Gold Standard

I don't think convertability is feasible in practice [although i support it in theory]. But if the currency is fractionally asset-backed by law and audited, the control over issuance will increase the perception of stability, and that's all that matters.

 

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There technically is an "account" that excess cash is taken out of and given US debt. So there kind of is a lockbox, but I agree with that point as well. Balances should be by person, not a pay as you go system.

I just don't want SS to become another welfare system. With welfare the politicians have enormous power over the population. It shoudl stay as it is, you get back roughly what you put in, not taking away money from people who do the right thing and save for retirement, since this just rewards people not saving. Too many times people are rewarded for poor behavior in this country, and punished for proper behavior, your proposals would extend that logic. If I pay into SS, but also save money for my retirement, you want to punish me, but reward those who **** everything away and spend way more than they make. That doesn't seem fair to me.

 

Obviously national survival will take priority over a gold standard, just as it did in previous wars so it is not a drawback at all. The amount of T-bills that could be sold would be limited by creditors. The government could not borrow what they would not lend if we had a gold-backed currency.

 

Sorry you lost me. Currently we can only borrow as much as someone will lend, and you are saying the same will be true of we have a gold backed currency. So how will having a gold backed currency change anything? Currency is not the issue at all, the debt is, and even under a "gold standard" the treasury will be free to create new debt, which is treated internationally as USD. So how has this changed anything? Would this put a premium on currency and make our debt trade at a discount, since the currency would be redeemable and the debt not?

I am sure I am missing something.

 

Under a gold standard that limits the ability of the Federal Government to create new money, they will NOT be able to go out and borrow whatever they need as they do now. The position of the Federal Government becomes more like that of the 50 states where borrowing capacity is tied to the ability to service the debt and not the need for unlimited debt. Lenders will have to analyze the debt service capacity of the Federal Government, recognizing that there could be a default if they lend too much - something not possible today. And Congress will have to limit spending, whether they like it or not, to what they can raise thorugh taxes and a much more limited borrowing capacity. On the one hand, this will lower interest rates to the Federal Government [without Fed intervention] because of lower inflation expectations, and will raise interest rates faster if the Federal Government borrows too much [since the Fed won't be able to monetize it].

Consider history:

Step 1: Kings could only spend what they had available in gold and silver plus what they could tax or steal. Maybe some bank will lend him a bit more, but they expect to get paid back relatively quickly - in gold. This obviously wasn't good enough for the average King.

Step 2: Create a central bank to lend money to the King by having the central bank create the money - backed by gold. Throw in fractional reserve banking for good measure so the bankers can make money. This is better, but Kings have unlimited ambition after all, and the debt still has to be serviced by paying interest in the form of gold to the banks even if the debt itself is rolled over perpetually. So the King has to tax people to raise the gold to pay the interest, and people might eventually revolt. The King can borrow more than before, but is still limited by that nagging debt service requirement that limits what the banks will lend.

Step 3: Get rid of the gold standard and just issue paper. Make it a law that everyone has to pretend the paper is as good as gold. Now the King is happy because he never runs out of money. Just borrow more and let the resulting inflation reduce the loan burden. No need to tax [except as a control mechanism over the people], so the people don't get angry. And even though they get upset about the value of the money going down over time, they don't really understand it. Just give them some more paper and they stay relatively quiet. Perfect.

What a return to some form of gold standard will do is move us from Step 3 back to Step 2.

 

It's meaningless if we just pay for program shortfalls with regular Federal Revenue or issuing debt.

If taxes are increased to pay for SS, which seems very likely at some future date, we are rewarding bad behavior, since 46% or so do not pay Federal income taxes. Those who do will pay more to retain SS solvency.

 

I understand what you are saying, but sorry if I am obtuse. Lets say we waive a magic wand and our currency is now on some kind of gold standard. How is debt affected? Can't they just issue more t-bills to pay the old debt and interest? The US borrowed before when we were on the gold standard. They don't really have to come up with currency to pay debt off, they just issue more t-bills to pay off the old note holders with interest.

Theoretically it may be a brake, but in practive it would be business as usual for issuing debt. Unless the debt has to be tied to some reserve, like say they can only issue debt in X relationship to currency, and currency can only be issued in X relationship to gold, I do not see how debt issuance is curtailed, which is what is killing the dollar. Again, the currency is not the issue, it is Federal Debt, which has equal or greater priority over all US assets as anything. The politicians are literally mortgaging our entire country, and everything we all own, freely.

 

Will creditors accept growing and unlimited quantities of perpetual debt that will never default but that can never be paid back as the condition of never defaulting? It's something you'll have to decide for yourself. If the issuance of additional debt was never a problem for government, why bother to end the gold standard? If issuing a trillion dollars in new debt makes no difference and doesn't cause a currency problem, why not issue $100 trillion? Or $1000 trillion? Or just pay off all personal and state debt with more Treasury debt [which will probably happen at some point to save the banks]? If it isn't currency there is no currency problem under your scenario. They seem to be doing this in Japan for a very long time with no bad side effects to the Yen. It's almost mystical. Why didn't anybody ever think of this before?

We all have a problem in that virtually everyone alive today has lived most of their life in a fiat system. Schools don't even teach students how the gold standard operated prior to World War I except in a very general way that always ends with the Panic of 1907. Teachers can't even teach it. Antal Fekete is the only person I know who even bothered to write it down. Fiat is all we know. It seems normal, natural for money to depreciate and for the government to never run out of the stuff. It's almost as if everyone suffers from Stockholm Syndrome when it comes to money. People get uncomfortable when it is suggested that money should again be commodity backed or have some intrinsic value. It seems dangerous to limit money creation by the government. What sort of new idea is that? What happens if we run out of money? Won't terrible things happen? There isn't enough gold, is there? Most people prefer the 100% certainty of loss of purchasing power to the possibility that money could retain its purchasing power over time. Maybe it's because they secretly want to believe someone is in control of money, even if they know those in control are robbing them blind. It might be a prison, but at least they feed you in prison. Right?

So I can say that it won't be business as usual, but I can't prove it. It has passed into the realm of ancient and forbidden knowledge.

 

Let me be succinct - if you think the money supply should be based on how big a pile of yellow stuff there is in a vault someplace, then what you are really saying is that arbitrary abstractions are more trustworthy than people.

The misanthropic part of that equation sounds like Ayn Rand. The ironic part of that equation (that we should use arbitrary abstractions devised by some people to prevent other people from being irresponsible) sounds like Monty Python.

At least Monty Python makes me laugh.

 

Absolutely! But gold and silver have been more of a shared construct than one devised by a few people. They were money before there were economists.

 

True. But cotton wasn't a viable crop until Whitney invented the gin. Does that mean we should only wear itchy woolen clothing today?

After all, woolen clothing is a construct independently devised by many peoples.

 

It was interesting in your comments about Ayn Rand and Monty Python that you chose to laugh over being free.

There are many websites that can explain why gold and silver have properties that make those two metals more suitable for use as money than other commodities.

 

The concept of freedom as it pertains to fragile, mortal beings such as ourselves is a bit profound for a message board devoted to collecting bits and pieces. However, I feel confident to say it has nothing to do with Rand's attempt to equate it with psychopathic selfishness.

As for laughing, I encourage everybody to do it as often as possible. It's almost as much fun as sex and you can do it as well alone as you can with others.

 

I don't think you understand Rand. A lot of people are heavily invested in their own personal master/slave relationships and won't easily let them go. But you are correct. It is beyond the scope of this forum.

 

Successful currencies have to have certain intrinsic properties in order for them to be worthwhile as a currency over time. Gold has all those properties and to a lesser extent silver. The first is the supply is limited and very difficult to increase. The second is that it is does not involve a third party to validate. The third is that it can be divided without destroying its value. The fourth is that it doesn't corrode or change properties over time or by use. The 5th is that it is durable and convenient enough to be used in trade.

 

As I learned it, a successful currency must be the following:

1) Limited in quantity.

2) Easily identifiable.

3) Difficult to duplicate.

Gold certainly fits the bill. So did cocoa beans in the Aztec empire. So did wampum in certain Native American cultures. So did huge rounded stones with holes in them on Yap Island. Well-executed paper money can fit the bill, too, although its rarity is a function of policy rather than actual physical scarcity.

But then, you can always plant more cocoa trees, mechanise the method of polishing shells, or use a larger boat to haul more big rocks to the island.

Or prospect for more gold.

 

I agree with you except that I would put more emphasis on silver than gold with the supply factor. Above ground silver supply is less than gold, is shrinking instead of growing as gold is, and much of it is unrecoupable due to it's industrial use. This video says it all. If the arguments made are sound, then having a silver standard would increase the value of the currency going forward.

http://www.youtube.com/watch?v=Qtp1i-z4AEY

 

Metals such as gold and silver still have the edge as money because they don't rot like cocoa beans so they are a better store of value, they are divisible into any quantity without destroying value [how do you make change for a rock with a hole in it or a shell?], and every quantity of gold and silver is equal in value to every other quantity of the same purity. Some cocoa beans or shells or rocks may have properties making them more attractive or valuable than others.

I would also add to your list the fact that for something to be currency it must have a value.

 

There is no reason a currency has to have intrinsic value of its own. In fact, having an intrinsic value can interfere with its utility. We as coin collectors learn this better than most. We know that America's struggles to keep coins in circulation lasted for decades, with gold coins disappearing in the early 19th Century, then silver in the 1840's and 1850's, and finally every sort of coin during the Civil War (shinplasters, anyone?).

Certainly precious metals endured as money for so long for the reasons you mention. But reliance on them has proven disastrous for many peoples in many places. A principal reason the Dark Ages were so dark was that the collapse of the Roman empire cut Europe off from traditional sources of gold and silver. Pathetic little chips of silver in far too-small quantities were all that was available as money for centuries, the ability to trade beyond one's own area and in any way other than barter was stymied and English kings were forced to send troops scurrying around the country, attempting to seize hoards of Roman gold whenever they were uncovered from farmer's fields or the walls of old buildings. That was the basis of today's Treasure Trove law - caches of gold when found were declared property of the Crown because the Crown was chronically desperate for cash.

Ironically, in some cases the opposite was true. When the Spanish discovered vast reserves of gold and silver in the New World, they swamped their home country's pre-industrial economy with heaps and piles of "intrinsically valuable" money for which there was nothing on offer to buy. Unable to ratchet up production to soak up the new funds, and too uncomprehending to realize that money is actually not very useful unless you can buy things with it, the Spanish experienced an early episode of hyper-inflation and the eventual destruction of their national economy. It was a catastrophic blow from which Spain failed to recover for hundreds of years.

It's only when "intrinsically worthless" currency became the norm that nations were shielded from the vagaries of the money supply, and could build the great industrial economies of the modern era.

 

Just sayin.