5 Comments

The Gold Standard Is Anachronism

[picapp align=”center” wrap=”false” link=”term=locomotive&iid=6581016″ src=”c/6/d/9/Welsh_Steam_Train_434b.jpg?adImageId=9327913&imageId=6581016″ width=”380″ height=”253″ /]

Have you ever realized this: If we had a true gold standard and some dude in Cabarrus County, North Carolina, say, had accidentaly found a dozen tons of gold in his backyard, we would automatically have worldwide inflation! Why? Because the money supply would have increased!

It is true that gold was used for a long time as currency because it is a scarce resource and therefore almost guarantees that it will not hyperinflate its value away, as paper money can do. But what a gold standard does is it substitutes planned inflation (paper money) with “accidental” inflation, as shown by my example above. History shows us that because of irregular successes in gold mining led to decade-long trends of either inflation or deflation. Sometimes they were lucky and found enough gold to increase the money supply, which then led to worldwide inflation, as it happened in the 1890s and 1900s. And sometimes they digged unsuccessfully, leading to deflation periods like 1870-1890.

The gold standard was just a very crude and simple kind of monetary regime, but it was somehow effective. In other words, it was a second best solution to the governments in the 19th century, who lacked the knowledge and ability to implement a more sophisticated monetary regime. IMHO today we should expect more from our modern societies than reverting to something as sophisticated as a steam locomotive.

Under a gold standard, the world economy would sooner or later look like this:

[picapp align=”center” wrap=”false” link=”term=locomotive&iid=751165″ src=”d/a/a/5/Freight_Train_Derailment_d6ba.jpg?adImageId=9327961&imageId=751165″ width=”380″ height=”242″ /]

Don’t get me wrong. I think that the current fiat money regimes can be incredibly dangerous, too, though they work nice in theory. But in reality, they are often abused for political purposes. So, the fiat regimes are like racing cars:

[picapp align=”center” wrap=”false” link=”term=drinking+driving&iid=4699427″ src=”8/0/d/a/Lipton_Tea_250_fb68.jpg?adImageId=9328127&imageId=4699427″ width=”380″ height=”253″ /]

Fast, effective, adjustable. But, if the wrong driver sits behind the steering wheel… well:

[picapp align=”center” wrap=”false” link=”term=drinking+driving&iid=6115917″ src=”2/a/9/a/Food_City_250_76fd.jpg?adImageId=9328122&imageId=6115917″ width=”380″ height=”253″ /]

What we need is an modern airplane: like the car it should be fast, adjustable, and effective. But above all, it should have an autopilot with anti-collision and terrain-following radar:

[picapp align=”center” wrap=”false” link=”term=dreamliner&iid=7396659″ src=”0/a/4/c/Boeing_Dreamliner_takes_7096.JPG?adImageId=9328245&imageId=7396659″ width=”380″ height=”253″ /]

Got any suggestions?

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5 comments on “The Gold Standard Is Anachronism

  1. I’m not an expert on Economic History but, if I recall correctly, when the Spanish Conquistadors brought tons of precious metals back to Spain, the economy was devastated by inflation exceeding 1000%.

    Of course the Crown of Spain become rich and powerful from these shipments, but it didn’t take long for their purchases to affect prices. They began to import a lot of products and precious metals left the country.

    A Gold Standard makes no sense. It ties up a useful commodity. Not all bearers of gold-backed notes are going to demand gold at the same time. There’s nothing to stop a monetary authority from issuing more notes than it has gold in inventory. The same discipline and honesty it takes to run a fiat system with low inflation also applies to a Gold Standard.

    • You are absolutely right about Spain. The same happened to China in the 17th, 18th, and 19th century with silver inflows from Japan and Latin America. And yes, the gold standard needs the same discipline as the fiat system, as long as we have fractional reserve banking. The main difference between the systems is that with the gold standard the money supply becomes totally erratic and uncontrollable (though control over the money supply isn’t always good, either).

  2. I thought that the gold standard is good because stops the government to inflate. I believe that the fortuitous inflation of gold currency is better than the programatic one of the paper money. Nevertheless, the points raised seem valid to me. So, instead of giving up the gold commodity as money, why not accepting competing commodities as money? I’m sure this happened in the past and then gold emerged as it’s fungible, durable and rather high value per unit of weight (was ther another criteria?).

    • You make a good point. Milton Friedman wrote about the silver-gold standard that was used, AFAIK, in France in the 19th century. There, Gresham’s law applied, that is, bad money drives out good money. The commodity with the higher inflation becomes the main currency. In the case of France it was silver, because gold was hard to find and therefore more valuable at that time. You would probably need more than two commodities to make sure that you never get deflation, but then the risks are also higher that one commodity becomes abundant and causes high inflation. I am not sure, if there are other problems with having several commodities as money.

      I highly recommend reading the book “A Monetary History of the United States” by Milton Friedman. It is entertaining to read and covers the period 1867-1960.

  3. Gold has many physical properties which makes it an almost ideal commodity money. But those same properties make it a useful resource. There is incredible efficiency in having money which is virtually worthless as a commodity yet controlled in supply.

    All things considered I think the success of modern monetary authorities controlling inflation is fairly evident.

    The last bout of serious price inflation in the US was crushed by Paul Volcker with extremely tight monetary policy. Since then, the Fed merely had to maintain credibility. The Board of Governors will likely act in good faith to tighten as soon as inflation rises or employment begins to turn the corner.

    The remaining issue is whether quantitative easing contributes significantly to asset price bubbles and whether the innovation in new policy instruments wielded by the Fed will create unintended and unpredictable economic consequences.

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