NationStates Jolt Archive

http://mises.org/story/3368
To criticize a monetary system based on gold as "rigid" only makes sense if you believe that printing green pieces of paper makes a country richer. After all, the only rigidity enforced by the gold standard is on the central bank's use of the printing press. Requiring the government to maintain a fixed dollar/gold exchange rate is "restrictive" in the same way that the Bill of Rights limits the discretionary power of the feds.

Consider for a moment the dollar, or the equivalent monetary unit of your country. Every year, it buys less. Here in the US, there is a perennial call to abandon the cent coin, and it has become particularly vociferous now that metals prices have "increased" to the point where it costs more to mint the penny and nickel than the face value of the coin. Is this really due to the metals increasing in value, or is it due to the dramatic decrease in the buying power of the dollar?

Some food for thought:

1. The classic Chevy Impala from the early 60's cost around $3,000 for a well-equipped model when it was first introduced. The current incarnation of the Impala costs nearly $30,000 for a well equipped model.

2. Old books mention "Five-and-Dime" stores or dime stores where children could buy various toys (generally made here) for a dime or nickel. Now we have dollar stores, and some dollar stores are unable to make a profit selling made-in-China crap for a dollar.

3. The US dimes with 90% silver from 1964 and earlier trade for approximately $1.50-$2.00 now. The buying power of silver and gold have remained fairly stable over the long term.

4. Perhaps you've heard the old musical couplet, "Shave and a haircut, two bits!" "Two bits" is a quarter dollar, and a shave and a haircut for that price is unthinkable now. This phrase seems to date back to the days when 'Another day, another dollar" made sense because a dollar a day was the standard wage for manual or otherwise unskilled/semi-skilled labor. As a side note, that dollar earned for a days work was silver.

So, I would suggest that perhaps the volatility in the metals market and other commodity markets is due not to the nature of the commodities, but rather due to the nature of fiat money that is anchored to nothing whatsoever. Furthermore, it appears that price increases arrive at the consumer level sooner than the increase in the money supply when the amount of money in circulation increases.

So what is the cause of inflation? It is not the steady increase of prices - that is a consequence of inflation. Is it oil prices? This may have an effect. After all, increases in manufacturing costs and transportation costs will affect prices, but this is hardly a complete explanation. What could be the root cause?

Obviously, every dollar printed by the Federal Reserve increases the number of dollars in circulation. Since there is no silver, gold, or other real commodity to back the dollar, the only thing giving the dollar value is the confidence of the general population. This fiat (not backed by anything real) money is inherently unstable, and when more money is added to the system without anything to back it, it devalues every other dollar already in circulation. Some economists of the Austrian School also argue that the system of fractional reserve banking (meaning the banks are only required to keep a small fraction of their financial obligations as cash in the bank) also inflates the money supply. This seems to make sense if every dollar the bank holds in reserve can back a loan of $5, and thus quintuple the money supply within that bank's sphere of influence.

In a capitalist system, the free market should drive prices down as businesses seek more efficient means of production, and the buying power of the everyman should increase as each dollar buys more. The money supply increases as more metals are mined, minted, and put into circulation. Each dollar represents some intrinsically valuable commodity. And no, this is by no means a complete explanation of capitalist theory. It is only the sketchiest of outlines, given here for the sake of some clarification.

Obviously we cannot back every Federal Reserve Note dollar presently in circulation with silver or gold. The only solution here is to abandon the worthless Federal Reserve Note dollar in as orderly a manner as possible during the transition to real money.

Agreed 150%.

http://video.google.com/videoplay?docid=7065205277695921912

We just had the thread come up where I found this video. It explains a lot. At least watch the first half hour, it explains the monetary system in the US very well.

Isn't inflation going to happen, no matter what?

Isn't inflation going to happen, no matter what?

no. if you tie a currency to a commodity the currency only devalues when the commodity devalues. For instance Gold has for 90% of the 20th + 21st Century been worth between 10 and 12 barrels of oil. Most of the 10% of the time that the prices have not correlated oil was much cheaper then oil(as it is now) and not the other way around.

So, I would suggest that perhaps the volatility in the metals market and other commodity markets is due not to the nature of the commodities, but rather due to the nature of fiat money that is anchored to nothing whatsoever. Furthermore, it appears that price increases arrive at the consumer level sooner than the increase in the money supply when the amount of money in circulation increases.

So what is the cause of inflation? It is not the steady increase of prices - that is a consequence of inflation. Is it oil prices? This may have an effect. After all, increases in manufacturing costs and transportation costs will affect prices, but this is hardly a complete explanation. What could be the root cause?


Wrong. Gold and silver are nothing but another layer of abstraction in the currency system, neither of them have any sort of practical value, like, say iron, they have what value humans gave to them, the same as paper currency. Gold and silver were originally picked as a medium of representing and exchanging goods as services, as they were rare and easily workable, with an added bonus of looking cool.

Now, what causes inflation? Population growth. As a population grows, we need more money to exist, to represent the increased amount of goods produced by that society, and the increase in services preformed. This increase in money causes existing money to be worth less of course, but that is a simple fact of life. Gold and silver were used as the medium of exchange for traditional reasons, however, as the twentieth century went by, human populations exceeded levels that allowed gold and silver to be used, so we switched to a paper system, where paper is used to represent goods and services, and their exchange.

Rolling squid;14607921']Wrong. Gold and silver are nothing but another layer of abstraction in the currency system, neither of them have any sort of practical value, like, say iron, they have what value humans gave to them, the same as paper currency. Gold and silver were originally picked as a medium of representing and exchanging goods as services, as they were rare and easily workable, with an added bonus of looking cool.

Now, what causes inflation? Population growth. As a population grows, we need more money to exist, to represent the increased amount of goods produced by that society, and the increase in services preformed. This increase in money causes existing money to be worth less of course, but that is a simple fact of life. Gold and silver were used as the medium of exchange for traditional reasons, however, as the twentieth century went by, human populations exceeded levels that allowed gold and silver to be used, so we switched to a paper system, where paper is used to represent goods and services, and their exchange.

So using your Premise. And Adding that the US had no inflation in the 19th century. Your saying that the US had no population growth in the 19th century?

So using your Premise. And Adding that the US had no inflation in the 19th century. Your saying that the US had no population growth in the 19th century?

not exactly. In 1800, the average wage was around $800 for a family . By 1900, it was up to $1000. Also, currency is a world wide system, Between 1800 and 1900, the world's population growth was 672 million people. Between 1900 and 2000, it was 4,328 million, or about 6 times as fast, so it follows that most of histories inflation would have happened in the last 100 years, which it has. Plus, with the advent of modern technology in the early twentieth century, the standard, and therefore the cost, of living has gone up.

Consider for a moment the dollar, or the equivalent monetary unit of your country. Every year, it buys less. Here in the US, there is a perennial call to abandon the cent coin

no it doesn't.

http://en.wikipedia.org/wiki/Deflation

it has become particularly vociferous now that metals prices have "increased" to the point where it costs more to mint the penny and nickel than the face value of the coin.

this has always been the case and its why we don't see coin counterfeiters these days *makes sure all my coins have the groove things on the side*

1. The classic Chevy Impala from the early 60's cost around $3,000 for a well-equipped model when it was first introduced. The current incarnation of the Impala costs nearly $30,000 for a well equipped model.

do we live in the economy of the 60's? no, the dollar has changed in value but so has the US economy

an example would be how the Pounds falling value to the euro is helping our exports to no end (unlike during 2007 when the pound was getting stupid)

3. The US dimes with 90% silver from 1964 and earlier trade for approximately $1.50-$2.00 now. The buying power of silver and gold have remained fairly stable over the long term.

which is not a good thing [see above]

So what is the cause of inflation? It is not the steady increase of prices - that is a consequence of inflation. Is it oil prices? This may have an effect. After all, increases in manufacturing costs and transportation costs will affect prices, but this is hardly a complete explanation. What could be the root cause?

money making surpassing growth or products becoming more valued (look at how valuable the classic car has become today)

*morphs into NL*
http://www.econjournalwatch.org/pdf/HummelCommentJanuary2007.pdf

the only thing giving the dollar value is the confidence of the general population.

*exchanges a few dollars for a few Euro's*

think of the dollar as representing a delicious slice\share of America from its gold reserves to its GDP (not forgetting all the money red China has invested in your currency and all those IOU's from Africa)

Inflation really is meaningless if productivity and personal income are growing faster. By and large, many products are cheaper and superior in quality as measured in real terms than they were in the past, especially electronics and durable goods. So, even if it takes more dollars to buy the product, if people are earning proportionately more the effect is neutered and if productivity/technology have enhanced its quality such that you're getting a better product for the same price, its effective cost has deflated. You can't tell me for a second that a television or refrigerator from 1959 were cheaper than comparable models sold today, or that a handheld calculator that cost $100 in 1970 is superior to a $300 model from today.

I could never understand the obsession with low prices...just because something cost a dollar in 1900 doesn't mean it was "cheaper" than that same item priced at $24.60 today. In fact, it's far more likely that the relative percentage of income that would have to be spent on that item is significantly lower today due to the fact that real personal income has outpaced inflation for most of the past century. That's a foolish misconception that fails to take in to account the fact that inflation must be viewed in the context of real data, not solely on its own.

By and large, many products are cheaper and superior in quality as measured in real terms than they were in the past, especially electronics and durable goods.

Vista? computer games? books? :p

*sits beside ducks complaining about how expensive bread is these days*

Vista? computer games? books? :p

*sits beside ducks complaining about how expensive bread is these days*

Hey, you win some and you lose some. It could always be worse...we could still be using DOS and playing Pong. You've got to accept some real shit for every diamond.

no it doesn't.

http://en.wikipedia.org/wiki/Deflation

Deflation would be a healthy market reaction to the rampant inflation that has taken place throughout my lifetime. The Fed won't allow real deflation to happen. The market is so heavily manipulated by the Fed that there is no true free economy.

this has always been the case and its why we don't see coin counterfeiters these days *makes sure all my coins have the groove things on the side*

The reeding is on coins that once had silver content. It was to prevent anyone from debasing the coins by shaving off the edges. Gold was $16/oz, and 1 oz. gold coins were $20 in the late 1800's. The coin was worth more than the material in it because it was minted with a certain verifiable purity. You fail.

do we live in the economy of the 60's? no, the dollar has changed in value but so has the US economy

But who gained? Prices rise here at the consumer level before the increased money supply does. That is bad for the economy.

an example would be how the Pounds falling value to the euro is helping our exports to no end (unlike during 2007 when the pound was getting stupid)

Yes, you exchanged one fiat currency for another based solely on your confidence in the economy. Both currencies are tending nto fall in value, and you decide which is falling slower. Smart. No thanks. I want a money that is connected to something solid.

money making surpassing growth or products becoming more valued (look at how valuable the classic car has become today)

Yeah. The classic car maintained its value. Just like gold and silver.

*exchanges a few dollars for a few Euro's*

Yes, you exchanged one fiat currency for another based solely on your confidence in the economy. Both currencies are tending nto fall in value, and you decide which is falling slower. Smart. No thanks. I want a money that is connected to something solid.

think of the dollar as representing a delicious slice\share of America from its gold reserves to its GDP (not forgetting all the money red China has invested in your currency and all those IOU's from Africa)

There are no gold reserves whatsoever backing the US Dollar. That system ended even the most convoluted connections to gold back in about 1973 when all currencies were set to a floating scale against one another. Whatever is in Fort Knox is not backing the dollar in any way.

Deflation would be a healthy market reaction to the rampant inflation that has taken place throughout my lifetime. The Fed won't allow real deflation to happen. The market is so heavily manipulated by the Fed that there is no true free economy.


A true free economy is a bad thing. Learn a little history.




Yes, you exchanged one fiat currency for another based solely on your confidence in the economy. Both currencies are tending nto fall in value, and you decide which is falling slower. Smart. No thanks. I want a money that is connected to something solid.


Right, my trust in fiat currency is the same as your trust in "solid" gold and silver. They both only have value because we say so. Gold as a metal is rather worthless, you can't make anything with it, except money, which we assign value, just adding another layer of abstraction to a system that was never anything but fiat.





There are no gold reserves whatsoever backing the US Dollar. That system ended even the most convoluted connections to gold back in about 1973 when all currencies were set to a floating scale against one another. Whatever is in Fort Knox is not backing the dollar in any way.

Actually, Fort Knox's gold is a strategic reserve that exists as a fail safe to our economy. If the dollar ever reached a point where the gold standard was feasible again, we'd return to it to prevent the further collapse of our economy. However, we'd have to fall a long way for that to happen, which is why we ditched the gold standard, it anchored our currency to a level that was doing nothing but harm.

Deflation would be a healthy market reaction to the rampant inflation

NO.

deflating the currency is a stupid stupid thing to do during a recession for much the same reasons interest rates are cut

The reeding is on coins that once had silver content. It was to prevent anyone from debasing the coins by shaving off the edges. Gold was $16/oz, and 1 oz. gold coins were $20 in the late 1800's. The coin was worth more than the material in it because it was minted with a certain verifiable purity. You fail.

nu-uh

Coins may be minted that have fiat values lower than the value of their component metals, but this is never done intentionally and initially for circulation coins, and happens only in due course later in the history of coin production due to inflation, as market values for the metal overtake the fiat declared face value of the coin. Examples of this phenomenon include the pre-1965 US dime, quarter, half dollar, and dollar, US nickel, and pre-1982 US penny. As a result of the increase in the value of copper, the United States greatly reduced the amount of copper in each penny. Since mid-1982, United States pennies are made of 97.5% zinc coated with 2.5% copper.

wiki it may be but whatever
(http://en.wikipedia.org/wiki/Coin#cite_note-1)
But who gained? Prices rise here at the consumer level before the increased money supply does. That is bad for the economy.

do you not have yearly raises? min wage adjustments? (though your American so I guess not but you get the point)

Yes, you exchanged one fiat currency for another based solely on your confidence in the economy.

nothing to do with mine its to do with how the dollar is being valued on the market at that particular day

Both currencies are tending nto fall in value, and you decide which is falling slower. Smart. No thanks. I want a money that is connected to something solid.

the low value of the pound helps exports if everyone used Gold it would be really shitty for export nations who now have a highly valued currency giving them a shitty deal

Yeah. The classic car maintained its value. Just like gold and silver.

I can get a shit ton more gold bricks than back in the 60's due an increase in value in the eyes of buyers

this happens on a much grander scale with items such as Oil and recently foodstuffs

There are no gold reserves whatsoever backing the US Dollar.

re-read that post the whole point of it was the dollar is a slice in the total value of the US (which is why Currency comes under greater inflation during economic hardship)

Rolling squid;14607921']Now, what causes inflation? Population growth. As a population grows, we need more money to exist, to represent the increased amount of goods produced by that society, and the increase in services preformed. This increase in money causes existing money to be worth less of course, but that is a simple fact of life.

This isn't entirely correct. Inflation is usually caused by increasing the money supply faster than the economy expands. If the money supply expands at the same rate as the economy, there will be no inflation. If the money supply grows faster than the economy, there will be inflation. How much inflation depends how much more quickly the money supply is growing compared to the economy.

This isn't entirely correct. Inflation is usually caused by increasing the money supply faster than the economy expands. If the money supply expands at the same rate as the economy, there will be no inflation. If the money supply grows faster than the economy, there will be inflation. How much inflation depends how much more quickly the money supply is growing compared to the economy.

But what causes the economy to grow? Expansions of population, generally speaking, which creates more goods and services, which are abstracted through money, leading to inflation, if more goods are found then people are born.

Rolling squid;14608618']But what causes the economy to grow? Expansions of population, generally speaking, which creates more goods and services, which are abstracted through money, leading to inflation, if more goods are found then people are born.

inflation was much less to non existent (depending how you calculate) in the 19th(gold standard time frame) century, however both Economic and population growth was much higher in the US during the 19th century.

Population growth and GDP does not correlation to inflation.

inflation was much less to non existent (depending how you calculate) in the 19th(gold standard time frame) century, however both Economic and population growth was much higher in the US during the 19th century.

Population growth and GDP does not correlation to inflation.

Again, you must think of the world economy here, and world population. $1 was worth more, way more in 1800 compared to 1900, and on top of that, world population grew the same in that time period (100 years) as it grew in the last nine years.

Your argument is further debunked by comparing the societies of 1900 with the society of 2009. The world has changed in almost every aspect, and so what may have been true 100 years ago is no longer relevant.

Rolling squid;14608687']Again, you must think of the world economy here, and world population. $1 was worth more, way more in 1800 compared to 1900, and on top of that, world population grew the same in that time period (100 years) as it grew in the last nine years.

Your argument is further debunked by comparing the societies of 1900 with the society of 2009. The world has changed in almost every aspect, and so what may have been true 100 years ago is no longer relevant.

first think from 1834 thats when the US had a Defacto gold standard. when we talk gold standard/19thcentury in the US think 1834- 1914. I should have been specific sorry history major thing of shifting centuries to match big events and to fit the conversation.
from 1834 to 1900
a set of goods that would cost 100 dollars in 1834 would cost 83.37 that's a net deflation.

Also using your numbers in this here inflation calculator http://www.westegg.com/inflation/infl.cgi
shows 100 dollars worth of goods in 1800 being worth 48.49 in 1900. that's actually a deflation. Given this is largely because of industrialization(which it still does) lowering prices, and before 1834 we were not on the gold standard. and this is a deflation with an average yearly growth rate of 4.%

As for the difference between the US Dollar now and then. The US didn't supply the worlds currency then, this is a demand for US dollars and is actually a deflationary pressure, the fact that we have inflation now shows piss poor management of the US currency today.

Rolling squid;14608290']A true free economy is a bad thing. Learn a little history.

Define a "true free economy."

(Playing Devil's advocate.)

Rolling squid;14608290'] Learn a little history.



Considering you just called a deflationary period a inflationary period i could say the same to you.

first think from 1834 thats when the US had a Defacto gold standard. when we talk gold standard/19thcentury in the US think 1834- 1914. I should have been specific sorry history major thing of shifting centuries to match big events and to fit the conversation.
from 1834 to 1900
a set of goods that would cost 100 dollars in 1834 would cost 83.37 that's a net deflation.

Also using your numbers in this here inflation calculator http://www.westegg.com/inflation/infl.cgi
shows 100 dollars worth of goods in 1800 being worth 48.49 in 1900. that's actually a deflation. Given this is largely because of industrialization(which it still does) lowering prices, and before 1834 we were not on the gold standard. and this is a deflation with an average yearly growth rate of 4.%

As for the difference between the US Dollar now and then. The US didn't supply the worlds currency then, this is a demand for US dollars and is actually a deflationary pressure, the fact that we have inflation now shows piss poor management of the US currency today.

You said it yourself, industrialization accounts for the deflation of currency, as less service was needed to produce the same good, dropping price. And the reason the dollar inflated was exactly your stated reason. Many nations use the dollar as their federal reserve; this leads to a large amount of dollars in circulation, creating inflation.

Define a "true free economy."

(Playing Devil's advocate.)

economy without a government doing things such as regulating business, insurance rates, credit, ect.


Considering you just called a deflationary period a inflationary period i could say the same to you.


You yourself admitted that the deflation was due to industrialization, not anything done directly to the currency, so moot point.

Rolling squid;14608769']economy without a government doing things such as regulating business, insurance rates, credit, ect.

The U.S. never had a true free economy. It has always had to varying degrees protectionism, regulation, "internal improvements," and different forms of taxation, etc.

Rolling squid;14608769']You said it yourself, industrialization accounts for the deflation of currency, as less service was needed to produce the same good, dropping price. And the reason the dollar inflated was exactly your stated reason. Many nations use the dollar as their federal reserve; this leads to a large amount of dollars in circulation, creating inflation.

along with the gold standard. which is why I really frown upon using numbers before 1834. just found it funny you called a deflationary(a 50% deflation at that) period an inflationary one. But also using your numbers wages went up from 800 to 1000. but that 1,000 dollars could buy 2,000 dollars worth of goods and services in 1800.
so the currency is worth more, and wages are increasing.

If you stabilize the currency in an industrialized country cost tend to go down over time, because innovations make goods and services. how much did a computer cost 10 years ago ? How much did a VCR cost 20 years ago? How much did a TV cost 50 years ago all in relation to average family income?
Right now we only see it in new technologies. Before we saw it in across the board. because its not like farming technology stopped advancing( or any other technology).

The U.S. never had a true free economy. It has always had to varying degrees protectionism, regulation, "internal improvements," and different forms of taxation, etc.

Right, but for all pratical purposes, the period from about 1870-1910 can be considered the most free economy in American history, and look what happened.

Rolling squid;14608806']Right, but for all pratical purposes, the period from about 1870-1910 can be considered the most free economy in American history, and look what happened.

Skyrocketing living standards, continually declining prices, and rising quality of products?

Skyrocketing living standards, continually declining prices, and rising quality of products?

http://en.wikipedia.org/wiki/Standard_oil
http://en.wikipedia.org/wiki/Trust_(19th_century)
http://en.wikipedia.org/wiki/Pinkertons

Rolling squid;14608290']Gold as a metal is rather worthless, you can't make anything with it...

http://en.wikipedia.org/wiki/Gold#Applications

Incorrect.

Rolling squid;14608873']http://en.wikipedia.org/wiki/Standard_oil
http://en.wikipedia.org/wiki/Trust_(19th_century)
http://en.wikipedia.org/wiki/Pinkertons

Read The Myth of the Robber Barons by Burton W. Folsom, Jr.

Deflation would be a healthy market reaction to the rampant inflation that has taken place throughout my lifetime. The Fed won't allow real deflation to happen. The market is so heavily manipulated by the Fed that there is no true free economy.

Inflation is not rampant and certainly doesn't warrant the risk of a deliberately induced deflationary spiral.

Read The Myth of the Robber Barons by Burton W. Folsom, Jr.

Are you disputing that these things happened? It is undeniable that the time in American history where the market was given the most freedom was also the time where workers had the least power over employment conditions and companies were at their most abusive.

Having looked up the book a bit, it seems he is primarily arguing that not all entrepreneurs were bad people, because they gave money to charity (gross oversimplification, I know). The point, however, remains - when the market is left to its own devices, the workers get screwed.

http://video.google.com/videoplay?docid=7065205277695921912

We just had the thread come up where I found this video. It explains a lot. At least watch the first half hour, it explains the monetary system in the US very well.

No, it really really doesn't. Linking to that is akin to linking to the Bible to show why homosexuality is wrong.

Are you disputing that these things happened? It is undeniable that the time in American history where the market was given the most freedom was also the time where workers had the least power over employment conditions and companies were at their most abusive.

Having looked up the book a bit, it seems he is primarily arguing that not all entrepreneurs were bad people, because they gave money to charity (gross oversimplification, I know). The point, however, remains - when the market is left to its own devices, the workers get screwed.

I won't deny that conditions for many workers were bad at the time. But conditions and wages both improved as the marginal productivity of labor increased. And as bad as conditions were in many factories, they were much worse on farms, which is why so many people came to the cities to work in factories.

Rolling squid;14608009']Between 1800 and 1900, the world's population growth was 672 million people. Between 1900 and 2000, it was 4,328 million, or about 6 times as fast
Just as a point of maths, it's actually about 4 times as fast (population growth from 975 million - 1.65bn is approx. a 70% increase, while from 1.65bn - 6bn is approx. a 260% increase). The absolute growth was six times as much.

the only thing giving the dollar value is the confidence of the general population.

Likewise, the only thing giving 'precious metals' value is the subjective confidence of the population. No commodity has intrinsic value independent of value assigned by the population. There is no such thing as 'real' money, because no commodity has value. A dollar bill is no more intrinsically valuable than a piece of gold.

Are you disputing that these things happened? It is undeniable that the time in American history where the market was given the most freedom was also the time where workers had the least power over employment conditions and companies were at their most abusive.

Having looked up the book a bit, it seems he is primarily arguing that not all entrepreneurs were bad people, because they gave money to charity (gross oversimplification, I know). The point, however, remains - when the market is left to its own devices, the workers get screwed.

yes. this is called Kuznets curve. however adjusting for deflation the later half of the 19th century saw a 4% per year raise in GDP but a 12% raise or workers wages per year. this comes about as a society industrializes and the investment shifts from Capital to skill. You see this regardless of the regulation level.

http://en.wikipedia.org/wiki/Gold#Applications

Incorrect.

alright, gold does have some uses, but they don't come close to justifying the price of gold.



Are you disputing that these things happened? It is undeniable that the time in American history where the market was given the most freedom was also the time where workers had the least power over employment conditions and companies were at their most abusive.

Having looked up the book a bit, it seems he is primarily arguing that not all entrepreneurs were bad people, because they gave money to charity (gross oversimplification, I know). The point, however, remains - when the market is left to its own devices, the workers get screwed.


The book really says that most of the good in the industrial revolution/age of steam came from those typically presented as robber barons, and that they caused massive economic growth and prosperity. The book disregards that in doing so, they oppressed millions of workers, leading to uncountable deaths and maiming, and generally ran the country for a number of years. Note that this economic growth would have happened anyways, albeit at a slightly slower pace, but with far decreased abuses of humanity.

(Note: The above is based on a summary of aforementioned book found here (http://www.campusreportonline.net/main/articles.php?id=154)

http://en.wikipedia.org/wiki/Gold#Applications

Incorrect.

and other cool stuff - http://www.cesar.ornl.gov/nanotechnology.html + http://www.subtleenergies.com/ORMUS/tw/superconductivity.htm

and other cool stuff - http://www.cesar.ornl.gov/nanotechnology.html + http://www.subtleenergies.com/ORMUS/tw/superconductivity.htm

Of course, there's the little fact that over 80% of all gold consumed each year is used to make jewelry. I wonder how much it would be worth if it weren't a shiny metal that happens to be in demand as something to wear? I have a feeling it would be worth significantly less than any other industrial metal on the planet...but then again, the concept of objective economic value is total bullshit anyways so it's kind of a moot point.

Likewise, the only thing giving 'precious metals' value is the subjective confidence of the population. No commodity has intrinsic value independent of value assigned by the population. There is no such thing as 'real' money, because no commodity has value. A dollar bill is no more intrinsically valuable than a piece of gold.

Incorrect. If you can eat it, it has an intrinsic value. That which helps you directly acquire food has an intrinsic value -1. And the further you get from eating it, the less intrinsic and the more abstract that value becomes.

Here are a few reasons why the gold standard is not a good idea. (http://www.j-bradford-delong.net/Politics/whynotthegoldstandard.html)

In any case, the general consensus among economists is that low inflation is better for the economy than zero inflation or deflation.

Incorrect. If you can eat it, it has an intrinsic value. That which helps you directly acquire food has an intrinsic value -1. And the further you get from eating it, the less intrinsic and the more abstract that value becomes.

That's an interesting definition of value. Not compelling, but interesting none the less. Does that mean that dollar bills are more intrinsically valuable than gold right now? Since it is much easier to get food with dollars than with gold.

Inflation is not rampant and certainly doesn't warrant the risk of a deliberately induced deflationary spiral.

Cosmopoles, there you are mistaken. Since the 1960s, at least in New Zealand, prices have increased by a factor of ten. Even in places such as Britain and the United States, prices increased at least five-fold. If that isn't rampant, then what is?

Of course, there's the little fact that over 80% of all gold consumed each year is used to make jewelry. I wonder how much it would be worth if it weren't a shiny metal that happens to be in demand as something to wear? I have a feeling it would be worth significantly less than any other industrial metal on the planet.

Your feeling is not accurate. Jewelry demand for gold went down ~11% (by tonnage), while gold price went up ~50% from 2007 to 2008; the exact opposite of what supply/demand analysis for commodities would suggest. This demonstrates the existence of a monetary demand for gold separate from the commodity demand for gold (i.e. jewelry). Monetary demand for gold dwarfs jewelry demand for gold, and it is monetary demand and not jewelry demand which drives gold prices. This fact is most strikingly illustrated in times of economy crisis, when the craftsman's premium on price of gold jewelry is dwarfed by the actual price of the raw gold itself contained in the jewelry.

You also fall to the fallacy of thinking gold jewelry is not considered money (i.e. store of value). This is incorrect. In India, the world's largest consumer of gold jewelry, gold jewelry is widely regarded and accepted as a store of value, thereby fulfilling the definition of money. This holds true not only in India, but in the rest of the world too.

Rolling squid;14610785']alright, gold does have some uses, but they don't come close to justifying the price of gold.


The price of gold reflects its high demand as a money. The three ideal properties of any money are: 1) scarcity, 2) supply stability, and 3) lack of alternative uses (which is related to the concept of supply stability).

Gold fulfills all 3 conditions admirably, probably better than many other materials including platinum, silver, and paper. The fewer the industrial utility of gold, the greater the utility of gold as money.

Inflation is not rampant and certainly doesn't warrant the risk of a deliberately induced deflationary spiral.

Deflation is induced with inflation. Had there not been inflation in the first place, there wouldn't be any deflation now.

The price of gold reflects its high demand as a money. The three ideal properties of any money are: 1) scarcity, 2) supply stability, and 3) lack of alternative uses (which is related to the concept of supply stability).

Gold fulfills all 3 conditions admirably, probably better than many other materials including platinum, silver, and paper. The fewer the industrial utility of gold, the greater the utility of gold as money.

Gold is no longer used as the world's currency backer for a very good reason, it's too scarce. The words now has too much wealth in order to use gold as a medium of exchange at current gold prices, and the world seems to be running fine without the gold standard, so lets leave well enough alone, and call it a day.

This isn't entirely correct. Inflation is usually caused by increasing the money supply faster than the economy expands. If the money supply expands at the same rate as the economy, there will be no inflation. If the money supply grows faster than the economy, there will be inflation. How much inflation depends how much more quickly the money supply is growing compared to the economy.

Inflation is simply an increase in money supply independent of any other factors. Deflation is a decrease in money supply. A fast-growing economy with a slowly-increasing money supply is still experiencing inflation. Inflation and "price increases" are different things.

Rolling squid;14611682']Gold is no longer used as the world's currency backer for a very good reason, it's too scarce. The words now has too much wealth in order to use gold as a medium of exchange at current gold prices, and the world seems to be running fine without the gold standard, so lets leave well enough alone, and call it a day.

Your claim that "gold is inconvenient" is a fallacious one and I'll demonstrate why. A banknote that is backed by gold is infinitely divisible even if the gold itself isn't divided. So if there is a gold standard, banknotes can be divided infinitely into as many convenient subunits as is necessary. For example, let's say 1 milligram of gold = 1 dollar.

1 milligram of gold = 1 dollar.
1 dollar = 100 cents.
1 cent = 100 zents (hypothetical made-up unit)
1 zent = 100 ??? and so forth

Therefore, 1 milligram of gold = 10,000 zents.

As you can see this hypothetical gold-backed currency system is infinitely flexible, and can be further subdivided if that is necessary for convenience's sake. Gold may be scarce, but due to this process of subdivision of gold-backed banknotes, the gold standard remains convenient, and the scarcity of *physical gold* does not at all get in the way of the convenience of "exchangeable gold" (in the form of redeemable banknotes).

As you can see this hypothetical gold-backed currency system is infinitely flexible, and can be further subdivided if that is necessary for convenience's sake. Gold may be scarce, but due to this process of subdivision of gold-backed banknotes, the gold standard remains convenient, and the scarcity of *physical gold* does not at all get in the way of the convenience of "exchangeable gold" (in the form of redeemable banknotes).

So how is gold any different from paper in this system? If gold has what value we give it, then apply the same idea to paper, and save ourselves having to store and transport gold.

NO.

deflating the currency is a stupid stupid thing to do during a recession for much the same reasons interest rates are cut

The twin policies of inflation and interest rate cuts are extremely harmful during a recession, because they encourage the economy to take on more debt and use debt-fueled consumption to pursue the temporary illusion of prosperity, without actually addressing or liquidating the fundamental problems in the capital structure.

Inflation and interest rate cuts don't solve any problems during a recession and can only make things worse. In the 2001 recession, inflation and interest rate cuts made things worse by flooding the market with artificial cheap credit and causing the real estate bubble. In our current situation it's unlikely that inflation and interest rate cuts will create a new bubble, because it's unlikely the economy is capable of sustaining any more debt than it already has. In our current situation, inflation and cheap credit won't create a new bubble, but will nonetheless still perpetuate defects in the capital structure and cause so many inefficiencies to accumulate (including shortages) that eventually the free market will be back by "popular demand" - at which point a painful Yeltsin-style "shock therapy" readjustment occurs to wash out all the unsustainable malinvestments and fiscal garbage that had accumulated in the system under monetarist/keynesian regimes.

re-read that post the whole point of it was the dollar is a slice in the total value of the US (which is why Currency comes under greater inflation during economic hardship)
If by "comes under greater" inflation you mean "lose purchasing power", then you're incorrect because in the case of a reserve currency like the dollar, recessions cause purchasing power increases.

Rolling squid;14611740']So how is gold any different from paper in this system? If gold has what value we give it, then apply the same idea to paper, and save ourselves having to store and transport gold.

Paper dollars would work if the government can promise to never print additional paper dollars, and keep the money supply constant. The only reason the gold standard is more reliable is because governments are terminally incapable of keeping that promise.

Paper dollars would work if the government can promise to never print additional paper dollars, and keep the money supply constant. The only reason the gold standard is more reliable than capable is because governments are terminally incapable of keeping that promise.

What's to stop the government from resetting gold prices as to create more money in a specie system?

Rolling squid;14611767']What's to stop the government from resetting gold prices as to create more money in a specie system?

Nothing, which is why any hypothetical gold-banknote standards should be maintained by banks in the free market, and not be enforced by government. By abolishing all legal tender laws, we can make this happen.

Nothing, which is why any hypothetical gold-banknote standards should be maintained by banks in the free market, and not be enforced by government. By abolishing all legal tender laws, we can make this happen.

No. Putting the currency in the hands of private individuals is wholly the wrong thing to do, as it makes the whole world beholden to them. The money supply belongs to the people.

Rolling squid;14611786']No. Putting the currency in the hands of private individuals is wholly the wrong thing to do, as it makes the whole world beholden to them. The money supply belongs to the people.

How can anyone be "beholden to them" if there were no legal tender laws? They can't force anyone to use their particular money.

Meh, long as the rest of the world's currency goes down with us...Who cares? lol

Why gold? We could use phlebotinum.

-snip-

More to the point, there are several key instances of precious-metals inflation since the 1500's. The most blisteringly painful and obvious being the radical inflation that was experienced throughout Europe, but especially in Spain, once the full-fledged looting of Latin America began in force. There have been other instances, of course, in which massive finds of precious metals have driven down the value and driven up the supply. Unlike paper currency, though, there is no control over these events--they just tend to happen.

Paper currency, though, can be tracked, it's release can be controlled, and a competent central bank can carry out a degree of inflation without negative social or economic effects.

Cosmopoles, there you are mistaken. Since the 1960s, at least in New Zealand, prices have increased by a factor of ten. Even in places such as Britain and the United States, prices increased at least five-fold. If that isn't rampant, then what is?

The fact that prices have increased by a certain factor - 5, 10, 20 or anything else - is irrelevant. The important factor is how they have increased compared to other indices - economic growth, wage growth, stock market indices etc. If inflation is 10% that may sound like a lot, but what if economic growth and wage increases were twice as much?

That's an interesting definition of value. Not compelling, but interesting none the less. Does that mean that dollar bills are more intrinsically valuable than gold right now? Since it is much easier to get food with dollars than with gold.

I wouldn't say the dollar is more intrinsically valuable, but that golds value is more abstract.

Rolling squid;14608618']But what causes the economy to grow? Expansions of population, generally speaking, which creates more goods and services, which are abstracted through money, leading to inflation, if more goods are found then people are born.
...I'm not quite sure what you are trying to get at here. Could you try rephrasing that? The sentence isn't reading clearly.

Inflation is simply an increase in money supply independent of any other factors. Deflation is a decrease in money supply. A fast-growing economy with a slowly-increasing money supply is still experiencing inflation. Inflation and "price increases" are different things.
Depends...you are talking about monetary inflation (in which case, refering to it as simply "inflation" is somewhat archaic), whereas I mean price inflation (which is what is usually implied when one discusses "inflation" today)?

...I'm not quite sure what you are trying to get at here. Could you try rephrasing that? The sentence isn't reading clearly.


Currency is the abstraction of goods and services; inflation is the natural reaction when more of either becomes available. (Services increase when a population increases, goods increase when more are found.)

Rolling squid;14614162']Currency is the abstraction of goods and services; inflation is the natural reaction when more of either becomes available. (Services increase when a population increases, goods increase when more are found.)

Depends upon which inflation you are talking about...price inflation (the standard that is implied when discussing "inflation" today) or monetary inflation. I am talking about price inflation.

The fact that prices have increased by a certain factor - 5, 10, 20 or anything else - is irrelevant.

It is very relevant. It doesn't matter if wages keep up with inflation, inflation is still a hidden tax - it unduly rewards borrowers and punishes savers. It means that we are forced to resize our coins every few decades because the value of the metal inside has increased too much, and it means that we are forced to take small coins out of circulation.

If inflation is 10% that may sound like a lot, but what if economic growth and wage increases were twice as much?

Would it not be better to have economic growth and wage increases with 0% inflation? If you look at the British CPI, their inflation rate averaged out at 0% between 1815 and 1939; it was possible for two centuries to get an ounce of gold for the mere sum of £3 17s 10d. You didn't need to go through the level of monetary change that Britain has gone through in the years since 1939 (and I am not including decimalisation).

Obviously we cannot back every Federal Reserve Note dollar presently in circulation with silver or gold. The only solution here is to abandon the worthless Federal Reserve Note dollar in as orderly a manner as possible during the transition to real money.
The Chinese did this in the 17th century in response to hyperinflation and it basically bankrupted the state for no good reason, as they just printed more money to sort things out and in 30 years they were re-shafted.

Not a good look.

.

Obviously we cannot back every Federal Reserve Note dollar presently in circulation with silver or gold. The only solution here is to abandon the worthless Federal Reserve Note dollar in as orderly a manner as possible during the transition to real money.


Like I said before the US could do a total dick move and print a ton of money. With this newly printed money buy hard assets. When the dollar drops to Zimbabwe figures sell the hard assets and pay off the national debt. Boom the dollar makes a comeback.

Like I said before the US could do a total dick move and print a ton of money. With this newly printed money buy hard assets. When the dollar drops to Zimbabwe figures sell the hard assets and pay off the national debt. Boom the dollar makes a comeback.

Nothing like using inflation as a tax on holding money. Works perfectly well unless you hit the hyperinflation level

Nothing like using inflation as a tax on holding money. Works perfectly well unless you hit the hyperinflation level

Maybe not a total collapse like Zimbabwe however I think the US has a unique situation where we could pull it off without the Zimbabwe like conditions.

Maybe not a total collapse like Zimbabwe however I think the US has a unique situation where we could pull it off without the Zimbabwe like conditions.

I don't inherently disagree...it plays a pretty dangerous game, however...

Also, buying up large ammounts of hard assets could create a bubble (particularly in the quantities needed in an idea like the one you mention). Flooding the market would then more than burst this bubble.

I do wonder how consumer spending and personal saving would respond to higher inflation, however.

I don't inherently disagree...it plays a pretty dangerous game, however...

Also, buying up large ammounts of hard assets could create a bubble (particularly in the quantities needed in an idea like the one you mention). Flooding the market would then more than burst this bubble.

I do wonder how consumer spending and personal saving would respond to higher inflation, however.

Dangerous to try, without a doubt. As for a bubble there is a sweet spot where the sell off and the decimated dollar would cross. Eleven trillion is a lot to pay off however if the dollar is devalued by 11 times it is only a trillion in today's dollars. With the bubble sure to come crashing down on the sell off. A surge of the US currency would start a boom in the US economy. Cheap raw materials coupled with a strong US dollar would fuel an economic boom.

As for consumer spending vs the coming inflationary period I think we would see further contraction and more savings. Thus fueling the downward spiral. This is the second Tsunami wave that is off shore and ready to hit us. Normal people are not even thinking of this aspect. Some of us are however the average Joe is fairly defenseless.

Dangerous to try, without a doubt. As for a bubble there is a sweet spot where the sell off and the decimated dollar would cross. Eleven trillion is a lot to pay off however if the dollar is devalued by 11 times it is only a trillion in today's dollars.
Worked really well for Germany.

Oh. Wait.

Worked really well for Germany.

Oh. Wait.

Did Germany enact a full scale hard assets grab like I propose?

Did Germany enact a full scale hard assets grab like I propose?
No, because the French and Belgians were doing it for them.

Your feeling is not accurate. Jewelry demand for gold went down ~11% (by tonnage), while gold price went up ~50% from 2007 to 2008; the exact opposite of what supply/demand analysis for commodities would suggest. This demonstrates the existence of a monetary demand for gold separate from the commodity demand for gold (i.e. jewelry). Monetary demand for gold dwarfs jewelry demand for gold, and it is monetary demand and not jewelry demand which drives gold prices. This fact is most strikingly illustrated in times of economy crisis, when the craftsman's premium on price of gold jewelry is dwarfed by the actual price of the raw gold itself contained in the jewelry.

And then its price collapsed as the commodities bubble burst and speculative investors retreated to other investments. It seems pretty nonsensical to base the entire value of our currency on a commodity that is so volatile, so vulnerable to speculative bubbles and so variable in its demand and in its subjective value by investors. That would be like backing our currency with CDOs or derivatives...hardly a solid foundation for a currency.

Of course, unlike them gold can't "default", but if its value is so variable and is so volatile even within the span of a single day, it makes little sense to base a currency on it. The gold value of a given currency could swing by as high as 5-10% in a single day, sending massive shockwaves through the entire economy as companies suffer gains and losses stemming from exchange rates. In order to maintain value, the government would either have to set the price of gold with all of its consequences or force up interest rates to artificially maintain the value of its currency.

The result would be low or nonexistent inflation at the cost of higher unemployment, lower real income and lower GDP growth.

Also, nobody's really addressed the fact that real incomes have outpaced inflation for most of the past century (particularly in the last two decades) and that qualitative improvements have drastically increased the quality and variety of goods and services provided by each dollar, even if it takes more of them to actually purchase the product.

Also, nobody's really addressed the fact that real incomes have outpaced inflation for most of the past century (particularly in the last two decades) and that qualitative improvements have drastically increased the quality and variety of goods and services provided by each dollar, even if it takes more of them to actually purchase the product.

That's because they can't. Why address a well reasoned answer that totally destroys your wet dream fantasy when you can attack a poorly reasoned one instead?

It is very relevant. It doesn't matter if wages keep up with inflation, inflation is still a hidden tax - it unduly rewards borrowers and punishes savers. It means that we are forced to resize our coins every few decades because the value of the metal inside has increased too much, and it means that we are forced to take small coins out of circulation.

Unstable inflation rates are far worse economically than a low, predictable inflation rate. See below.

Would it not be better to have economic growth and wage increases with 0% inflation? If you look at the British CPI, their inflation rate averaged out at 0% between 1815 and 1939; it was possible for two centuries to get an ounce of gold for the mere sum of £3 17s 10d. You didn't need to go through the level of monetary change that Britain has gone through in the years since 1939 (and I am not including decimalisation).

And the only drawback was several crippling deflationary spirals! I, on the other hand, value monetary stability rather than wild fluctuations of inflation and deflation. Uncertainty about the level of inflation is economically harmful. Individuals and organisations can't plan ahead if there is a good chance the inflation rate could be anywhere between very high and negative. An uncertain inflation rate will discourage savings far more than a stable predictable inflation rate of a few percent. Just because net inflation after 100 years is 0% doesn't make your monetary system stable.

And the only drawback was several crippling deflationary spirals! I, on the other hand, value monetary stability rather than wild fluctuations of inflation and deflation. Uncertainty about the level of inflation is economically harmful. Individuals and organisations can't plan ahead if there is a good chance the inflation rate could be anywhere between very high and negative. An uncertain inflation rate will discourage savings far more than a stable predictable inflation rate of a few percent. Just because net inflation after 100 years is 0% doesn't make your monetary system stable.

Cosmopoles, and in spite of what you are saying, we went through a significant period of growth at that time. There were only two major depressions during that period (I am not counting the panics, since they only affected the New World), and it was only the last one that had a significant negative impact (largely because world trade ground to a halt).

Even then, after 1860, at least in Britain, the rate of inflation was generally stable - it was between 6% and -5%, except for World War I and World War II. It was only in the post war period that things started getting bad again.

Don't believe me - here is some data: http://www.statistics.gov.uk/articles/economic_trends/ET604CPI1750.pdf