not sure the government could just "pull" the money supply like that though. They would have to destroy basically any funds that pass through government accounts. Even then, though, it would take some time.

Well, they might be able to do something by simply dividing by 10 or something. Most of the money supply is in the M2 supply, i.e. bank accounts. By Federal decree, as of ten-minutes-ago, all bank accounts lose a digit.

Alternatively (or in addition), they might be able to simply abolish (and outlaw) the US dollar and replace it with the new Goldbug Dollar (G$). Since the government wouldn't accept the current dollar any more, the existing stocks would be valueless (no one in their right mind would take them), and people would be fighting tooth-and-nail over the G$. This would have the advantage of also eliminating the national debt, since that's valued in dollars (and they could just print up "novelty" bills to pay off the holders).

And since we're talking about making a total wreck of the economy anyway, it doesn't really matter whether or not we stiff all the US bond holders.

[bjornart]

Returning to the gold standard is insane, but I'd pick what I think is less insane than drkitten's suggestion.

First I'd buy up some gold. Let's for simplicity's sake say we increase the US holdings by one quarter to 10 000 tonnes. At a price of USD 1000 / oz. this would be worth USD 32 150 000 per tonne.

Then you take the current money supply, lets say M2 and estimate 10 000 000 000 000, and divide this by the gold holdings. Gold is now worth USD 31 000 / oz.

Of course you can't hand out 31 000 to anyone with an ounce of gold that wasn't in the US holdings to start with, but you _can_ give an ounce of gold to anyone mad enough to pay you 31 000.

Okay, I'm not entirely sure this is less insane, but it's too absurd to actually bother to try predict any further consequences.

[drkitten]

Returning to the gold standard is insane, but I'd pick what I think is less insane than drkitten's suggestion.

First I'd buy up some gold. Let's for simplicity's sake say we increase the US holdings by one quarter to 10 000 tonnes. At a price of USD 1000 / oz. this would be worth USD 32 150 000 per tonne.

Then you take the current money supply, lets say M2 and estimate 10 000 000 000 000, and divide this by the gold holdings. Gold is now worth USD 31 000 / oz.

Well, that's the other alternative I posited in post #32.

[JoelKatz]

... but the point I was trying to make was that value is lost from labor.But this is necessary and proper and has nothing do with inflation or currency.

Say I want you to mow my lawn. You decide that you really want a bookshelf and consider one fair compensation for mowing my lawn. I agree and ask you to mow my lawn tomorrow, oh but I'll pay you the bookshelf in 10 years. Does that still seem fair?

The problem was that you extended the duration between the labor and obtaining compensation. It's as if you got the bookshelf but then you forgot about it for ten years leaving you no better off than someone who didn't get the bookshelf at all for 10 years. Of course that's a worse deal than getting and enjoying the bookshelf immediately.