We Should Have A Gold Standard in the USA
Debate Rounds (5)
"the system by which the value of a currency was defined in terms of gold, for which the currency could be exchanged."
How much is that dollar in your wallet worth? If money can be worth anything, it can just as easily be worth nothing.
This wasn"t always the case. For nearly 200 years, the value of the U.S. Dollar defined by a certain amount of gold, or the "gold standard." That system collapsed in 1968 when we reduced our gold reserves and removed the requirement to maintain at least 25% of gold on hand to satisfy Federal Reserve notes.
In 1971, President Richard Nixon officially took the United States off the gold standard.
What has happened since we left the gold standard? Inflation has run rampant " a dollar today can buy only one-sixth of what it could buy in 1971.
Between the end of World War II and 1967, when America began edging away from the gold standard, annual inflation averaged less than 2 percent. But between 1967 and 2009, inflation more than doubled to average almost 4.5 percent.
Your money doesn"t go as far as it used to. The gold standard is crucial to limiting the size of government. Today Congress has the equivalent of a credit card. Lawmakers can consistently spend more than we have, on the assumption that the government can print more money to pay down the debt if there comes a time when we can"t borrow it. The gold standard, however, forces Congress to use a "debit" card. It restricts the government to spend only what we have.
The gold standard also helps the economy maintain an even keel. As long as the market is allowed to function freely, recessions are shorter and milder. Unemployment rates would be consistently lower, and any swings would be far less rapid.
In 1967, future Federal Reserve Chairman Alan Greenspan warned that leaving the gold standard would leave Americans vulnerable to forces that would devalue everything they own:
In the absence of the gold standard, there is no way to protect savings from confiscation through inflation " Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights.
The "floating" currency we use today allows politicians to pursue policies that lead to wealth-destroying inflation. It"s simply not sustainable. That"s one reason why Steve Forbes recently predicted that we will see a return to the gold standard within five years.
I'm going to start by going through some rebuttal, and then move into my arguments against instituting the gold standard in the U.S.
Pro talks about inflation. For one thing, he ignores the reasoning by which Nixon took us off the gold standard, but I'll get into that later. For now, let's just focus on the facts he cites.
"What has happened since we left the gold standard? Inflation has run rampant."
I'm not sure where Pro is getting his information here because he doesn't cite it, but it's not true.
Here's CPI inflation under the gold standard:
And here's it since:
Yes, inflation has happened since the 1970's, but currency is most chaotic under the gold standard. And it doesn't look much different over the remaining years:
The highest inflation spikes on that chart, by far, are during the 1910's and late 1940's. That nice low average inflation rate that Con cites between 1945 and 1967 contains some of the most volatile periods in the history of U.S. currency. How does this support the idea that Pro is espousing here? Should we expect some measure of consistency when, at no point in our history, was our currency stable under the gold standard? The coefficient of variation, which reflects the level of short-term instability, is much higher during our history on the gold standard than our time off of it. In fact, as economist Michael D. Bordo explains: "For the United States between 1879 and 1913, the coefficient was 17.0, which is quite high. Between 1946 and 1990 it was only 0.8.". I'll get into this more later, but whether it's inflation or deflation, massive changes in the value of currency are far more problematic than small changes over time.
Pro states that it is crucial to limiting the size of government. Firstly, he doesn't say why a larger government is harmful, or delineate at what point government becomes too large. Second, this is just baffling to me. When the Bretton Woods system was used to artificially inflate the price of gold by FDR, it shows that this is only a perceptual limitation. The U.S. government holds the largest supply of gold in the country by far. They aren't limited by it. Later, I'll present reasons why, even if it is restricted as Pro says, it does more harm than good.
Pro says that the gold standard shortens recessions. First off, I don't think simply limiting the length of recessions makes it significantly better, especially when more recessions happened in the same length of time under the gold standard as have since. From 1928-1971, 8 recessions have occurred. From 1971-2014, 6 recessions have occurred. More recessions isn't better. Second, this ignores history. Let's limit our analysis to the 1900's and after:
Most recessions during the time that we had a gold standard were 1-3 years long, most of them being approx. 2 years long. The Great Depression, the longest and most devastating economic collapse in our history, occurred at a time when we had the gold standard. This matches the length of recessions during the period since 1971. Most recessions have lasted about 2 years or less, and we haven't experienced anything akin to the Great Depression.
Pro says that the gold standard will remain consistently low. Again, I'm at a loss for how he justifies this.
That chart showcases relatively consistent level of unemployment below 10% across all time periods aside from the Great Depression and the end of the 1800's. If anything, volatility is far more common under the gold standard, given this data.
Now, let's look into why else the gold standard won't work.
Let's assume that the gold standard will limit spending. If such is the case, the money supply will not be able to be adjusted to changing economic conditions. "The Federal Reserve came into existence in 1913 because 50 years on the gold standard convinced Americans that we needed ' flexible currency,' as noted in the preamble of the act." Combating inflation or deflation will be impossible. Handling persistent unemployment becomes impossible. Why? "Because in that world, monetary policy by definition instead of being countercyclical becomes procyclical." That's from Nouriel Roubini, co-founder and chairman of Roubini Global Economics. He explains further:
"Roubini asks us to imagine two countries: One that's growing very quickly, and one that's growing very slowly.
The economy that is growing quickly would tend to "overheat""an economic phenomenon characterized by accelerated growth, inflation and the potential for asset bubbles. In the economy that is growing more slowly, there would be a tendency toward deflationary pressure and recession. So, instead of having a central bank with the capacity to successfully counter-balance these tendencies, an economy with a fixed exchange rate regime would continue to reinforce the existing negative trends in the business cycle."
He's not the only one who believes this " it's pretty mainstream. In fact, Bordo, the economist I mentioned earlier, did some analysis using the coefficient of variation to analyze output and unemployment by comparison. "The coefficient of variation for real output was 3.5 between 1879 and 1913, and only 1.5 between 1946 and 1990. Not coincidentally, since the government could not have discretion over monetary policy, unemployment was higher during the gold standard. It averaged 6.8 percent in the United States between 1879 and 1913 versus 5.6 percent between 1946 and 1990."
Now, what are some other major problems? Well, as the economy grows, we need more gold. Otherwise, price level, including wages and values of commodities, will fall. Sounds great, right? Not really. Deflation like this tends to have even harsher effects on an economy than inflation. It deters consumption spending and investment for the simple reason that people put off buying things because they think prices will decrease. It happened in the U.S. Consumer prices decreased by 35% between 1870 and 1900. This was intensely damaging for farmers and many business owners, whose prices were forced down. Industrial workers suffered reduced wages. Almost half of this time is considered to have been in recession. For a more current example, all you need for an example is Japan since 1980. It's suffered deflation and has practically no growth to show for it.
It's not just recessions. The U.S. economy was also more prone to financial crisis. This is because gold doesn't flow into a country consistently " its flow changes based on interest rates, government pressure, financial or political emergencies and demand for non-monetary uses of gold. When this flow goes away from the U.S., it raises interest rates and cuts off credit. When it goes toward us, we have excessive liquidity, causing banks to take more risks and substantial rises in prices. Gold production is also important to this " the Alaska Gold Rush dramatically affected prices. Of course, we don't mine gold in the U.S. anymore, so now we would have to worry about who is mining, which is mainly China. That means they would control our currency and, thus, our economy. As we develop new gold extraction processes, this production becomes even more volatile, which just exacerbates the problem.
Since 1971, the gold standard has not been used by any major economy. With the problems I've already presented, there are plenty of good reasons why. But another part of the reason for this is because all countries on the gold standard are forced to maintain fixed exchange rates. The result is that any country on the gold standard will badly affect others that are also on it. Every country on the gold standard is therefore dependent on every other, so it's not just our bad economic policy we have to worry about, but everyone else who follows our lead.
Pro's case also completely ignores why we went off the gold standard to begin with.
"If we could turn the clock back maybe 150 years then it"s possible for the U.S. dollar to be linked to gold," said Moorad Choudhry, treasurer of the corporate banking division of RBS. "I think it"s absolutely nonsensical. It won"t work. There"s a very good reason (the U.S.) unhooked it in 1971. It"s because their deficit didn"t enable them to maintain (the gold standard) with their supply of gold.
That problem would be an order of magnitude worse today.
The U.S. holds"8,133 metric tons of gold reserves, according to the World Gold Council, or about 261 million ounces. At current market prices of about $1,667 an ounce, those reserves are worth roughly $435 billion.
That would cover less than 3 percent of the $15.9 trillion in Treasury debt outstanding. In fact"all the worlds" reserves -- estimated at 31,353 tons, or just over a billion ounces -- is not nearly enough to cover the outstanding U.S. Debt."
Ronald Reagan's own gold commission recommended against the idea in March 1982 because of the sheer amount of money that the U.S. Would have to be willing and ready to exchange for gold or risk a Great Depression-like collapse " about $10 trillion.
With that, I'll leave off and allow my opponent to respond and defend his case.
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1 votes has been placed for this debate.
Vote Placed by Krazzy_Player 2 years ago
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