Should the U.S. adopt a Gold Standard?
Debate Rounds (5)
We need a gold backed US dollar. A gold standard would introduce discipline to the Dollar. America could no longer print what it did not have. Inflation and Dollar debasement would no longer be an issue therefore saving itself from self destruction.
A gold standard is transparent, simple to administer, and has produced very stable prices over long periods. It reflects a strong commitment of the government not to resort to monetary finance (printing money) and may help reinforce such a commitment.
Under the gold standard, high levels of inflation are rare, and hyperinflation is nearly impossible as the money supply can only grow at the rate that the gold supply increases. Economy-wide price increases caused by ever-increasing amounts of currency chasing a constant supply of goods are rare, as gold supply for monetary use is limited by the available gold that can be minted into coin.
"The gold standard provides fixed international exchange rates between those countries that have adopted it, and thus reduces uncertainty in international trade.
"Financial repression is a situation whereby newly printed money can be used to purchase goods and services, and to discharge debts, at no cost to the printer.
This acts as a mechanism to transfer the wealth of society to those that can print money, from everyone else. The adoption of the Gold standard prohibits this and stands as a protector of property rights.
I call for the reintroduction of the US gold based standard.
Bringing back the gold standard in today's economy would devastate the middle and lower classes, most notably those who have any form of debt.
Implementing a precious metal standard on a trust based system would ultimately massive deflation. While that may seem like a good thing on the surface, people with debts would have money worth more, but still have debts at the same levels as those when money was at a lower value, essentially making the debts more expensive. A gold standard would be a blessing to creditors and a curse to debtors.
A gold standard would severely weaken the power of a central bank to protect against recessions as it could only work with the amount of money backed by gold. Had the United States been on a gold standard in 2008, a second Great Depression could have very well happened had it not been for the quick action of the Federal Reserve to loan money to larger banks on the brink of failure.
The gold standard is not in the best interests of the middle class, lower class, and economy, but for the benefit of the rich, bankers, and creditors.
I call for the continued abolishment of the gold standard.
I would say that there are two main nuances to the word "deflationary." One is the notion of a rising currency value"essentially the opposite of "inflationary," denoting a falling currency.
The other is economic contraction in general, which leads to "air going out of the balloon" metaphors and often a tendency for prices to decline as a result of recession.
A gold standard is not supposed to produce a rising currency value. It is supposed to produce a currency of stable value � one that neither rises nor falls.
The World Gold Council has produced a paper which studies long-term price trends, called "Gold as a Store of Value: Research Study No. 22," by Stephen Harmston. It has data from 1596 to 1971 in Britain. These are basically commodity price indexes, because those are the only price series that we have going back to 1596.
What it shows is basically a flat line. From end to end, commodity prices (compared to gold) actually go up a little bit over the time period, denoting an inflationary rather than deflationary long-term trend.
However, the difference is so small that it can be considered statistical noise. In essence, the price data shows that gold is indeed stable in value, as much as anything can be over a four-century period. Sometimes people say that economies have a "deflationary trend" with a gold standard.
What they seem to mean by this is that many goods and services become cheaper in price over time. For example, computers are much cheaper today than they were thirty years ago. This is due to advances in technology and processes, not any sort of monetary distortion.
At the same time, other things"notably urban real estate and wages"tend to go up in value over time, reflecting the increasing societal wealth that tends to happen with a gold standard system. Both are natural occurrences when you have a currency that is stable in value.
The second notion is that a gold standard system causes economic contraction and decline. Well, does it? After 182 years of a gold standard system, did the United States have a larger, or smaller economy?
In 1790, the population of the United States was 3.9 million, and there were thirteen states with an economy based on subsistence farming. In 1970, the population was 203 million, with 50 states and the most advanced, wealthiest industrial economy the world had ever seen.
If a gold standard causes contraction and decline, how did that happen? Obviously it is baloney. After 182 years of a gold standard system, the U.S. became the richest, most powerful, most influential country in the world.
What causes contraction and decline is not using a gold standard system. In the forty years since floating currencies began in 1971, the average American family has made no progress at all"even with two incomes, instead of one. If you measure income in terms of ounces of gold, we are back to early-1950s levels. Although there were many ups and downs over the last two centuries, including a Civil War and a Great Depression, this is perhaps the first time in U.S. history where the average family is worse off than it was forty years earlier.
However, during those two centuries, there have been times when a gold standard has been genuinely "deflationary." This was typically after wars"the War of 1812, the Civil War, World War I, and World War II.
During the Civil War, the U.S. dollar floated and was devalued. This was the famous "greenback" period. At the end of the war, the dollar was worth about half of its prewar value. The decision was made to raise the value of the dollar back to its original parity, and peg it to gold again at $20.67/ounce. This took place over several years, and the U.S. returned to a gold standard in 1879. The other wars mentioned were also accompanied by sagging dollar value, although not as much as during the Civil War. After the wars ended, the dollar�s value was raised and returned to its prewar parity.
This choice to return to a gold standard system at prewar parity (instead of a new parity) involved a rising currency value, and thus was indeed "deflationary" as we defined it earlier. However, this was not due to the gold standard itself, but rather because the U.S. left the gold standard system during each of these wars.
During World War I, France also floated and devalued the franc. France returned to a gold standard system in 1926, but at a new parity that did not require a rising currency value. In effect, the currency was permanently devalued, and repegged to gold at the new rate. As a result of this, no deflation was necessary. However, by devaluing the currency, the terms of all contracts were altered, producing arbitrary winners and losers. Both policies � returning to a prewar parity, or using a new parity " have their benefits and complications.
The gold standard is also blamed for "deflation" during any recession. For as long as there have been gold standard systems, which is a very long time, there have been other people who have wanted to try to solve their economic problems with a currency devaluation or some sort of "easy money" policy.
"But as this Addition to the Money, will employ the People are now Idle, and these now employ"d to more Advantage: So the Product will be encreas"d, and Manufacture advanc"d. If the Consumption of the Nation continue as now, the Export will be greater, and a Ballance due to us �"
See? Just add more money, and all your problems are solved. Does that sound like QE2 today? This quote comes from a book called Money and Trade Considered: With a Proposal for Supplying the Nation with Money. It was published in 1705. The author was John Law.
Law continued: "Indeed, if lowness of Interest were the Consequence of a greater Quantity of Money, the Stock applied to Trade would be greater, and Merchants would Trade Cheaper, from the easiness of borrowing and the lower Interest of Money, without any Inconveniencies attending it."
How could anyone refuse such a sensible proposal, especially one without any "inconveniencies" attending it?
Law must have been convincing, because by 1720 he was the Finance Minister of France. His inflationary "Mississippi Bubble" bankrupted most of the aristocracy of France, an Inconvenience that made Law rather unpopular there. Before the end of the year 1720, he fled the country dressed as a woman.
A gold standard prevents this sort of currency fiddling. Thus, the gold standard is called "deflationary" (recessionary) because it prevents the currency manipulators from supposedly solving the unemployment problem through the magic of the printing press.
1. Buy up more gold to make up the difference between our money in circulation and our gold reserves
2. Take money out of circulation to make up the same difference.
3. Re-adjust the value of gold to coincide with the amount of money in circulation.
All of these options are unpractical in the modern state of the United States as they would all royally mess with the value of a dollar and would lead to possible deflation (with the possible exception of the third option). You claim that gold is a stable value? This is somewhat true, but not entirely. During the many gold rushes in American history, more gold was added to the market, thus the value of the dollar was weakened, it's simple supply and demand. When more gold was added in such a short time, the value of the paper money fell as more had to be printed to keep up with the supply of gold.
You claim that a gold standard leads to a "flat line" in terms of prices and value, for the most part this is true, but your data set must be of a long period of time as gold may be somewhat stable in the long term, the short term effects are economically violent as prices are continuously changed with the amount of gold available. This is a flaw in the gold standard on a large scale, it's good in a macro sense, but not a micro sense.
You point numbers from 1790 and 1970, while your statements are true, all the good the United States economy since the conception of the nation cannot be attributed to gold simply because we were on a gold standard, by such logic as, "We were on a gold standard in the late 1800s and early 1900s, and the Robber-Barons became rich. It must be the gold." Using the same idea that the backing of currency is the reason for progress and economic success, I could say, "Google and Apple have become two of the most wealthy and expensive companies (by stock price) on a floating currency, it must be the float". The backing of currency is not the direct tribulation to an economy's susses, an economy succeeds (at least under free market principals) by the ingenuity and efficiency of the people within the economy.
Your statements are true about the Civil War, however, they do not hold true today as money is simply not printed to get more money. Money is loaned out through a central bank (the Federal Reserve) to other banks, who in turn loan the money out at a slightly higher interest rate to make a profit. The banks pay back their loans, with the interest they own on the original capital. This does not simply add money to the economy, or as some would say "print more off," but more so adds a temporary source of capital to the economy in which people can buy larger, more expensive items such as cars, houses, or create businesses. The money is not added the the economy simply to add money, but is added temporarily to spark spending. This couldn't happen under a gold standard as it would require to gold to be withdrawn from the country or the value of the dollar to deflate when money is taken out of circulation.
The fatal flaw to the gold standard however is that it is limited. Only so much money can ever exist, and that amount of money is tied directly to gold, which is finite. As a population grows, the amount of money that can be spread across that population is less and less, leading to a stable currency, yes, but a the price of a starved economy. I present the flowing example (in which I'll use smaller numbers to save time.)
Let us assume that there are 100 people in a nation, and roughly 100,000 dollars in circulation based on gold. Everything is peachy, but in about fifty to a hundred years, the original 100 have procreated and people form other countries have migrated to this country and the population stands now at 200 with the same 100,000 dollars backed by gold in circulation. While still doable at the previous circulation amounts, the government decides to get more gold and add 50,000 dollars to the economy because the population has grown. This is a sound reason, and the newer 150,000 in circulation makes everything peachy again. another hundred years passes and the population has doubled, 400 people. the government decides to attain another 50,000 dollars worth of gold, and the total amount of money in circulation is 200,000, everything is peachy for now. Fast forward another fifty years, and the population has grown exponentially. 1000 people are now in the country and the amount of money in circulation sits at 200,000 dollars. The government goest to add money to circulation, but can't as there is no more gold to be added. This means that no matter how large the population in this country of fiction gets, there is always going to be, at most, 200,000 dollars in circulation.
This fatal flaw of a gold standard makes in less than ideal for growing nations in both size of population and size of economy, and to answer such growth, you wouldn't just "print more money" but have to "buy more gold."
With the passage of time and several issues of these notes we would have a series of "new monies" in terms of gold and eventually, demand claims on gold. The degree of success of restoring long-term fiscal confidence will show up clearly in the yield spreads between gold and fiat dollar obligations of the same maturities. Full convertibility would require that the yield spread for all maturities virtually disappear. If they do not, convertibility will be very difficult, probably impossible, to implement.
A second advantage of gold notes is that they are likely to reduce current budget deficits. Treasury gold notes in today's markets could be sold at interest rates at approximately 2% or less. In fact from today's markets one can construct the equivalent of a 22-month gold note yielding 1%, by arbitraging regular Treasury note yields for June 1983 maturities (17%) and the forward delivery premiums of gold (16% annual rate) inferred from June 1983 futures contracts. Presumably five-year note issues would reflect a similar relationship.
I am not saying that a gold standard is the all in one solutions to the current currency, monetary and fiscal problems.But its a better evil than the current system.
In a gold standard regime, the central bank (or currency board or similar authority) uses the tools available (setting interest rates, buying and selling the currency against gold and against other currencies) to maintain an almost constant price for a given amount of gold. For example, if the demand for gold were to rise around the world due to one circumstance or another such as economic uncertainty, the currency authority would have to contract the supply of money (raising interest rates or exchanging gold for currency) to maintain the gold standard. Or, if the demand for gold were falling, the currency authority would have to expand the money supply to maintain the gold price (lowering interest rates or exchanging currency for gold).
Long term changes in the demand for gold versus the currency would be managed through interest rate changes, while short term changes would be managed through gold-currency exchanges or currency exchanges between nations. Trade deficits or surpluses would also have an effect here with their own policy tools.
I am still studying the time when German turned to the gold standard after its hyperinflation craze. That can give some pointers on the implementation of such a system in the USA.
Germany, had a hyperinflation from 1919 to 1923. At the end, the mark was worth one trillionth of its original value. Afterwards, the new German mark was pegged to gold, at its prewar parity.
How did this happen? How did the new gold standard emerge?
The first thing that happened was that Gustav Stresemann was appointed Chancellor on Aug. 13, 1923. On Sept. 26, 1923, in the midst of hyperinflationary chaos, he suspended seven articles of the Weimar constitution, and declared a State of Emergency. This effectively rendered Germany a military dictatorship.
On Oct. 15, the Rentenmark Ordinance was published, which allowed for a new currency to be issued by a new institution, the Rentenbank, equivalent in value to the gold-linked prewar mark, or "gold mark." It was the invention of Hans Luther of the Finance Ministry, and Hjalmar Schacht, the managing director of the Darmstadt & National Bank.
Hyperinflation reached its ultimate end. Farmers refused to take any form of paper money for their crops. The harvest of 1923 sat in farmers" warehouses while supermarkets in the cities were empty. Starvation and civil unrest loomed.
The state itself threatened to break apart. On Nov. 9, 1923, Nazi Party leader Adolf Hitler attempted to seize power in Munich, and from there march on Berlin, in the model of Benito Mussolini"s successful March on Rome in October 1922.
On Nov. 13, Schacht was appointed Commissioner for National Currency. On Nov. 15, printing of the devalued mark ceased. On Nov. 16, the very first rentenmarks, linked to gold at the prewar parity, began to emerge. On Nov. 20, the devalued mark was pegged to the rentenmark at a trillion to one. The hyperinflation was over, and Germany was back on a gold standard system.
The Rentenbank apparently held no gold bullion. Instead, the bank held mostly debt, in the form of mortgages on property and bonds on German industry. The rentenmark was not redeemable in gold.
The main thing, with the Rentenmark, was that its value remained equivalent to a "gold mark." This was accomplished by reducing its issuance if there was any threat of its market value falling below that parity. The mechanism was simple adjustment of supply.
Schacht himself had no staff. Adam Fergusson, in his book When Money Dies, describes how Schacht operated:
"Dr. Schacht sat in a single room which had once been used as a charwoman"s cupboard, looking on to a backyard in the Ministry of Finance. From this post he transformed the German financial system from chaos to stability in less than a week. His secretary, Fraulein Steffeck, was later asked to describe his work as commissioner:
What did he do? He sat on his chair and smoked in his little dark room which still smelled of old floor cloths. Did he read letters? No, he read no letters. Did he write letters? No, he wrote no letters. He telephoned a great deal--he telephoned in every direction and to every German or foreign place that had anything to do with money and foreign exchange as well as with the Reichsbank and the Finance Minister. And he smoked. We usually went home late, often by the last suburban train, traveling third class. Apart from that he did nothing."
Farmers accepted the rentenmark in trade for their crop, and the crisis was resolved. A new reichsmark replaced the rentenmark a year later, at 1:1, putting Germany"s return to a gold standard on a more long-term basis.
So we see that it takes almost nothing to adopt a gold standard system. The Rentenbank held little if any gold. The rentenmark was not convertible into gold. No preparation was necessary. No staff was necessary. No time was necessary. The only thing that was necessary was a clear policy, namely to maintain the value of the rentenmark equivalent to a prewar gold mark, and a clear means to accomplish this policy, by restricting the supply of rentenmarks to maintain its value.
Germany was not the only country to suffer from hyperinflation after the First World War. Austria returned to gold in 1923, Poland in 1924, and Hungary in 1925.
It amuses me today when people invent this, that or another reason why a gold standard system is "impossible." What they usually mean by that is: they don"t know how to do it. You can"t be in a worse position than Germany on Nov. 15, 1923.
If it was possible then, it is possible at any time.
A free market gold standard [or similar] is not something that is instituted by a central party, but something that could (and would) gradually evolve and take over from fiat money in the absence of onerous restrictions.
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