Monetary standards

[Emsworth]

Under the gold standard, all currency is backed by gold. Under the bimetallic standard, currency is backed by two metals (usually gold and silver). Fiat money or paper money is not backed by anything.

For more in-depth analyses, see: gold standard, bimetallic standard, and fiat money.

I vote for option 1.

[A18]

Fiat money.

The gold standard promises deflation. If that's what you want, why not do it with fiat money?

[bullmoose88]

fiat money

[Emsworth]

The gold standard promises deflation. If that's what you want, why not do it with fiat money?

I do not support the gold standard because I support deflation. The deflationary nature of the gold standard is not the basis of my argument. I oppose governmental control of the money supply because I believe that it can lead to severe economic problems.

In a free market, interest rates would be determined on the basis of the actual supply of and demand for loanable money. Interest is, effectively, the price of a loan. Interest rates can be determined by free market forces in the same way as the price of any other goods or services.

Businesses often make investment decisions on the basis of interest rates. If rates are low, businesses tend to invest more; if they are high, they tend to invest less. In a free market, rates of interest will naturally respond to business activity, keeping it in check. If business investment starts rising, then demand for loans will also start rising. If demand for loans starts rising, then interest rates will start rising (in accordance with the law of demand). And if interest rates start rising, then borrowing and investment will eventually fall. Thus, business investment will always be kept in check; it will not be allowed to rise uncontrollably.

Central banks, however, disrupt this process by interfering with the size of the money supply and by lowering interest rates. Artificially low interest rates, combined with an inflated money supply, will lead to more investment than would have occurred in a free market. In many cases, companies will invest in projects they might have avoided had the interest rate been at its natural level. This, in turn, leads to an inflationary boom--and eventually, a bust.

This might seem like an argument against central banks, rather than an argument in favor of the gold standard. If it were possible to use fiat money but simultaneously keep the size of the money supply constant, I would agree with this criticism. However, the fact of the matter is, it is altogether too easy for the government to inflate the supply of paper money. On the other hand, the government cannot inflate the supply of gold.

The gold standard alone would not be enough. It must be coupled with free banking in order to be effective.

[A18]

I don't see why it should distort anything. I mean, the inflation is not exactly a secret.

[Emsworth]

I don't see why it should distort anything. I mean, the inflation is not exactly a secret.

The very basis of monetary policy is the idea that the government should expand or contract the money supply in order to artificially encourage or discourage investment. Any artificial stimulus is a distortion of the free market.

If the government increases taxes, then it is artificially depressing investment. And if the government increases the money supply, then it is artificially stimulating investment. Neither the tax nor the inflation is secret, but both are distortions.

[DanielX]

I voted 'bimetallic' but I mean 'trimetallic' - Gold, Silver, Platinum.

[Dave from Michigan]

have no idea, I don't even know what these are (I really need to learn about economics can't find a good book)

[dazzleman]

have no idea, I don't even know what these are (I really need to learn about economics can't find a good book)

What the gold standard meant was that the government set a price of gold per ounce, and could not print more money than the value of the gold it held in Fort Knox.  This effectively severely limited the money supply.

[Emsworth]

I voted 'bimetallic' but I mean 'trimetallic' - Gold, Silver, Platinum.

A bimetallic or trimetallic standard would certainly have some of the virtues of the gold standard: in particular, the government would lose its control over the money supply.

However, I think that there is one important problem with this approach. Under a trimetallic scheme, the relative prices of gold, silver, and platinum would not be allowed to fluctuate in accordance with market forces. Rather, their relative prices would be fixed. As a result, the official value of a metal would be different from its true free market value, which in turn leads to shortages of undervalued metals.

For example, consider what happened when the United States operated on a bimetallic standard. Under this standard, sixteen ounces of silver were equal to one ounce of gold. However, the true free-market value of gold was much higher. As predicted by Gresham's Law, people started hoarding away gold but using only silver. This eventually results in a surplus of circulating silver and a shortage of circulating gold.

[A18]

What the gold standard meant was that the government set a price of gold per ounce

No, it is not price fixing. Rather, "dollar" becomes a name for a certain amount of gold.

[True Federalist (진정한 연방 주의자)]

The only way to make bimetallic work would be to allow gold and silver to float as two separate currencies, which I think most people would find too confusing.

Deflation is more of a problem than mild inflation.  It places too much of a premium on savings for an economy that is above the subsistence level.  A silver standard could conceivably avoid deflation depending on what the production reserves are, but gold today would put us in a deflationary spiral that would cripple our economy.

[Emsworth]

Deflation is more of a problem than mild inflation.

If a reduction in prices is caused naturally by free market forces, then I don't think that there would be any problem at all. In fact, I think that it would be more problematic if the government disrupts free market forces to artificially stop prices from falling.

[True Federalist (진정한 연방 주의자)]

Deflation is more of a problem than mild inflation.

If a reduction in prices is caused naturally by free market forces, then I don't think that there would be any problem at all. In fact, I think that it would be more problematic if the government disrupts free market forces to artificially stop prices from falling.

Our economy is dependent on the consumption of non-essential goods and services.  Deflation leads to non-consumption and underemployment.

[bullmoose88]

Hmm..atlasia needs a monetarist party (just kidding)...

though it seems, I'd be the only member of the one issue group.

[12th Doctor]

Fiat, since there is not longer enough precious metal to back the amount of money needed to keep the economy going.

[MaC]

Fiat money.

Please change your avatar to Democrat, as you trust the government to deal in this area.

Gold standard would be ideal, but I suggest going directly to silver as a transitional step.  To go gold would disrupt the balance.

[Bono]

Fiat, since there is not longer enough precious metal to back the amount of money needed to keep the economy going.

There is, you just have to value the dollar low enough. I think one ounce of gold should have to equivalent to about $4000 in order to take in acount all Federal Reserve Liabilities.

[Filuwaúrdjan]

Fiat

Most of my family went through Hell as a result of the moronic decision to bring Britain back into the Gold Standard in 1925.

[Emsworth]

Most of my family went through Hell as a result of the moronic decision to bring Britain back into the Gold Standard in 1925.

In my opinion, the problem was not the return to the gold standard per se, but the way in which the standard was defined. Winston Churchill decided to define the gold standard based on the pre-WWI gold price. However, the free market price of gold had actually increased significantly since the war. Thus, the deflation caused by the return to the gold standard was much greater than it should have been.

There is, you just have to value the dollar low enough. I think one ounce of gold should have to equivalent to about $4000 in order to take in acount all Federal Reserve Liabilities.

Murray Rothbard wrote an interesting article, "The Case for a Genuine Gold Dollar." He calculated that, in 1981, one ounce of gold would have to be defined as equal to $676 in order to cover Federal Reserve liabilities. I don't know how much the definition has changed since then, however.

[Bono]

There is, you just have to value the dollar low enough. I think one ounce of gold should have to equivalent to about $4000 in order to take in acount all Federal Reserve Liabilities.

Murray Rothbard wrote an interesting article, "The Case for a Genuine Gold Dollar." He calculated that, in 1981, one ounce of gold would have to be defined as equal to $676 in order to cover Federal Reserve liabilities. I don't know how much the definition has changed since then, however.

Yea but that value is for what the liabilities were in 1981. Someone in a forum I know just calculated that for current(well a year ago's) values, and the dollar would have to be worth 0.00025 ounces of gold.

[A18]

I don't see why it should distort anything. I mean, the inflation is not exactly a secret.

The very basis of monetary policy is the idea that the government should expand or contract the money supply in order to artificially encourage or discourage investment. Any artificial stimulus is a distortion of the free market.

If the government increases taxes, then it is artificially depressing investment. And if the government increases the money supply, then it is artificially stimulating investment. Neither the tax nor the inflation is secret, but both are distortions.

The Austrian theory, which I think is what you're describing, rests on the basis that the business community has been fooled. That is, savings have not really increased, but rather monetary policy has caused the interest rate to fall.

But why would the business community think there was a larger pool of savings?

[Emsworth]

Yea but that value is for what the liabilities were in 1981. Someone in a forum I know just calculated that for current(well a year ago's) values, and the dollar would have to be worth 0.00025 ounces of gold.

That seems approximately right. I've done my own calculation (source):

a. Total value of gold stock = $11.041 billion
b. Official value of gold = $42.22 per oz.
c. Total Federal Reserve liabilities = $824.341 billion

d. Total size of gold stock = a/b = 261.5 million oz.
e. New value of gold = c/d = $3152.36 per oz.
f. New definition of dollar = 1/e = 0.00032 oz. of gold

[A18]

And what about the gold of other nations?

[Emsworth]

But why would the business community think there was a larger pool of savings?

Interest rates will fall if the money supply is inflated. Interest rates will also fall if savings increase. Thus, the effect in each case is the same. When the business community looks at the effect--the increase in the interest rate--it would tend to presume that there was an increase in savings.

You might say, because entrepreneurs are rational, they would know that the decline in interest rates was caused by money supply inflation rather than an increase in savings. Well, this would only be partly true. It must be remembered that economic agents never have complete information; they must rely on incomplete and imperfect data. Even though a business might know that the money supply has been inflated, it might still be misled by the rise in interest rates. A business might erroneously suppose that the inflation of the money supply was only partly responsible for the increase, and that an increase in savings was also partly responsible. After all, there is no way to perform an exact calculation to determine the effect of the inflation: economic acitivity cannot be modeled by equations.

And what about the gold of other nations?

Good point--I'm not sure exactly how much of the gold stock belongs to other nations.