Community | August 30, 2012 | 45 comments

Gold standard: Could it return in the US?

source: http://www.bbc.co.uk/news/magazine-19422104

Image
Vierotchka

http://www.bbc.co.uk/news/magazine-19422104

For many years, calling for "a return to the gold standard" in the United States put you in the company of economic eccentrics and the libertarian, Congressman Ron Paul. But this week, the Republican Party agreed to set up a commission to look into fixing the gold value of the dollar. Why?

The usual reason given for a return to some kind of gold standard is that gold leads to sound money. It links the supply of money to the supply of gold and since gold reserves increase only slowly, the growth in the supply of money is limited, thus helping to choke off causes of inflation.

The problem is that in practice, things do not always work out like that - from 1919 to the 1930s, US prices were anything but stable.

Kenneth Rogoff, an economics professor at Harvard University, agrees that a gold standard would not necessarily be more stable than the current monetary system.

"The price of gold fluctuates a lot and therefore the price of your currency would fluctuate a lot," he says.

Rogoff points to the fluctuations of the dollar in the 19th and early 20th centuries when the dollar was tied to silver and gold.

"You find yourself tied to the availability of the particular metal."

The US had another go at linking the dollar to gold after World War II.

From 1945-1971, the period of the "gold exchange standard", the US fixed the dollar to gold at $35 an ounce. Growth rates were higher and rises in wealth were more equitably shared across society than in the years that followed.

Unemployment has been higher, growth lower, and wealth more unevenly distributed since the US dollar came off gold in 1971. This could have been coincidence, however. Many would argue that the dollar's link to gold contributed little to post-war prosperity.

Furthermore, the US and other advanced economies were on the gold standard together. So if the gold drained from one part of the system, it pooled in another part, with the concomitant expansion of the money supply, demand and the potential to pull in goods from the part that had been depressed . Theoretically it was a self-sustaining system.

So how could the US implement a new gold exchange standard today?

"For a gold standard to work, people have to believe that you will never go back to fiat money," says Rogoff. Fiat money is the way the modern money supply works. Dollars, euros and pounds are created by central banks without reference to any underlying asset such as gold or silver.

"If people doubt your resolve, if you are not completely credible, they will want to get your gold," he says.

The current price of gold is about $1,665 an ounce. Theoretically, the US government could promise to redeem dollars for gold at that price. Alternatively, the US could in effect devalue the dollar against gold by fixing the price lower, at say $2,000 an ounce.

The initial problem would be the maintenance of credibility. At the end of the 1960s, foreign central banks no longer believed US assurances that the gold standard would be maintained and started demanding US gold - in other words, redeeming dollars - in ever greater quantities.

Such demands would start after any return to gold. For Anil Kashyap of the University of Chicago Booth School of Business, any suggestion of a return to gold is "incredibly crazy". If the US returned to gold unilaterally "all you would hear is a giant sucking sound as Fort Knox was drained" - with no corresponding benefits.

Holders of dollars - such as foreign central banks - would want to test the US government's resolve and the demand for gold could mount, especially as there is no reason to think that other major economies would also want to return to gold. There would also be speculative attacks on the dollar just as there is with other fixed exchange rates - eg the Black Wednesday sterling crisis of 1992.

Charles Wyplosz, professor of international economics at the graduate institute of international and development studies in Geneva, says that if the US government substantially devalued the dollar "it could buy a few years" but eventually the system would break.

(click on the link for the whole article)
  1. groups:
    Community,   Culture,   Opinion,   Point of View/ Opinion,   3 more
  2. tags:
    Economy,  Gold Standard
  3. recommended by:
    Vierotchka
  4.     
    |

45 comments // Gold standard: Could it return in the US?

  • savroD
  • Dagum
  • Vierotchka
  • Dagum
    • +1
      Dagum  
    • Vierotchka:

      I don't know the situation in Europe but this Country started under a silver standard with a "Dollar" being 371 1/4 grain troy of pure silver. It functioned well for 100 years or so.

      As a matter of fact, by the 1900 most states states switched from a bimetallism standard to a purely gold standard because because there too much sliver, discoveries of large deposits in the Americas were driving the prices down and decreasing the value of the currency.

    • 9 months ago
  • Vierotchka
    • 0
      Vierotchka  
    • Dagum:

      I'm talking about the situation in the world. You're referring to the situation a century ago - since then, natural reserves have dwindled significantly and the industrial demands have increased exponentially.

    • 9 months ago
  • Dagum
    • 0
      Dagum  
    • Vierotchka:

      I'd be willing to gander the available silver hasn't depleted so much if society so freely uses it in medical supplies and other industries, like throw away aluminum.

      But I think we identified the concern. You're concerned about a divisibility problem? Is there enough raw silver to coin and place in everyone hands and at what weight?

    • 9 months ago
  • Vierotchka
    • 0
      Vierotchka  
    • Dagum:

      The medical use of silver against infections is a godsend in view of the fact that antibiotics are fast losing their efficacy.

      http://www.ncbi.nlm.nih.gov/pubmed/9836841

      Mind you, if we stop using silver for wound management in the face of increasing bacterial antibiotic resistance, the world population will be dramatically reduced so there will be more silver to go round for the survivors.

    • 9 months ago
  • Vierotchka
    • 0
      Vierotchka  
    • Dagum:

      "While i have found nothing on how much silver is in the world, i do know there is about 700 million ounce of silver mined each year. Some experts say its higher and close to 800 million and some suggest is a bit below. But for the sake of argument we are going with 700 million in this article. There are roughly about 310 million people living in the united states as of 2012. If you take those numbers and divide the number of people living in the united states vs how many ounce of silver are mined each year you end up with 2.25 ounce of silver. That means there is only 2.25 ounces of silver on the market for each American citizen every year." http://businessinvestorpro.com/how-much-silver-is-in-the-world/

    • 9 months ago
  • Vierotchka
  • Vierotchka
    • 0
      Vierotchka  
    • Dagum:

      Even more (so to speak)

      Uh... I think he got his decades mixed up; the global population in 1980 was 4,453,831,714 - it was in 1950 that the global population was about 2.5 billion.

    • 9 months ago
  • Vic_Romano
    • 0
      Vic_Romano  
    • Dagum:

      A question I have with regards to precious metals in general is how badly are we messing with the environment in order to extract them?

      Now, I get that the SCARCITY of these metals is what gives them their exchange value, but food, water, paper are scarce too in the economic sense.

      I'm no expert on this subject, but it just seems that this type of means of exchange is just as flawed, if not more so, as the current monetary system we have.

      And as Hammywill pointed out, I think this has a lot more to do with banking than it does a monetary system.

    • 9 months ago
  • CreditFigaro
  • bailey78
  • bailey78
  • Vierotchka
  • bailey78
  • Vierotchka
  • bailey78
  • hammywill
    • +2
      hammywill  

    • It's not the gold that is the problem. It is the banking system with unlimited fractional reserve lending. Although gold does have some limitations such as the limited quantity which can then be cornered. But again, it is not tying money to something with an "intrinsic" value, it is the supply of that particular item. The dollar only fluctuates in value (like in the 1930's) due to the current banking model we use that allows for fractional lending. Dollar value fluctuations are caused by banking, not by monetary standards.

    • 9 months ago
  • Vic_Romano
    • +1
      Vic_Romano  
    • Image
    • hammywill:

      It's that whole "golden rule" thingey...you know, those with the gold make the rules.

      In this instance, though, it's the big banksters who have rigged the game in their favor--and they don't even need gold to do it anymore. And even if we were to return to a gold standard, it would be done in such a manner so as to benefit the monied classes who have already rigged the game.

      What we really need is some sort of worldwide jubilee.

    • 9 months ago
  • dugdog47
    • +2
      dugdog47  

    • There ain't enough gold on the planet to be paid out for all the money the Fed has printed in the last 10 years alone. Good idea, but will not work.

    • 9 months ago
  • Vierotchka
  • Vierotchka
  • Kilnsapper
  • Saladin
    • +3
      Saladin  

    • People who advocate for the gold standard are not students of history or economics.

      It has no intrinsic benefit, it makes no sense and it can be *disastrous* if it causes deflation, which it always does.

      Some people credit most of the depressions in the Gilded Age to the gold standard alone as it caused a sharp contraction in currency.

      What's weird is, inflation hawks really are class warriors. It's the ultimate debtors tool because you can never escape your debt with deflation. In fact, your debt is likely to get more expensive because the currency is worth less.

      Yet this original purpose is lost on the modern audience.

      The lie is so old, people actually think it's proper economic doctrine now.

      People tend to fall asleep in history class when studying the Populists, but there'd be no gold-backers if they hadn't.

    • 9 months ago
  • B_N_L
  • Dagum
    • 0
      Dagum  
    • Saladin:

      You don't escape from debt with inflation. You just pay for it in higher prices. For everyone except the 1%, the long lag between a rise in prices and a corresponding rise in wages means you mostly even end up paying more.

      Inflation is the ultimate creator of income disparity.

      And Speaking of history, The populists and William Jennings Bryan, didn't want to replace gold with fiat, that wanted to add silver to the monetary base.

    • 9 months ago
  • Saladin
    • +1
      Saladin  
    • Dagum:

      "You don't escape from debt with inflation. You just pay for it in higher prices."

      No, if you took out a ten thousand dollar loan and the currency inflates 20%, that loan is now significantly cheaper.

      The higher prices are irrelevant because, if the economy is functioning correctly, your wages will rise to meet those new prices.

      "Inflation is the ultimate creator of income disparity."

      Funny then, why is it always the Federal Reserve's mission to fight inflation then?

      Why is the world on the brink of fiscal collapse in trying to stop inflation via excessive spending?

      Inflation hawking is the ultimate one percent activity because all those people are really interested in is the return on their investments.

      "And Speaking of history, The populists and William Jennings Bryan, didn't want to replace gold with fiat, that wanted to add silver to the monetary base."

      What they wanted was inflation because the gold standard was artificially limiting the economy's ability to grow and giving bankers disproportionate power since most of those people were quite strapped for cash.

      They wanted to add silver because no one really understood monetary shit back then. Gold was the standard mainly because of tradition, because people didn't understand money as being representative of the economy at large. It was a pretty new idea back then.

      If they understood the issue better, and weren't mostly Southern, they probably would gone with Lincoln's greenback.

    • 9 months ago
  • Dagum
    • 0
      Dagum  
    • Saladin:

      "The higher prices are irrelevant because, if the economy is functioning correctly, your wages will rise to meet those new prices."

      But there is always lag. Do you know the nature of inflation? Even in a healthy functioning economy price/wage lag could be a decade. It varies by region, profession where you are on the pyramid. And they are always printing more off much faster than wages can catch up.. Wages always lag behind the price increases.

      It's pyramid in nature. Whoever get's the newly printed money first has all positives of new money without the rise in prices because it hasn't been spent yet. Every successive person that get's that dollar, get's it with decreased purchasing power as prices rise. Very insignificant at the stop, snowballs to the bottom.

      Reason why there is always a lag of wages behind the rise prices? Why? Because who gets new money first? It's not every member in society. Everyone doesn't just wake up with their share of the newly printed money in their bank account. They have to wait for it to trickle down the pyramid. It's in the hand of an elite few that the new money first finds itself.

      When new money is created the treasury issues a bond. (In the rarer and rarer cases when FRN are physically printed, the, Federal Reserve calls the treasury to just print the money needed to buy that bond.) The treasury gives the money the Fed to buy the bond, and one of the primary dealers, such as Goldman Sachs is used as a "financial intermediary" which is allowed to skim off transactions fees.

      "Funny then, why is it always the Federal Reserve's mission to fight inflation then?"

      That's the big joke. Of course it doesn't fight inflation. It creates it like crazy. Uncle Ben is a mad man printer. The fed has never lived up to it's mandate. It never intended to serve the public any more than any other private corporation that operates for private profit.

      "What they wanted was inflation because the gold standard,"

      The populists knew more about monetary policy than, than almost everyone today. Silver was our original base monetary unit under the Constitution. And by adding it back in, it certainly did expand the monetary base. 2 metals is more than 1. But both are still...metals. It takes work, energy to get metal out of the ground. The people that have created metallic money, have worked to create it.

      In contrast, it takes Ben Bernake all of 5 seconds to lift his chubby fingers to click his mouse and create a few billions is some electronic account belonging to well connected insiders.

      As far as greenbacks go. I'll say that was definitely a more just system than we have now. I suspect that's why Lincoln ended up dead, because he wished to continue with them.

    • 9 months ago
  • fiberbundle
    • +3
      fiberbundle  

    • If you really believe that gold has some intrinsic property that holds value outside of a government fiat that pegs its value---then buy gold--who's stopping you?

      If you don't believe in "fiat" money, then why do you require governments to set the price of gold?

      If government is telling you what currency is worth--whether its gold or paper --its still fiat.

    • 9 months ago
  • remanns
    • +1
      remanns  

    • Actually,.....ammunition would make a rather good basis for backed currency as well.

      ( and wars already cost MONEY,....so what the hell. )
      p.s
      One dollar would always be worth one 50 caliber round,.....something like that

    • 9 months ago
  • remanns
  • MSII
  • bailey78
  • lenhart
    • +3
      lenhart  

    • Interesting article! Gold was not working when William Jennings Bryan made his famous CROSS OF GOLD speech. The REAL 'backing' of a nation's currency is its PRODUCTIVE capacity. Its position vis a vis the rest of world is more important than the gold that is --or is not --in Ft Knox. Sadly --the U.S. is on the very bottom of the CIA's list with the World's Largest NEGATIVE CURRENT ACCOUNT BALANCE, formerly called the Balance of Trade Deficit. Guess who's on FIRST: CHINA!!! They own us.

    • 9 months ago
  • hammywill
  • Kilnsapper
  • Dagum
  • fiberbundle
  • Joeydee44
  • Vic_Romano
    • +2
      Vic_Romano  

    • Seems to me that the likes of Goldman Sachs could easily manipulate such a system, and the have nots of the world would be thrown way under the bus if such a system were ever instituted.

      But the system we got now isn't working all that well either.

    • 9 months ago
  • Vierotchka
    • +1
      Vierotchka  

    • An excerpt:

      For Anil Kashyap of the University of Chicago Booth School of Business, any suggestion of a return to gold is "incredibly crazy". If the US returned to gold unilaterally "all you would hear is a giant sucking sound as Fort Knox was drained" - with no corresponding benefits.

    • 9 months ago
  • Dagum
  • Vierotchka
  • Dagum
    • 0
      Dagum  
    • Vierotchka:

      I would be willing to bet money on that.

      At best it's filled with bars that are owned by someone else. At worst it's empty. The vault hasn't been audited by the Congress in decades. We just take the word of some employee in the treasury department, that it's all accounted for.

      Funny thing too. The value of the gold on the treasury's balance sheet hasn't changed in decades yet the value of gold on the market in just the past 10 years has gone up over ten fold.

      As the scumbag Henry Kissinger "It's not a matter of what is true that counts but a matter of what is perceived to be true,"

      The perception that we have a vault filled to the brim with U.S. citizen's gold gives us clout in international affairs.

    • 9 months ago
more from Community:
from the community

top videos