NationStates Jolt Archive

I'm going to set aside my hatred for petroleum's use in energy production as the staus quo. But after watching a documentary (http://www.thelastoutpost.com/site/1489/default.aspx) about the fiat currency system in place in the US, I have been thinking of a practical reinstitution of something like the gold standard. Since gold is sort of out of touch with people today, I think petroleum may be a very useful medium to back currency. Two barrels(42 gallons/160 litres) of petroleum can buy about a week's groceries for an average family of four. So I say set the dollar to be backed by one gallon of petroleum. Then it would all fall into place.

Petroleum drives the economy of the US already, why not make it fully official?

Does this make any sense at all? Is it feasible? Should it be done (or at least the idea of getting off fiat currency)?

What do we d when we run out of petroleum?

One cannot rest one's economy on a high-demand consumable resource that is acquired predominantly by import. 'nuff said.

Is there a way we could back the economy on Paris Hilton? She's domestic.

What do we d when we run out of petroleum?

It's more the idea then that fact. It would be based on the main source of energy then.

It would make just as much sense as a goldstandard, probably even more. Petroleum is actually useful, gold is just universally agreed to be pretty (much like myself, but a New Limacon-standard would be inefficient). Of course, I don't really support having anything as the standard, so I wouldn't like oil anymore than gold.

Gold you can stockpile. It cannot be physically destroyed. A bit goes to landfill.
Petroleum is only valuable in the process of being destroyed. Once burnt, it is gone.

The value of gold is based on how much of it there is.
The value of petrol is based on supply and demand.

No.

Gold you can stockpile. It cannot be physically destroyed. A bit goes to landfill.
Petroleum is only valuable in the process of being destroyed. Once burnt, it is gone.

The value of gold is based on how much of it there is.
The value of petrol is based on supply and demand.

No.

Im gonna have to agree with that. on top of the fact that people would be using gallons of petrolium for currency, everyone would have to have massive vehicles to transport thier, for lack of a better word, money. and those vehicles would be consuming petro as well as moving and storing it. Banks would have to be freakin huge, and what if there was a fire, not only would the area have to be evacuated so people dont suffocate and get cancer and all that crap, but it would be gone. all of it. :rolleyes:

I think most of the world gets along fine on fiat money. :p

Fiat money is fine as long as you don't overuse it. It can be as stable and hold its value as well as a gold-backed currency if the government manages growth in the money supply at a constant rate and avoids trying to manipulate the economy with monetary policy. However, energy-backed currencies may have use in the future as energy use increases due to the demand placed on it by new technologies and economic growth. Space expansion would make that especially pertinent since energy has practical utility that would be far more useful to colonists or mining outposts than lumps of shiny rock.

No, oil is not the same as gold. Not feasible.


The value of gold is based on how much of it there is.
I.e., supply of gold? ;) Value is determined by the interplay of supply and demand, after all.

I think most of the world gets along fine on fiat money. :p

No.

Fiat money is fine as long as

It's never fine.

A petroleum-backed economy in the U.S. would be suicide. One of the main reasons we are concerned about the current state of the dollar is that it is being usurped by stronger currencies like the euro; if trade organizations like the OPEC abandoned the dollar as their standard, other nations could drive us into bankruptcy by way of our national debt. A petroleum-backed dollar would be even more vulnerable to the OPEC nations.

What do we d when we run out of petroleum?

Not going to happen. Since now fuel can be made from agricultural products it could be done. That also may level out the wild fluctuations in crude oil prices. If oil goes up then the US gets richer.

A petroleum-backed economy in the U.S. would be suicide. One of the main reasons we are concerned about the current state of the dollar is that it is being usurped by stronger currencies like the euro; if trade organizations like the OPEC abandoned the dollar as their standard, other nations could drive us into bankruptcy by way of our national debt. A petroleum-backed dollar would be even more vulnerable to the OPEC nations.

OPEC nations only deals with oil from the ground. There is oil from crops and non-OPEC nations. Plus OPEC would only kill itself if it lowered oil prices drastically.

Is there a way we could back the economy on Paris Hilton? She's domestic.

Our economy could never withstand a raging case of Chlamydia or crabs.

I'm going to set aside my hatred for petroleum's use in energy production as the staus quo. But after watching a documentary (http://www.thelastoutpost.com/site/1489/default.aspx) about the fiat currency system in place in the US, I have been thinking of a practical reinstitution of something like the gold standard. Since gold is sort of out of touch with people today, I think petroleum may be a very useful medium to back currency. Two barrels(42 gallons/160 litres) of petroleum can buy about a week's groceries for an average family of four. So I say set the dollar to be backed by one gallon of petroleum. Then it would all fall into place.

Petroleum drives the economy of the US already, why not make it fully official?

Does this make any sense at all? Is it feasible? Should it be done (or at least the idea of getting off fiat currency)?


What about a land-backed economy? Our currency is backed by a slice of "Federal Land". There is plenty of it and it does have a tangible value to it.

Backing money with a commodity that is increasingly valuable and scarce means money will be increasingly valuable and scarce.

My prediction is that such an approach would lead to the Great Depression MkII, when interest rates sky rocket.

It's never fine.

The past 60 years would disagree with you. The economy is stronger and more stable now than it was under the gold standard.

Gold you can stockpile. It cannot be physically destroyed. A bit goes to landfill.
Petroleum is only valuable in the process of being destroyed. Once burnt, it is gone.

The value of gold is based on how much of it there is.
The value of petrol is based on supply and demand.

No.
When the US had the gold standard, you could exchange money for gold at the bank. There could be something similar here.

Not going to happen. Since now fuel can be made from agricultural products it could be done. That also may level out the wild fluctuations in crude oil prices. If oil goes up then the US gets richer.You may want to look into how much fossil fuel (ie coal) is used to produce that argifuel. It's actually more costly than petrol :p

When the US had the gold standard, you could exchange money for gold at the bank. There could be something similar here.

Wouldn't that defeat the purpose of gasoline stations? Another problem, of course, is that crude oil is useless for individuals; you need refineries to turn it in to something useful.

It reminds me of the early Jamestown economy, possibly the most famous example of a non-gold commodity currency. They used the hot tobacco crop as their currency, which inflated with the rising tabacco costs. However, if it dropped for any reason, they were in big trouble.
That's part of why I think a petroleum standard wouldn't work, especially because it is so incredibly volatile. Another reason is that petroleum, like any commodity, is finite, and by its very nature, terminates from existance when it's burned. This just doesn't limit the money supply, but can also restrict trade and liquidity. The current system has its flaws, but allows for economic growth bar none.

Im gonna have to agree with that. on top of the fact that people would be using gallons of petrolium for currency, everyone would have to have massive vehicles to transport thier, for lack of a better word, money. and those vehicles would be consuming petro as well as moving and storing it. Banks would have to be freakin huge, and what if there was a fire, not only would the area have to be evacuated so people dont suffocate and get cancer and all that crap, but it would be gone. all of it. :rolleyes:

You really don't understand economics at all, do you? :confused:

It's more the idea then that fact. It would be based on the main source of energy then.

So you'd base the economy on the sun or wind, then?

The reason why gold was used for currency is because it has a fairly stable supply and is nearly impossible to destroy. Thus, the quantity of gold is relatively static. If you want your currency backed by gold, that means you have to have that amount of gold held somewhere (like in Fort Knox) to back up the supposed value.

If you wanted to base the dollar on crude oil, then you have several problems.
What kind of crude? Oil is not some homogeneous substance - even light sweet crude is just that - crude.

You would also have to keep the total value of your currency in the form of crude oil stored somewhere. Essentially you are asking to have the government store trillions of barrels of oil somewhere just stockpiling it to be the total value of the currency.

The price of oil fluctuates quite dramatically - the common person in the world would have very little sense of what the dollar was worth on any given day.

Common currencies came into being to provide a relatively stable medium of exchange - highly volatile values are ludicrous.

There is absolutely nothing wrong with fiat currency if you have a government committed to keeping within reasonable limits of fluctuation. A fixed total dollars is not a wise situation anyway - a 1.8% rate of inflation is actually good for the economy as it gives it a little breathing room and allows for better growth. If you really wanted a hard limit on the number of dollars, then you really would be turning the economy into a zero sum game - and that isn't good for anyone.

Im gonna have to agree with that. on top of the fact that people would be using gallons of petrolium for currency, everyone would have to have massive vehicles to transport thier, for lack of a better word, money. and those vehicles would be consuming petro as well as moving and storing it. Banks would have to be freakin huge, and what if there was a fire, not only would the area have to be evacuated so people dont suffocate and get cancer and all that crap, but it would be gone. all of it. :rolleyes:

You're an idiot.

Backing money with a commodity that is increasingly valuable and scarce means money will be increasingly valuable and scarce.

My prediction is that such an approach would lead to the Great Depression MkII, when interest rates sky rocket.

Absolutely not. In fact, fiat is partially why the Great Depression occurred. If there is a stable, trustable medium, such as gold, the worst you'd have is panics every now and then because of people trying to corner markets. If the US plunged into anarchy, people would resort to gold or something similar, not a bunch of paper. Also, if a government collapses, the coined gold can still be used for full value, which fiat paper can't

The past 60 years would disagree with you. The economy is stronger and more stable now than it was under the gold standard.

Yes, and our "money" is worth a tiny fraction of what it was then. Moreover, fiat currency allows the government to spend money it does not have (simply by printing more), whereas if we had a gold standard, the government could only increase spending by increasing taxes.

Yes, and our "money" is worth a tiny fraction of what it was then. Moreover, fiat currency allows the government to spend money it does not have (simply by printing more), whereas if we had a gold standard, the government could only increase spending by increasing taxes.

Uh? What about doing what it does now ... borrow?

I think most of the world gets along fine on fiat money. :p

http://www.geocities.com/rooksmith/One_Million_Turkish_Lira.jpg

Oh really....there was no net inflation between 1815 and 1939; mainly because of the gold standard. Had it not been dropped, I believe it would still be possible to get a litre of milk for four cents and my newspaper would only cost eight cents.

Absolutely not. In fact, fiat is partially why the Great Depression occurred. If there is a stable, trustable medium, such as gold, the worst you'd have is panics every now and then because of people trying to corner markets. If the US plunged into anarchy, people would resort to gold or something similar, not a bunch of paper. Also, if a government collapses, the coined gold can still be used for full value, which fiat paper can't

Actually the desire to maintain the gold standard caused the Great Depression. In the US, Hoover allowed the money supply to contract by 1/2, which created depreciation, which caused a real interest rate of 25%, which had a massive downward effect on US income.

Additionally it created a transmission mechanism to feed negative shocks between the US and the rest of the world.

And if your worried about the government collapsing; I think you'll find a government backed gold standard won't help you, as the government will no longer exist to give you your gold.


From Wikipedia: More recent research, by economists such as Peter Temin, Ben Bernanke and Barry Eichengreen, has focused on the constraints policy makers were under at the time of the Depression. In this view, the constraints of the inter-war gold standard magnified the initial economic shock and were a significant obstacle to any actions that would ameliorate the growing Depression. The initial destabilizing shock may have originated with the Wall Street Crash of 1929 in the U.S., but it was the gold standard system that transmitted the problem to the rest of the world.

According to their conclusions, during a time of crisis, policy makers may have wanted to loosen monetary and fiscal policy, but such action would threaten the countries’ ability to maintain its obligation to exchange gold at its contractual rate. Therefore, governments had their hands tied as the economies collapsed, unless they abandoned their currency’s link to gold. As the Depression worsened, many countries started to abandon the gold standard, and those that abandoned it earlier suffered less from deflation and tended to recover more quickly.

Farmina, although the gold standard may not have helped the situation, what probably caused the Great Depression more than anything was the Smoot-Hawley Tariff. Prior to the passing of that law, the US economy was going down slightly. After that law was passed, that slight downturn turned nasty, why? Because global trade ground to a halt.

In saying that, a properly managed gold standard system should be able to avoid situations such as the Great Depression. How do I propose it is done? Easy, have 125% backing for the amount of currency in circulation (i.e. there is $1.25 of gold for every $1). That would allow the Federal Reserve or Reserve Bank to increase the amount of currency in circulation if there is an abnormally high level of deflation without any problems in regard to the Federal Reserve or Reserve Bank meeting its obligations.

The reason why gold was used for currency is because it has a fairly stable supply and is nearly impossible to destroy. Thus, the quantity of gold is relatively static. If you want your currency backed by gold, that means you have to have that amount of gold held somewhere (like in Fort Knox) to back up the supposed value.
Exactly. It has a relatively stable value. Oil, on the other hand, most certainly does not.

Uh? What about doing what it does now ... borrow?
How do you think it repays said borrowing?

In saying that, a properly managed gold standard system should be able to avoid situations such as the Great Depression. How do I propose it is done? Easy, have 125% backing for the amount of currency in circulation (i.e. there is $1.25 of gold for every $1). That would allow the Federal Reserve or Reserve Bank to increase the amount of currency in circulation if there is an abnormally high level of deflation without any problems in regard to the Federal Reserve or Reserve Bank meeting its obligations.

What do you do when 125% doesn't give you enough currency? 150%. Then what, 200%? The currency is no longer really backed by a commodity once you start fiddling with backing ratios. If people want to cash out their cash for, suddenly you have a situation where only a certain proportion of people will be able to get gold. We saw this with the collapse of Bretton-Woods in the 70s, when the US government was increasing currency faster than gold was becoming available.

Gold supplies, and even more so energy supplies, are simply not going to grow fast enough and place restrictive rules on monetary policy that can be disasterous.

And if your worried about the government collapsing; I think you'll find a government backed gold standard won't help you, as the government will no longer exist to give you your gold.

Not if you had the gold coin and it is possible for banks to remain open to exchange paper for gold, maybe at a reduced ratio to ensure their security, but still.

One problem that really should be fixed is the Federal Reserve. The government should print its own money and not borrow.

One problem that really should be fixed is the Federal Reserve. The government should print its own money and not borrow.

I agree the Federal Reserve should be looked at in how it runs. I think there should be a better way. One of the ways is what you just described. However what is the biggest pitfall to printing more money rather then "borrowing"? First off I would say that runaway spending could be an even bigger problem then it already is. Devaluation of the currency and how that would be affected by just printing more cash when you need it. I think the only way you could do that effectively would be to have a balanced budget requirement in the constitution.

hmm...

http://upload.wikimedia.org/wikipedia/commons/thumb/2/26/Gascoupon.png/320px-Gascoupon.png

Not if you had the gold coin and it is possible for banks to remain open to exchange paper for gold, maybe at a reduced ratio to ensure their security, but still.

One problem that really should be fixed is the Federal Reserve. The government should print its own money and not borrow.

I wouldn't trust banks either if the government collapsed. Why would they want to give up gold for money everyone is trying to get rid of?

You'll still have a lot of difficulty finding enough gold to cover all currency liabilities of the Federal Reserve and to replace all the coins with gold coins.

I'm not sure what you mean by letting government's print their own money; but if you mean it literally, I'd be rather worried. Governments that control their own presses tend to over-print, which causes excessive inflation. If the government recieves a dividend from managed central banks, this is a far better idea.

What do you do when 125% doesn't give you enough currency? 150%. Then what, 200%? The currency is no longer really backed by a commodity once you start fiddling with backing ratios. If people want to cash out their cash for, suddenly you have a situation where only a certain proportion of people will be able to get gold. We saw this with the collapse of Bretton-Woods in the 70s, when the US government was increasing currency faster than gold was becoming available.

Gold supplies, and even more so energy supplies, are simply not going to grow fast enough and place restrictive rules on monetary policy that can be disasterous.

Having a supply of gold 25% greater than the amount of paper money in circulation would mean that the money supply could be increased by 25% very quickly. Name for me a situation where the money supply has had to be increased by a level greater than 25%? I cannot remember such a situation. Once the emergency has passed, then the money can be slowly withdrawn from circulation; certainly the paper currency produced during the US Civil War was withdrawn without causing a massive economic collapse.

What the problem was, as you rightly pointed out, is that the amount of paper money in circulation was greater than the amount of gold in the vault. Once you start using leverage in such a fashion, you are going to have problems.

If a gold standard was organised properly, then it would not be disasterous; if it were, it would probably be far less disasterous than what happened in the absence of a gold standard - ridiculous inflation. Had the gold standard been kept, then perhaps I would be able to go to the shop and buy a litre of milk for four cents.

Having a supply of gold 25% greater than the amount of paper money in circulation would mean that the money supply could be increased by 25% very quickly. Name for me a situation where the money supply has had to be increased by a level greater than 25%? I cannot remember such a situation. Once the emergency has passed, then the money can be slowly withdrawn from circulation; certainly the paper currency produced during the US Civil War was withdrawn without causing a massive economic collapse.

What the problem was, as you rightly pointed out, is that the amount of paper money in circulation was greater than the amount of gold in the vault. Once you start using leverage in such a fashion, you are going to have problems.

If a gold standard was organised properly, then it would not be disasterous; if it were, it would probably be far less disasterous than what happened in the absence of a gold standard - ridiculous inflation. Had the gold standard been kept, then perhaps I would be able to go to the shop and buy a litre of milk for four cents.

Oh I get you know. But to have the extra gold backing means you need to find more gold. To begin with this is an expense; secondly higher government gold holdings will imply scarcity in the gold markets.

With regard to the post-civil war period; yes the economy didn't collapse. This wasn't particularly suprising due to the huge amounts of reconstruction and pent-up saving that were consumed.

Backed currency is plausible if the government maintains control; ie the backed commodity isn't super-exchangable for currency, and the backing commodity is readily availabe at the appropriate levels for neccisary flexibility. This is not the case with gold or petroleum. Additionally backing commodities that are suitable as backing commodities tend be worthless than fiat money, meaning the benefit is minimal.

And I didn't realise inflation in the US was ridiculous; I understood it to be under control. I'd note that economic modelling shows that in the absence of inflation during 2001-2002, the recession in the US would have been far more severe.

EDIT Mk2: I did some quick sums and screwed them up the first time. The US alone would need about 66,000 metric tonnes of gold to back its M1 money supply, certis paribus. US gold holdings would need to increase by about 3,000-5,000 metric tonnes a year. In 2001, it was estimated that all the gold ever mined totaled 145,000 tonnes.

Come on... forget the fiat cur rency , petroleum... Lets :sniper: lidians... Lets act like money never found... Just lets exchange.. like ;
"Hey I can make soap , you can make bread... Take the soap , give me the bread !"

hmm...

http://upload.wikimedia.org/wikipedia/commons/thumb/2/26/Gascoupon.png/320px-Gascoupon.png

You win the thread.

Oh I get you know. But to have the extra gold backing means you need to find more gold. To begin with this is an expense; secondly higher government gold holdings will imply scarcity in the gold markets.

And scarcity is bad how?? Also, since it is a stock, gold is never an expense; unless you use it in the manufacture of goods and services (highly unlikely)

With regard to the post-civil war period; yes the economy didn't collapse. This wasn't particularly suprising due to the huge amounts of reconstruction and pent-up saving that were consumed.

Yes, but bear in mind that this occurred during a time when the United States government had to take millions of dollars of currency out of circulation

Backed currency is plausible if the government maintains control; ie the backed commodity isn't super-exchangable for currency, and the backing commodity is readily availabe at the appropriate levels for neccisary flexibility. This is not the case with gold or petroleum. Additionally backing commodities that are suitable as backing commodities tend be worthless than fiat money, meaning the benefit is minimal.

How about including silver in the mix? After all, it was used as currency right up until the 1960s. Silver has a large level of supply and can be quite readily available.

And I didn't realise inflation in the US was ridiculous; I understood it to be under control. I'd note that economic modelling shows that in the absence of inflation during 2001-2002, the recession in the US would have been far more severe.

Between 1815 and 1939, prices did not move at all; the price that a person prior to World War II saw was the same as the price that a person at the end of the Napoleonic Wars saw. Between 1816 and 1920, British coins had stayed the same size with the same metallic composition; without any problems. However, since then, things have not been the same.

In the United States, the CPI was at 18.2 in January 1946; in May this year, it was at 207.95 - an 11 fold increase. In Great Britain, the CPI was at 27.0 in 1946; in 2003 it was at 715.2 - a 26 fold increase.

Of course, I could look up other countries, however, you can see that inflation has clearly not been under control - this is an increase in prices unprecedented in world history.

If inflation had been under control, then perhaps I could go down to my local supermarket and purchase a litre of milk for 4 cents - of course I cannot, indeed, I cannot even spend 4 cents these days; in New Zealand, we don't have 1, 2 or 5 cent coins anymore, the victims of inflation.

On my second point, currency does not even maintain its same size or metallic composition for long anymore; name me a coin, any coin, that still uses the same metallic composition and is the same size as it was a hundred years ago.

In terms of the 2001/02 recession in the United States, that is what proper use of Keynesian economics is for - during bad economic times, you borrow, boost the money supply and avoid recession. During good economic times, you cut the money supply slowly and repay. Also, my 125% idea would allow the money supply to be discretely increased without having significant negative impact on the gold standard system.

EDIT Mk2: I did some quick sums and screwed them up the first time. The US alone would need about 66,000 metric tonnes of gold to back its M1 money supply, certis paribus. US gold holdings would need to increase by about 3,000-5,000 metric tonnes a year. In 2001, it was estimated that all the gold ever mined totaled 145,000 tonnes.

Well, obviously there is too much paper money in circulation. If you wanted to return to a gold standard, then you would need to cut the amount of paper money in circulation, using government revenue (after all, government revenue was artificially boosted in the 1970s by letting the printing presses go loose). Yes, it would be unpopular, however, the amount of money in circulation in the U.S. is only about 25% of annual GDP, so it would not come at significant expense to the U.S. Government, and anyway, since currency in circulation is debt, they would be repaying the debt.

Suppose I want to buy rice from a farmer in Thailand. We agree a price. I take my fiat money to a bank and they change it into Thai Baht and pay the farmer with it. (Perhaps I use a bank account or some third currency, but it makes no difference.) Perhaps the farmer would rather have my dollars, in which case it's even simpler.

I see four flexible prices or rates in this simple market scenario: the price I'm willing to pay, the strength of the currency I have to spend, the strength of the currency the farmer is being paid in, and the price the farmer wants for his rice.

I'm at a loss to understand how setting one of those figures to be equal to the value of some entirely other commodity (gold or oil) is going to optimize that market. I don't think it even makes it simpler.

Well the Kenyesian theory points out a couple problems with fiat and gold standard. What we need is a tri-standard backed currency platinium, gold, and silver. silver is in a large amount US has 10000 tonnes in gold but no platinium which is more rare and expensive then gold.

Exactly. It has a relatively stable value. Oil, on the other hand, most certainly does not.

Gold does not have a relatively stable value. In the past ten years or so its price has nearly tripled. I would not call that stable.

Suppose I want to buy rice from a farmer in Thailand. We agree a price. I take my fiat money to a bank and they change it into Thai Baht and pay the farmer with it. (Perhaps I use a bank account or some third currency, but it makes no difference.) Perhaps the farmer would rather have my dollars, in which case it's even simpler.

I see four flexible prices or rates in this simple market scenario: the price I'm willing to pay, the strength of the currency I have to spend, the strength of the currency the farmer is being paid in, and the price the farmer wants for his rice.

I'm at a loss to understand how setting one of those figures to be equal to the value of some entirely other commodity (gold or oil) is going to optimize that market. I don't think it even makes it simpler.

My support for a gold standard is not for the reasons that you expressed, but for the simple reason that it completely avoids inflation. Name me a country that has not had ridiculous inflation in the absence of the gold standard, and name me a country that had ridiculous inflation while they had the gold standard.

Obviously my friend, you are a supporter of inflation. I am not.

Gold does not have a relatively stable value. In the past ten years or so its price has nearly tripled. I would not call that stable.

The tripling of the market price for Gold was caused by a decrease in the market price for US Dollars. If you adjusted the price of Gold for inflation, you would notice that its market price has stayed reasonably static.

Suppose I want to buy rice from a farmer in Thailand. We agree a price. I take my fiat money to a bank and they change it into Thai Baht and pay the farmer with it. (Perhaps I use a bank account or some third currency, but it makes no difference.) Perhaps the farmer would rather have my dollars, in which case it's even simpler.

I see four flexible prices or rates in this simple market scenario: the price I'm willing to pay, the strength of the currency I have to spend, the strength of the currency the farmer is being paid in, and the price the farmer wants for his rice.

I'm at a loss to understand how setting one of those figures to be equal to the value of some entirely other commodity (gold or oil) is going to optimize that market. I don't think it even makes it simpler.

the rice would be the same amount of gold in either country. An ounce of gold might cost $600 here, but $250 in Thailand. But for them it is like $600.

Well, obviously there is too much paper money in circulation. If you wanted to return to a gold standard, then you would need to cut the amount of paper money in circulation, using government revenue (after all, government revenue was artificially boosted in the 1970s by letting the printing presses go loose). Yes, it would be unpopular, however, the amount of money in circulation in the U.S. is only about 25% of annual GDP, so it would not come at significant expense to the U.S. Government, and anyway, since currency in circulation is debt, they would be repaying the debt.

Your problem is that decreasing the supply of money, proportionally increases its value (quantity theory of money). This perfectly inverse relationship means that to back the currency in a credible fashion, would require the same amount of gold, regardless of whether you reduced the money supply.

The tripling of the market price for Gold was caused by a decrease in the market price for US Dollars. If you adjusted the price of Gold for inflation, you would notice that its market price has stayed reasonably static.
The most rapid increase that I observed occurred when the U.S. dollar value was rising.

Also, the quantity of gold is not static. It is falling, since, despite some people's claims to the contrary, gold is actually useful in certain technologies, and thus is used.

Well the Kenyesian theory points out a couple problems with fiat and gold standard. What we need is a tri-standard backed currency platinium, gold, and silver. silver is in a large amount US has 10000 tonnes in gold but no platinium which is more rare and expensive then gold.
Keynesian theory is the last thing I'd put my trust in. However, you are correct.

Gold does not have a relatively stable value. In the past ten years or so its price has nearly tripled. I would not call that stable.

On this (http://www.conciseguidetoeconomics.com/book/goldStandard/):

Yet another ridiculous claim against gold is that the price of gold is too volatile--having run up from $70 in the early 1970's to $850 in 1980 and now selling in 1995 at $350. But this line of analysis exactly reverses the true cause and effect. Gold in terms of paper dollars soared in the late 1970's due to the growing distrust in the paper money when inflation hit double-digits. With the disinflation of the 1980's fears subsided and the price of gold declined. Gold is seen as the safe haven, the hedge against inflation. The actual volatility was in the confidence of the paper dollar; the price of gold in terms of those dollars was an effect.

I was reading this thread and the side discussion about a gold standard caught my eye...

Perhaps I could outline one of the other problems with a gold standard. A gold standard implies that the currency can be exchanged on a fixed rate with gold, the idea being to restrict inflation.

May I point to the Phillips curve that relates inflation to unemployment: A stable price level with 0% inflation correlates to a 5.5% unemployment. If the government is not willing to accept a 5.5% unemployment, we are going to have inflation...

There could also be a problem with credit creation. Introducing a gold standard will mean that people who borrow money from the bank are going to have notes that aren't backed as the person that the bank takes the money from still legally owns the money and thus the gold behind it. The unbacked notes the lender takes are entered into circulation, this can be taken as a negative amount of gold in circulation. To maintain a gold standard, this money has to be recovered, all the time.
Consider this scenario: The borrower defaults on his loan and is declared bankrupt. The bank writes off his debt and thus unbacked notes (negative gold) is in circulation.
Thus, the only way to maintain a strict gold ratio to currency would be to make sure all notes and money in accounts are backed by gold.
This would however, stifle investment as people cannot borrow money to conduct investment. No investment? That's going to hit the economy pretty hard...

By the way, a continually adjusted gold standard is almost the same as today's currency...

Also,
Alexandrian Ptolemais said:
"If you wanted to return to a gold standard, then you would need to cut the amount of paper money in circulation"

Cutting the amount of money in circulation would mean that the value of money would start to go up as the goods' value to money available ratio would go up. This of course leads to a negative real interest rate, I shall describe with an understatement... deflation is not good...

Therefore, the gold standard would create a large impact on the economy as investment decreases dramatically. Apart from implementation problems to top it off... not good again...

May I point to the Phillips curve that relates inflation to unemployment: A stable price level with 0% inflation correlates to a 5.5% unemployment. If the government is not willing to accept a 5.5% unemployment, we are going to have inflation...

A lower level of unemployment does not necessarily mean that there will be inflation; neither will a lower level of inflation mean that there will be unemployment. In recent years, there has only been a noticeable effect on inflation when unemployment becomes extremely low. Also, 5.5% unemployment is not necessarily bad; it depends on the nature of the unemployment - if it is significant levels of long term unemployment, then yes it is bad. If it is short term unemployment, it is not bad for an economy.

There could also be a problem with credit creation. Introducing a gold standard will mean that people who borrow money from the bank are going to have notes that aren't backed as the person that the bank takes the money from still legally owns the money and thus the gold behind it. The unbacked notes the lender takes are entered into circulation, this can be taken as a negative amount of gold in circulation. To maintain a gold standard, this money has to be recovered, all the time.

There may be a problem with credit creation (I am not 100% understanding what you are saying), however, it is far better than giving the Reserve Bank/Federal Reserve the unhindered ability to start up the printing presses.

Consider this scenario: The borrower defaults on his loan and is declared bankrupt. The bank writes off his debt and thus unbacked notes (negative gold) is in circulation.
Thus, the only way to maintain a strict gold ratio to currency would be to make sure all notes and money in accounts are backed by gold.
This would however, stifle investment as people cannot borrow money to conduct investment. No investment? That's going to hit the economy pretty hard...

I am not 100% sure, but during the gold standard era, you still had normal banking activities such as lending and depositing occur, albeit on a lesser scale (mainly because lower and middle class households were users of cash) than today.

Also, it would only need to be the bank notes backed in gold - the money in accounts would be there at the depositors risk; also, during the days of the gold standard (baring the Great Depression), money deposited in bank accounts was generally not lost. This compares to money that is eroded by inflation in a fiat currency situation.

By the way, a continually adjusted gold standard is almost the same as today's currency...

My suggestion would not change the value of gold at all, it would allow for more flexibility in operations. One of the fundamental flaws under the old gold standard was that the amount of gold in the vaults was actually less than the amount of money in circulation (the government taking the line that not all banknotes will suddenly be exchanged for gold), which reduced the level of flexibility available. If you have more gold in the vaults than the amount of money in circulation, then you will not have that problem; and you can increase the amount of money in circulation during negative economic times without preventing fulfilment of the Reserve Bank's/Federal Reserve's obligation; therefore, that would prevent the threat of severe deflation.

Cutting the amount of money in circulation would mean that the value of money would start to go up as the goods' value to money available ratio would go up. This of course leads to a negative real interest rate, I shall describe with an understatement... deflation is not good...

Therefore, the gold standard would create a large impact on the economy as investment decreases dramatically. Apart from implementation problems to top it off... not good again...

Bringing back the gold standard would require a great deal of secretive planning and so on, I do agree, however, cutting the amount of money in circulation can be done very discretely. Also, deflation is not necessarily bad - during much of the 19th Century, there was deflation - that was deflation caused by increases in aggregate supply. Had we kept the gold standard, we would have probably had supply based deflation in the 1990s as well. Demand side deflation and sudden deflation is bad

Also, deflation will at least mean that four cent bottles of milk will be nearer.

The most rapid increase that I observed occurred when the U.S. dollar value was rising.

Errr, the U.S. dollar is falling quite badly at the moment; while during the 1970s and 1980s, other countries had much higher levels of inflation (U.K. had a 26 fold increase in the CPI between 1946 and 2007, compared with the U.S. with an 11 fold increase).

Your problem is that decreasing the supply of money, proportionally increases its value (quantity theory of money). This perfectly inverse relationship means that to back the currency in a credible fashion, would require the same amount of gold, regardless of whether you reduced the money supply

Yes, you do make money more valuable, however, it would increase the level of confidence in the currency and therefore people would tend to decrease their gold holdings in favour of currency holdings - therefore bringing down the price of gold to its long term average (if the price of gold had only increased at the rate of inflation, it would be roughly US$400 today, not nearly US$700) and making it easier to revive a gold standard.

May I point to the Phillips curve that relates inflation to unemployment: A stable price level with 0% inflation correlates to a 5.5% unemployment. If the government is not willing to accept a 5.5% unemployment, we are going to have inflation...
This approach was abandoned in the 60s; there is no Phillip's curve in the sense you speak of.

Cutting the amount of money in circulation would mean that the value of money would start to go up as the goods' value to money available ratio would go up. This of course leads to a negative real interest rate, I shall describe with an understatement... deflation is not good...
Okay you're getting a little confused here. Deflation=bad; correct and contracting the money supply will cause deflation. "Unexpected" contracting of the money supply means HIGHER real interest rates. Deflation can also contribute to higher real interest rates.

Sorry for being unclear about the deflation thing...

What I meant was that implementing a gold standard by taking money off the market would cause deflationary pressure on the economy. As the population experiences falling prices, the expectation of further deflation would set in... leading to the deflationary cycle. The deflationary cycle is what I'm saying is not good...

Hope that clears it up...

Btw, one way to break a deflationary cycle before the expectation gets built in is, paradoxically, print money...

Edit: Hmmm, I didn't know the Phillips curve was abandoned... got that off my text book.

Textbooks tend to use notoriously old theory. Some people still refer to the "expectations augmented" Phillip's curve, which is nothing like the original Phillip's Curve; but even that is rare.

Sorry for being unclear about the deflation thing...

What I meant was that implementing a gold standard by taking money off the market would cause deflationary pressure on the economy. As the population experiences falling prices, the expectation of further deflation would set in... leading to the deflationary cycle. The deflationary cycle is what I'm saying is not good...
This is mainly a problem for debtors. Not the economy at large. Inflation is more pernicious, and is at a constant growth rate now.

Textbooks tend to use notoriously old theory. Some people still refer to the "expectations augmented" Phillip's curve, which is nothing like the original Phillip's Curve; but even that is rare.
That they do.

This is mainly a problem for debtors. Not the economy at large. Inflation is more pernicious, and is at a constant growth rate now.

To Europa Maxima:
<
Deflation is mainly a problem for debtors? Hmmm, but consumers don't spend in expectation of further deflation, thereby causing that very deflation to occur/worsen. If I remember my textbook correctly, that was what happened in Japan... (then again, its my textbook, dunno if I can trust it...)

This sort of cycle can destroy many sectors of the economy, esp. luxury goods and property (high-cost non-essential items). The populace not willing to spend money on goods in expectation of their money being worth more soon will cut consumption in non-essential items. The ensuing shrinking of those sectors then reinforces the deflationary cycle... This eventually also spills over to other more essential sectors and the economy can be in danger of collapse if the government doesn't do anything...

As to whether inflation is more worrying, I can say that a deflationary cycle is more worrying... Anyway, it depends on whether the inflation comes from excessive money supply or actual growth in production... In one sense, the gold standard makes sense in curbing excessive money supply but there may be better ways to do that than something this drastic...
>

To Alexandrian Ptolemais:
<
I don't think pulling money out of circulation can be done secretively to the extent required to implement a gold standard with a 25% 'buffer'. People are going to notice when prices drop, long before you get to a 4 cents = 1 milk bottle stage...

Deflation caused by increases in the aggregate supply will be fine in the short run, I agree. However, the government must correct the trend before consumers get the expectation of deflation and cause demand-side deflation... (see above)
>

Deflation tends to have worse side-effects than inflation. Inflation represents a way to sideline nominal rigidities (interest rate and wage rigidities), while deflation emphasises them. Inflation (via money printing) is also a form of revenue for the government. The emphasising of nominal rigidities, particularly interest rate rigidities, were the problem in Japan (this is sort of like not wanting to spend in anticipation of cheaper prices).

To implement deflation; you probably want people to know about it, otherwise the shock would cause unemployment instead of deflation.

I'm not sure why you would want to deflate the economy, since it would flow on equally to wages.