There are real practical problems with gold and changing economies. What happens when your population goes up - you need more gold. Or economic growth. Similarly if gold is discovered like Spain's Latin American winnings it causes inflation.
The thought has crossed my mind that the answer is, it is impossible to have a long-term gold-backed system (or any other commodity), for all the various reasons that doesn't work, and it's impossible to have a long-term system not based on gold or some other set of commodities, because it is impossible for a government to be given the power to print arbitrarily without eventually using it, unto the death of that currency.
There is no guarantee that there is a long-term stable monetary system, after all. They may form a bistable pair together. Proponents of either state can easily read history as vindicating their claims that one or the other is superior, because look at how often the other failed, but I submit that if history vindicates anything at all it may actually be this position.
Yeah, a big thing that makes gold messy is that you can have massive supply shocks. Asteroid mining in the next few centuries are likely to make that worse.
Gold being poorly divisible also makes it very impractical for day to day coinage of a growing population. Eventually, the coins start getting so tiny as to be impossible to work with. I believe that's a big reason why we started using silver and copper for smaller denominations at some point.
An increasing population wouldn’t need more gold, gold (and money backed by it) would just become more valuable, right? Or, in other words, prices would drop and there would be deflation, for better or for worse.
When I first read up on economics, I had similar doubts about the gold standards.
It doesn't help that most modern day advocators of a gold standard have but a dim understanding of history and economics.
So, first: if the population in one country goes up, they can import more gold from elsewhere. It's a commodity after all.
Similar for one country digging up a lot of gold.
(The global economy wasn't quite as integrated back when Spain had their windfall from the new world. But even then, the long term impact on the price level in Spain compared to the rest of the world was rather modest compared to levels of inflation we see today.
Spain just imported more goods and services from the rest of Europe for a while than they exported; naturally losing gold in the process.)
So the real concern is about global population vs global gold stocks.
Similarly for economic growth: productivity increases under a gold standard lead to decrease in nominal prices. See https://news.ycombinator.com/item?id=26386115 for how this works (and worked in history).
The more important problem isn't so much population changes or economic growth; it's changes in demand for money balances!
Depending on the state of the economy, people want to hold on to different amounts of money vs other assets. That's true not only in nominal terms, but also in inflation adjusted real terms.
Those swings can be wild.
A central bank can print money (or take money out of circulation) to adapt to those swings in the desire for money balances. Look at the various measures of amount of money, like M1 or M2, change over time. Eg M2 for the US at https://fred.stlouisfed.org/graph/?g=MSEz
It is entirely fair and accurate to say that this would a disaster for an economy trying to run on gold coins.
Luckily, we have and had the technology to make the gold standard work: fractional reserve banking and privately issued bank notes. See https://www.alt-m.org/2015/07/29/there-was-no-place-like-can... for how that worked fabulously in Canada, and why it worked so much worse in the US.
> For a good portion of the time that the Bretton Woods system actually operated, the head of that Treasury division was Paul Volcker (yep, THAT Paul Volcker!)
Bretton Woods operated from 1945 to 1971. Paul Volker served as the under secretary of the Treasury for international monetary affairs from 1969 to 1974. What am I missing here?
The fact that gold reserves are still a very common feature in almost every country indicates to me that our governments aren't completely committed or secure in this grand experiment of unbacked fiat currency that's been going on for 50 years.
The total value of all currency right now is far higher than the value of all the gold - if there was some sort of rush back to gold the price increase would be tremendous
Yes, the thing that ended was pegging currencies to specific amounts of gold. Central banks / nations still hold large supplies of assets to "back" their currencies. It is just quite a lot more efficient to be able to manage the money supply.
Well, let's start with commodities. They have value, see, and that value contains both the exchange value (what it's worth in exchange for another commodity) and the use value (the value it provides as a commodity, like a coat keeping you warm.)
But exchange value of commodity to commodity is a pain, so inevitably people tend to turn to a commodity that can be the "money commodity". A universal store of value, in this case gold.
Then exchange becomes commodity -> money -> commodity. Gold becomes the interface between commodity exchange.
But, over enough time something else happens. Hoarding, luck, and gains in the money form mean someone now has enough spare gold to skip straight to money -> commodity, which then can be sold for more money when prices fluctuate.
Now you have two flows: commodity -> money -> commodity and money -> commodity -> more money.
The first one uses gold as a means of smoothing the interface between commodity transactions, the second, however, makes increasing the store of gold the goal. But that surplus gold doesn't come from just anywhere. It's not just ethereal excess, it needs to come from either the raw material value or the labor that was used to produce the commodity. While rarely, surplus value comes from making a commodity cheaper, the bulk of the excess gold in a money -> commodity -> money transaction comes from extracting value from labor.
> Well, let's start with commodities. They have value, see, and that value contains both the exchange value and the use value
Worth remembering also, that what you call "exchange value" is essentially a derivative of what you call "use value". I can use (eat) a side of beef. I cannot eat 50 sides of beef before it spoils. To get any value at all our of the other 49 sides of beef I have to find a market (49 other people who want to eat beef) and exchange it for something else. If there is no "use value" though, there's no market. Exchange value (prices) will change based on market conditions, but use value only changes with occasional technological innovation (freezers to freeze your beef, new industrial or chemical uses for gold, etc).
This is where fiat currencies come in. Fiat currencies like the US$ have a "use value", and that use is legally settling debts (being legal tender[0]), and paying my taxes (which actually are debts).
In any case, I think the extreme gold bugs who see fiat currencies all collapsing and gold going to the moon really over-estimate the market demand for gold in any scenario where shit hits the fan that bad. I mean, one way or another, whatever Government is in power is going to want to eat 25-50% of your income in taxes, regardless of what currency you use.
Even in a world where the only model is commodity -> gold/money -> commodity, there will be people who will hoard a commodity to sell it when the demand is high. So, hoarding and making profits is a human nature, that just cannot be avoided.
The South African Rand Note had the words, "I promise to pay the bearer, on demand at Pretoria, one Rand" and had the facsimile of the signature of the Governor of the Reserve Bank at the time.
I don't know of anybody who made the trip to exchange one. But by the time I could read that and understand it... you wouldn't of got much gold!
Why some arguments for 'Gold money standard wouldn't work' do not make a lot of sense
1. 'Co-operation under anarchy is impossible to achieve'
The whole point of money is to get people with different motives to co-operate. It is a technology that allows people to produce, store and exchange value. This system does not require perfect coordination, it only has to be good enough and humans have built good enough systems of coordination based on gold many times over the course of history. Is there any good reason to think humans have lost this ability?
2. 'The specie-flow numbers are not perfect'
Neither are most financial models including discounted cash flow, interest rate models etc. They do bake in many assumptions and conditionals but that does not mean it cannot be used to build a system.
However, there is a point to be made about the fact that gold is not that useful in the modern world because of the invention of new alloys like stainless steel, improved metalworking technologies etc. Also, economic activity would be correlated with gold extraction if we move into a gold standard.
However, we already have economic activity correlated to commodity extraction when it comes to oil. Oil (and other forms of cheap energy) consumption are a direct predictor of the economic output of a nation and so far there are no substitutes for oil.
Technically speaking the world might be better served by an oil standard. Ideally, there could be a central bank that exchanges (standardized) oil for paper currency. The system could be kept honest as new currency is only issued when people supply oil to the reserves and currency is destroyed when it is redeemed from the reserves. This would mean that currency circulation and economic activity is proportional to oil extraction which is already roughly how modern economies work.
However, this will never happen since western countries have deadly militaries and they are not going to let middle east economies set their own agenda on the global stage.
Long term however, if we can get hydrogen as currency that might be best. I am not a chemist, but it might be possible to develop good electrolysis technology to store energy by splitting water into hydrogen and oxygen. Then burn hydrogen to generate power and release harmless water vapor. We could have a decentralized monetary system that could potentially benefit everyone.
I'm pretty sure the fatal flaw of a gold standard is that we are using something permanent to account for fleeting human "energy". People age but gold does not.
I don't get what's so confusing about gold. It's limited because it was created by the universe and it can be easily stored. If we had some gold-backed system, a real one, then where's the inflation ? Where's the problem for the average person ?
> It's limited because it was created by the universe and it can be easily stored. If we had some gold-backed system, a real one, then where's the inflation ? Where's the problem for the average person ?
Being on the gold standard does not help with inflation specifically, or with monetary stability generally, as the historical record in the US shows; see the first chart:
Further a monetary system based on fixed currency often leads make deflation a problem for the average person. Look at the history of the Great Depression: the longer a country stayed on the gold standard, the longer it's economy stalled. Countries who left the gold standard sooner started to recover sooner.
It's been used / tried and we've moved on for a reason:
The amount of value exchanged in an economy changes over time, the value exchange between two separated economies trading with each other changes with trade imbalances. The inability to control this because you're pegged to the amount of gold available has significant consequences.
Growing populations and economy increases the demand for gold but there's not much that can be done to increase supply. You get deflation where people who already have money get progressively more spending power, not by investing but just by existing so there's a lot of idle capital, this trend increases hording further reducing available gold increasing deflation.
The average person would be faced with regular pay cuts to keep up with deflation and an extra source of volatility with no recourse for nations who would from time to time just go bankrupt and be overthrown because they run out of money to spend and have no out.
I'm really into bitcoin but comments like these make me cringe. Please add to the discussion or don't say anything at all.
For example you could draw parallels between a gold standard and a bitcoin standard and highlight why a bitcoin standard makes more sense than a gold standard if fiat currencies collapse.
rofl stack sats. really . there is zero likelihood of bitcoin ever replacing any of the fiat system. Bitcoin is so heavily regulated and tracked now anyway.
Fun fact: France sent a warship to New York harbor in early August 1971 with instructions to bring back its gold from the New York Federal Reserve Bank. Guess how that ended up.
[+] [-] throw0101a|4 years ago|reply
* https://www.goodreads.com/book/show/249245.The_Power_of_Gold
* https://en.wikipedia.org/wiki/Peter_L._Bernstein
Also good are Money : the true story of a made-up thing by Jacob Goldstein (also of NPR's Planey Money) and Debt: The First 5000 Years by Graeber:
* https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years
[+] [-] rr808|4 years ago|reply
[+] [-] jerf|4 years ago|reply
There is no guarantee that there is a long-term stable monetary system, after all. They may form a bistable pair together. Proponents of either state can easily read history as vindicating their claims that one or the other is superior, because look at how often the other failed, but I submit that if history vindicates anything at all it may actually be this position.
[+] [-] anonporridge|4 years ago|reply
Gold being poorly divisible also makes it very impractical for day to day coinage of a growing population. Eventually, the coins start getting so tiny as to be impossible to work with. I believe that's a big reason why we started using silver and copper for smaller denominations at some point.
[+] [-] hahajk|4 years ago|reply
[+] [-] eru|4 years ago|reply
It doesn't help that most modern day advocators of a gold standard have but a dim understanding of history and economics.
So, first: if the population in one country goes up, they can import more gold from elsewhere. It's a commodity after all.
Similar for one country digging up a lot of gold.
(The global economy wasn't quite as integrated back when Spain had their windfall from the new world. But even then, the long term impact on the price level in Spain compared to the rest of the world was rather modest compared to levels of inflation we see today.
Spain just imported more goods and services from the rest of Europe for a while than they exported; naturally losing gold in the process.)
So the real concern is about global population vs global gold stocks.
Similarly for economic growth: productivity increases under a gold standard lead to decrease in nominal prices. See https://news.ycombinator.com/item?id=26386115 for how this works (and worked in history).
The more important problem isn't so much population changes or economic growth; it's changes in demand for money balances!
Depending on the state of the economy, people want to hold on to different amounts of money vs other assets. That's true not only in nominal terms, but also in inflation adjusted real terms.
Those swings can be wild.
A central bank can print money (or take money out of circulation) to adapt to those swings in the desire for money balances. Look at the various measures of amount of money, like M1 or M2, change over time. Eg M2 for the US at https://fred.stlouisfed.org/graph/?g=MSEz
It is entirely fair and accurate to say that this would a disaster for an economy trying to run on gold coins.
Luckily, we have and had the technology to make the gold standard work: fractional reserve banking and privately issued bank notes. See https://www.alt-m.org/2015/07/29/there-was-no-place-like-can... for how that worked fabulously in Canada, and why it worked so much worse in the US.
[+] [-] unmole|4 years ago|reply
Bretton Woods operated from 1945 to 1971. Paul Volker served as the under secretary of the Treasury for international monetary affairs from 1969 to 1974. What am I missing here?
[+] [-] anonporridge|4 years ago|reply
https://tradingeconomics.com/country-list/gold-reserves
And since the 2008 financial crisis and recent events with Russia, it seems like that uncertainty might be justified.
[+] [-] juanci_to|4 years ago|reply
[+] [-] unmole|4 years ago|reply
[+] [-] ip26|4 years ago|reply
In other words, if my government holds a bunch of gold, your government will take my fiat currency more seriously.
[+] [-] bugzz|4 years ago|reply
[+] [-] colechristensen|4 years ago|reply
[+] [-] bendergender|4 years ago|reply
But exchange value of commodity to commodity is a pain, so inevitably people tend to turn to a commodity that can be the "money commodity". A universal store of value, in this case gold.
Then exchange becomes commodity -> money -> commodity. Gold becomes the interface between commodity exchange.
But, over enough time something else happens. Hoarding, luck, and gains in the money form mean someone now has enough spare gold to skip straight to money -> commodity, which then can be sold for more money when prices fluctuate.
Now you have two flows: commodity -> money -> commodity and money -> commodity -> more money.
The first one uses gold as a means of smoothing the interface between commodity transactions, the second, however, makes increasing the store of gold the goal. But that surplus gold doesn't come from just anywhere. It's not just ethereal excess, it needs to come from either the raw material value or the labor that was used to produce the commodity. While rarely, surplus value comes from making a commodity cheaper, the bulk of the excess gold in a money -> commodity -> money transaction comes from extracting value from labor.
[+] [-] nly|4 years ago|reply
Worth remembering also, that what you call "exchange value" is essentially a derivative of what you call "use value". I can use (eat) a side of beef. I cannot eat 50 sides of beef before it spoils. To get any value at all our of the other 49 sides of beef I have to find a market (49 other people who want to eat beef) and exchange it for something else. If there is no "use value" though, there's no market. Exchange value (prices) will change based on market conditions, but use value only changes with occasional technological innovation (freezers to freeze your beef, new industrial or chemical uses for gold, etc).
This is where fiat currencies come in. Fiat currencies like the US$ have a "use value", and that use is legally settling debts (being legal tender[0]), and paying my taxes (which actually are debts).
In any case, I think the extreme gold bugs who see fiat currencies all collapsing and gold going to the moon really over-estimate the market demand for gold in any scenario where shit hits the fan that bad. I mean, one way or another, whatever Government is in power is going to want to eat 25-50% of your income in taxes, regardless of what currency you use.
[0] Many people also misunderstand what "legal tender" means. The Bank of England has a good explanation of this: https://www.bankofengland.co.uk/knowledgebank/what-is-legal-...
[+] [-] gurjeet|4 years ago|reply
[+] [-] eloff|4 years ago|reply
Huh? Thats just speculation, why would gains come from labor? Would losses go to labor? I dont see a connection.
[+] [-] gHosts|4 years ago|reply
The South African Rand Note had the words, "I promise to pay the bearer, on demand at Pretoria, one Rand" and had the facsimile of the signature of the Governor of the Reserve Bank at the time.
I don't know of anybody who made the trip to exchange one. But by the time I could read that and understand it... you wouldn't of got much gold!
[+] [-] lizardactivist|4 years ago|reply
And also, with the way things work today as far as gold trade and keeping gold stock goes, which countries benefit the most?
[+] [-] simula67|4 years ago|reply
1. 'Co-operation under anarchy is impossible to achieve'
The whole point of money is to get people with different motives to co-operate. It is a technology that allows people to produce, store and exchange value. This system does not require perfect coordination, it only has to be good enough and humans have built good enough systems of coordination based on gold many times over the course of history. Is there any good reason to think humans have lost this ability?
2. 'The specie-flow numbers are not perfect'
Neither are most financial models including discounted cash flow, interest rate models etc. They do bake in many assumptions and conditionals but that does not mean it cannot be used to build a system.
However, there is a point to be made about the fact that gold is not that useful in the modern world because of the invention of new alloys like stainless steel, improved metalworking technologies etc. Also, economic activity would be correlated with gold extraction if we move into a gold standard.
However, we already have economic activity correlated to commodity extraction when it comes to oil. Oil (and other forms of cheap energy) consumption are a direct predictor of the economic output of a nation and so far there are no substitutes for oil.
Technically speaking the world might be better served by an oil standard. Ideally, there could be a central bank that exchanges (standardized) oil for paper currency. The system could be kept honest as new currency is only issued when people supply oil to the reserves and currency is destroyed when it is redeemed from the reserves. This would mean that currency circulation and economic activity is proportional to oil extraction which is already roughly how modern economies work.
However, this will never happen since western countries have deadly militaries and they are not going to let middle east economies set their own agenda on the global stage.
Long term however, if we can get hydrogen as currency that might be best. I am not a chemist, but it might be possible to develop good electrolysis technology to store energy by splitting water into hydrogen and oxygen. Then burn hydrogen to generate power and release harmless water vapor. We could have a decentralized monetary system that could potentially benefit everyone.
[+] [-] imtringued|4 years ago|reply
[+] [-] 1-6|4 years ago|reply
[+] [-] krallja|4 years ago|reply
[+] [-] unknown|4 years ago|reply
[deleted]
[+] [-] yellow_postit|4 years ago|reply
https://www.usmint.gov/about/mint-tours-facilities/fort-knox
[+] [-] heavyset_go|4 years ago|reply
[+] [-] shusaku|4 years ago|reply
What actually caused this? Countries buying US arms in the lead up to ww2?
[+] [-] yarky|4 years ago|reply
[+] [-] throw0101a|4 years ago|reply
Being on the gold standard does not help with inflation specifically, or with monetary stability generally, as the historical record in the US shows; see the first chart:
* https://www.theatlantic.com/business/archive/2012/08/why-the...
* https://archive.ph/FWKcL
Further a monetary system based on fixed currency often leads make deflation a problem for the average person. Look at the history of the Great Depression: the longer a country stayed on the gold standard, the longer it's economy stalled. Countries who left the gold standard sooner started to recover sooner.
It's been used / tried and we've moved on for a reason:
* https://www.vox.com/2014/7/16/5900297/case-against-gold-stan...
[+] [-] FastMonkey|4 years ago|reply
[+] [-] colechristensen|4 years ago|reply
Growing populations and economy increases the demand for gold but there's not much that can be done to increase supply. You get deflation where people who already have money get progressively more spending power, not by investing but just by existing so there's a lot of idle capital, this trend increases hording further reducing available gold increasing deflation.
The average person would be faced with regular pay cuts to keep up with deflation and an extra source of volatility with no recourse for nations who would from time to time just go bankrupt and be overthrown because they run out of money to spend and have no out.
[+] [-] imtringued|4 years ago|reply
[+] [-] shrimp_emoji|4 years ago|reply
[+] [-] commandersaki|4 years ago|reply
[+] [-] randomhodler84|4 years ago|reply
[deleted]
[+] [-] doomroot|4 years ago|reply
For example you could draw parallels between a gold standard and a bitcoin standard and highlight why a bitcoin standard makes more sense than a gold standard if fiat currencies collapse.
[+] [-] recuter|4 years ago|reply
[+] [-] i67vw3|4 years ago|reply
[+] [-] paulpauper|4 years ago|reply
[+] [-] rado|4 years ago|reply