The Truth About Gold as Money

Combine gold's heady price gains over the last several years, greater access to the gold ownership through products such as the SPDR Gold Shares (NYSE: GLD  ) , and concerns about the monetary stewardship of the Federal Reserve, and it's no wonder the idea of a resumption of the gold standard has gained some currency lately. Proponents would have us believe that the gold standard is a cure-all for government corruption, profligacy, and incompetence. The unvarnished truth, however, is that gold is no panacea -- one need only look at history for examples.

Financial crises are not just a 20th-century phenomenon
Last July, in response to a question from Rep. Ron Paul (R-Texas), Fed Chairman Ben Bernanke reminded the Congressman that "the reason the Federal Reserve was founded a century ago was to try to address the problems arising from financial panics, which did, by the way, occur in an unregulated environment in the 19th century." (See the exchange for yourself.) In fact, a significant proportion of the classical gold-standard era coincided with the Long Depression, which spanned from 1873 to 1896 and included the panics of 1873, 1884, and 1893. Some of these crises were accompanied by significant declines in industrial production.

Joe Davis of the Vanguard Group and the NBER has analyzed the U.S. business cycle between 1796 and 1914. He found that the periods of economic contraction during the post-Civil War period (1866-1914) were a bit more frequent and longer than they have been in the post-World War II era. (Note, however, that his paper was published in 2004 and does not include the Great Recession the U.S. experienced as a result of the credit crisis.)

Who's with me?
There is another problem: The U.S. is not the only country that abandoned the gold standard. Are gold enthusiasts advocating a return to an international gold standard? If the U.S. were to go it alone, macroeconomic stability would be anything but assured. As Dr. Michael Bordo, a professor at Rutgers and an expert on the gold standard, wrote in 1981: "This suggests that one country alone on the gold standard would likely find its monetary gold stock and hence its money supply subject to persistent shocks from factors beyond its control."

Incidentally, Bordo is hardly a rabid statist: He took his doctorate at the University of Chicago and is a fellow of the Hoover Institution.

The fundamental illogic of a gold standard
Hard-money advocates are fixated with removing control of the money supply from the government and/or central bankers, to a point where they appear willing to completely ignore some of the problems with a gold standard.

 Under a genuine gold standard, the money supply is equal to the supply of gold -- and by "genuine," I'm referring to a system in which money is either made of gold or, more realistically, is fully backed by and redeemable in gold. Now, if you want to argue that the Chilean peso should be based on copper -- which makes up the country's major industry -- I can agree that there is at least some logical basis for the notion. However, what's the economic justification for tying the U.S. money supply to world gold mining output?

Under this standard, advancements in gold-mining technologies or discoveries of new, easier-to-mine gold deposits alter the purchasing power of money, i.e., the price level of goods and services in the economy. If gold were money, these developments would imply a direct increase in the money supply. For the "money market" to clear, the price level in the economy must increase. Indeed, you now have more gold chasing the same amount of goods services, with each ounce of gold now buying fewer of those same goods and services.

Although I've described this phenomenon in theoretical terms, this is exactly what happened when gold was discovered in California in 1848. Gold proponents will argue that the resulting inflation was less than the average inflation we are entirely accustomed to under a fiat money system. That's quite true, but my question remains: What is the basis for tying prices to mining activity? On this question, I'm aligned with an Economist reader who wrote: "The money supply is far too important to the health of the economy to be left to the happenings of the mining economy."

Show me
Is fiat money and fractional reserve banking a perfect system for facilitating the stable development of the U.S. economy? No. However, it's quite a leap from that observation to the conclusion that a gold standard would automatically function better. Given gold's record as a currency, the burden of proof we should require from its advocates is much higher than that.

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Fool contributor Alex Dumortier holds no position in any company mentioned. Check out his holdings and a short bio. You can follow him on Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (37) | Recommend This Article (21)

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  • Report this Comment On March 07, 2012, at 4:33 PM, TMFMorgan wrote:

    Great stuff, Alex.

  • Report this Comment On March 07, 2012, at 4:55 PM, AgAuMoney wrote:

    The most important thing about money is to maintain its stability... You have to choose between trusting the natural stability of gold and the honesty and intelligence of members of the government. With due respect for these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold. --George Bernard Shaw

  • Report this Comment On March 07, 2012, at 5:01 PM, TheDumbMoney wrote:

    Oh this should be fun. Hold on while I go make some popcorn.

  • Report this Comment On March 07, 2012, at 7:30 PM, TMFAleph1 wrote:

    @dumberthanafool

    Good choice!

  • Report this Comment On March 07, 2012, at 8:42 PM, DDHv wrote:

    I've wondered what would happen if some government made a list of commodities that were good for long term storage, and made a policy of buying and storing ones whose price was below the past ten year average, and selling when above?

  • Report this Comment On March 07, 2012, at 9:24 PM, roggowa wrote:

    The question can just as easily be turned around - What is the basis of tying the money supply to the tom-foolery of politics? Or stated another way - The money supply is far too important to the health of the economy to be left to the whims of a few elitists.

    A consideration to make for the difference between post civil war era and post WW2 era economies is that Keynesian economics is all about manipulation. The manipulations can make things better in the short run, but there is always a price to be paid in the long run. We may yet have to pay the price for our previous, artificially generated prosperity.

  • Report this Comment On March 08, 2012, at 10:08 AM, whereaminow wrote:

    LOL, Alex you never learn. Guess I have to smack you down again. This will be fun.

    David in Liberty

  • Report this Comment On March 08, 2012, at 10:17 AM, DJDynamicNC wrote:

    "You have to choose between trusting the natural stability of gold and the honesty and intelligence of members of the government. "

    Not sure where the perceived "stability" of gold comes from. It's a rock that gold mining companies can (and do) get out of the ground. Supply is subject to shocks inherent to any mining industry. Price is subject to the same supply and demand function as anything else in a market economy. And value is subject to restrictive deflationary pressure in the face of population growth. Further, we'd be putting an arbitrary cap on the ultimate growth function of human society - there is only so much gold on the planet.

    Of course, Mr. Shaw was speaking as somebody who actively advocated for the END of the capitalist system, so I do quite enjoy your use of his quote.

  • Report this Comment On March 08, 2012, at 10:21 AM, DJDynamicNC wrote:

    "We may yet have to pay the price for our previous, artificially generated prosperity."

    If the quality of life has drastically improved for millions of people over almost a hundred years, I'm not sure that constitutes "artificial" prosperity.

    Again, there isn't any evidence being offered here other than vague moralizings over how this economic growth hasn't been "real" or is "irresponsible" or so on and so forth.

    If millions of people are living better, longer, more contented lives - and they unequivocally, objectively and quantifiably are - then this notion that it somehow doesn't "count" because some bondholder somewhere has to pay high taxes or because some rock somewhere is no longer used as a unit of currency is ridiculous.

  • Report this Comment On March 08, 2012, at 10:28 AM, DJDynamicNC wrote:

    "Gambling promises the poor what property performs for the rich--something for nothing." - George Bernard Shaw

    Since we're trading quotes. :)

  • Report this Comment On March 08, 2012, at 11:11 AM, whereaminow wrote:

    Let's take this paragraph-by-paragraph. It's sad that CPA's are not required to have any understanding of monetary history, or it seems, history in general or basic economic theory.

    ------> Proponents would have us believe that the gold standard is a cure-all for government corruption, profligacy, and incompetence. <----

    Strawman alert! One thing about a Dumortier article, you can always count on him hiding his weak arguments behind a caricature of his opponent's position.

    Alex and I went back on forth on the gold standard last year. Never once did I say that the gold standard solves corruption. I've never seen TMFSinchiruna write. I've never seen ANY gold standard proponent write this.

    Alex's level of knowledge in this area is extremely weak and it shows when he consistently (not just once in a while) starts his articles with strawman attacks.

    The gold standard failed precisely because politicians are corrupt and can't be trusted. If we gold standard supporters know this, we would be violating the Law of Non Contradiction to say that such a monetary rule solves the problem of corruption.

    It's so easy even a caveman could figure this out. What is Alex's problem? I don't know. I'm not a psychiatrist.

    --->In fact, a significant proportion of the classical gold-standard era coincided with the Long Depression, which spanned from 1873 to 1896 and included the panics of 1873, 1884, and 1893. Some of these crises were accompanied by significant declines in industrial production.<----

    Alex must have studied the Long Depression in high school. I guess he hasn't gotten the memo that nearly every single mainstream economist now agrees with the classical free market economists, that the Long Depression was neither long nor a depression. In fact, most now see the 1870's as a brief recession followed by one of the most robust periods of growth in US history!

    Oops.

    "Historians long attributed the turmoil to a "great depression of the 1870's." But recent detailed reconstructions of 19th-century data by economic historians show that there was no 1870's depression: aside from a short recession in 1873, in fact, the decade saw possibly the fastest sustained growth in American history. "

    http://www.nytimes.com/2006/06/02/opinion/02morris.html

    The reason that historians though it was a long depression is because prices were falling. They didn't understand (and many on this board still don't) that you can have fantastic economic growth while prices fall. So they assumed everyone was miserable. But we don't expect historians to understand economics. We do expect financial writes to understand it though.

    And just for fun, what happened just before 1873 that might have caused an increase in the money supply that always leads to a crash? I'll give you a hint: greenback.

    -------> Joe Davis of the Vanguard Group and the NBER has analyzed the U.S. business cycle between 1796 and 1914. He found that the periods of economic contraction during the post-Civil War period (1866-1914) were a bit more frequent and longer than they have been in the post-World War II era. (Note, however, that his paper was published in 2004 and does not include the Great Recession the U.S. experienced as a result of the credit crisis.)<-----

    I'm going to take a wild guess and assume that Joe Davis used GDP as his measure of economic growth and contraction. Again, since prices under a gold standard rule tend to fall over time (the CPI in 1900 was at roughly the exact same level it was in 1800, despite massive price rises due to currency debasement in the War of 1812 and especially the Civil War), GDP rarely paints the 1800s as a time of prosperity. Which right there, should tell you all you need to know about the usefulness of GDP (it really just measures price rises.)

    Meanwhile the standard of living exploded during the Gilded Age, despite GDP growth that looks no better, sometimes worse, than the 1970s. Is there really an economist that is going to tell me the 1970s saw more impressive YOY gains in wealth accumulation than The Gilded Age? We have a name for those kinds of people. They're called Quacks.

    ------>The U.S. is not the only country that abandoned the gold standard.<-------

    Besides the logical fallacy inherent in this statement, does anyone in our audience know why the entire world abandoned the gold standard? I bet dozens of readers do. Poor Alex seems to have never heard of World War I.

    --->If the U.S. were to go it alone, macroeconomic stability would be anything but assured. <---

    Strawman. Nobody is promising you a rose garden.

    ----> As Dr. Michael Bordo, a professor at Rutgers and an expert on the gold standard, wrote in 1981: "This suggests that one country alone on the gold standard would likely find its monetary gold stock and hence its money supply subject to persistent shocks from factors beyond its control."<----

    This "hardly a statist" is also "hardly an Austrian School scholar". We have historical examples of what happens when one country stays on the gold standard while everyone else is debasing their currency. Gold rushes to the country that is the safe haven. When other countries wake up from their inflationary fantasies, the gold starts to go back.

    America from 1914-1917 saw a huge increase in the gold stock, as the belligerent nations turned their printing presses on high. The Netherlands saw a massive increase in gold which helped create the Tulip Bubble as money poured in to escape the debasements in rival European countries.

    Anytime you see a massive and sudden increase in the supply of money, be it gold or moon rocks, you have ripe conditions for excessive speculation, a boom and bust.

    Of course, we wonder why the Fed Apologists think they have solved that problem by continuously engaging in massive increases in the supply of money... But hey, they have the Princeton doctorates and I'm just a rube in the IT field. What do I know?

    -------------------------

    TO BE CONTINUED

    David in Liberty

  • Report this Comment On March 08, 2012, at 11:12 AM, whereaminow wrote:

    Let's take this paragraph-by-paragraph. It's sad that CPA's are not required to have any understanding of monetary history, or it seems, history in general or basic economic theory.

    ------> Proponents would have us believe that the gold standard is a cure-all for government corruption, profligacy, and incompetence. <----

    Strawman alert! One thing about a Dumortier article, you can always count on him hiding his weak arguments behind a caricature of his opponent's position.

    Alex and I went back on forth on the gold standard last year. Never once did I say that the gold standard solves corruption. I've never seen TMFSinchiruna write. I've never seen ANY gold standard proponent write this.

    Alex's level of knowledge in this area is extremely weak and it shows when he consistently (not just once in a while) starts his articles with strawman attacks.

    The gold standard failed precisely because politicians are corrupt and can't be trusted. If we gold standard supporters know this, we would be violating the Law of Non Contradiction to say that such a monetary rule solves the problem of corruption.

    It's so easy even a caveman could figure this out. What is Alex's problem? I don't know. I'm not a psychiatrist.

    --->In fact, a significant proportion of the classical gold-standard era coincided with the Long Depression, which spanned from 1873 to 1896 and included the panics of 1873, 1884, and 1893. Some of these crises were accompanied by significant declines in industrial production.<----

    Alex must have studied the Long Depression in high school. I guess he hasn't gotten the memo that nearly every single mainstream economist now agrees with the classical free market economists, that the Long Depression was neither long nor a depression. In fact, most now see the 1870's as a brief recession followed by one of the most robust periods of growth in US history!

    Oops.

    "Historians long attributed the turmoil to a "great depression of the 1870's." But recent detailed reconstructions of 19th-century data by economic historians show that there was no 1870's depression: aside from a short recession in 1873, in fact, the decade saw possibly the fastest sustained growth in American history. "

    http://www.nytimes.com/2006/06/02/opinion/02morris.html

    The reason that historians though it was a long depression is because prices were falling. They didn't understand (and many on this board still don't) that you can have fantastic economic growth while prices fall. So they assumed everyone was miserable. But we don't expect historians to understand economics. We do expect financial writes to understand it though.

    And just for fun, what happened just before 1873 that might have caused an increase in the money supply that always leads to a crash? I'll give you a hint: greenback.

    -------> Joe Davis of the Vanguard Group and the NBER has analyzed the U.S. business cycle between 1796 and 1914. He found that the periods of economic contraction during the post-Civil War period (1866-1914) were a bit more frequent and longer than they have been in the post-World War II era. (Note, however, that his paper was published in 2004 and does not include the Great Recession the U.S. experienced as a result of the credit crisis.)<-----

    I'm going to take a wild guess and assume that Joe Davis used GDP as his measure of economic growth and contraction. Again, since prices under a gold standard rule tend to fall over time (the CPI in 1900 was at roughly the exact same level it was in 1800, despite massive price rises due to currency debasement in the War of 1812 and especially the Civil War), GDP rarely paints the 1800s as a time of prosperity. Which right there, should tell you all you need to know about the usefulness of GDP (it really just measures price rises.)

    Meanwhile the standard of living exploded during the Gilded Age, despite GDP growth that looks no better, sometimes worse, than the 1970s. Is there really an economist that is going to tell me the 1970s saw more impressive YOY gains in wealth accumulation than The Gilded Age? We have a name for those kinds of people. They're called Quacks.

    ------>The U.S. is not the only country that abandoned the gold standard.<-------

    Besides the logical fallacy inherent in this statement, does anyone in our audience know why the entire world abandoned the gold standard? I bet dozens of readers do. Poor Alex seems to have never heard of World War I.

    --->If the U.S. were to go it alone, macroeconomic stability would be anything but assured. <---

    Strawman. Nobody is promising you a rose garden.

    ----> As Dr. Michael Bordo, a professor at Rutgers and an expert on the gold standard, wrote in 1981: "This suggests that one country alone on the gold standard would likely find its monetary gold stock and hence its money supply subject to persistent shocks from factors beyond its control."<----

    This "hardly a statist" is also "hardly an Austrian School scholar". We have historical examples of what happens when one country stays on the gold standard while everyone else is debasing their currency. Gold rushes to the country that is the safe haven. When other countries wake up from their inflationary fantasies, the gold starts to go back.

    America from 1914-1917 saw a huge increase in the gold stock, as the belligerent nations turned their printing presses on high. The Netherlands saw a massive increase in gold which helped create the Tulip Bubble as money poured in to escape the debasements in rival European countries.

    Anytime you see a massive and sudden increase in the supply of money, be it gold or moon rocks, you have ripe conditions for excessive speculation, a boom and bust.

    Of course, we wonder why the Fed Apologists think they have solved that problem by continuously engaging in massive increases in the supply of money... But hey, they have the Princeton doctorates and I'm just a rube in the IT field. What do I know?

    -------------------------

    TO BE CONTINUED

    David in Liberty

  • Report this Comment On March 08, 2012, at 11:17 AM, TMFMorgan wrote:

    I don't think it's a strawman argument. Here's John Tammy of Forbes describing what life will be like back on the gold standard:

    "Jobs will be plentiful because all jobs are the result of delayed consumption. Rather than worry about how they'll find work, by 2015 the world's citizens will reclassify their problems with the more pressing question being where they will choose to work ... Most important of all, stable money will foster an era of world peace. With gyrating currencies no longer slowing global exchange on the way to trading friction, the world's division of labor will expand on the way to a self-interested avoidance of war."

  • Report this Comment On March 08, 2012, at 11:26 AM, whereaminow wrote:

    Yeah Morgan, I don't see the words corruption, profligacy, and incompetence in there.

    But it's always nice to see you stand up for your little sister.

    It's very hard to fight a war on a gold standard. That's why Nation States - being run by blood thirsty monsters - abandoned it.

    Jobs are a result of delayed consumption. This is Econ 101, not hyperbole. If you disagree, please let me know when your economics textbook gets published that overthrows the foundations of the entire profession.

    David in Liberty

  • Report this Comment On March 08, 2012, at 11:47 AM, DJDynamicNC wrote:

    Hard to fight a war on the gold standard?

    That's difficult to believe, seeing as most ancient wars were fought under a gold standard, and the imperial era saw non-stop, often world-wide struggles between nations under either a gold or a silver standard.

    Of course, if your argument is that nations went off the gold standard to pay for increasingly complex and expensive wars in the 20th century industrial era, then ok, I'll buy that - but isn't that conceding my point that booting the gold standard enables enhanced economic activity?

  • Report this Comment On March 08, 2012, at 12:19 PM, whereaminow wrote:

    ---->However, what's the economic justification for tying the U.S. money supply to world gold mining output?<------

    Alex,

    There is this thing. It's called a market. A market is a collection of individuals acting in exchange based on subjective value scales.

    When left free to choose, market participants tend to prefer gold and silver as their money. Now, today that may no longer be the case, after years of being bred on paper bills. However, we don't actually know of any market in history that has chosen paper money over commodity money. Only through the use of government force has paper money become standard.

    So what's the economic justification for using gold as money? Economics is supposed to be about identifying the laws that govern markets. Though it may not be a law, it sure does appear that markets prefer real money.

    But hey, I know this is difficult material.

    David in Liberty

  • Report this Comment On March 08, 2012, at 12:20 PM, whereaminow wrote:

    ---------> Of course, if your argument is that nations went off the gold standard to pay for increasingly complex and expensive wars in the 20th century industrial era, then ok, I'll buy that <-----

    Good, because that's not just an argument. That's what happened.

    ---> but isn't that conceding my point that booting the gold standard enables enhanced economic activity? <---

    Within the Military Industrial Complex, sure. In the voluntary peaceful sector of the economy, not so much. But hey, maybe you like watching innocent people get slaughtered. To each their own, right?

    David in Liberty

  • Report this Comment On March 08, 2012, at 12:27 PM, whereaminow wrote:

    --->Under this standard, advancements in gold-mining technologies or discoveries of new, easier-to-mine gold deposits alter the purchasing power of money, i.e., the price level of goods and services in the economy.<----

    Yep, and markets clear, Alex. If the money in use no longer fulfills the needs of market participants (perhaps because some new technological caused a sudden increase in it.... oh like electronic deposits at the Federal Reserve, perhaps), the market will eventually reject that currency.

    The funny thing is, we've seen markets reject paper currencies over and over again in just about every corner of the world. Many of these currency rejections have occurred in the last 20 years, so it's not like this problem is going away.

    Yet we've never seen a market reject gold. Why? Well, no matter how many advances we see in mining we have yet to discover a comparable technology to the ability to create an infinite amount of money out of nothing.

    If that truly is your concern, I can't imagine how you remain a Fed Apologist.

    David in Liberty

  • Report this Comment On March 08, 2012, at 12:28 PM, whereaminow wrote:

    Had enough? Or would you like me to keep going with your ignorant article?

    David in Liberty

  • Report this Comment On March 08, 2012, at 12:34 PM, outoffocus wrote:

    BURNED!! Lol just kidding. Great discussion.

  • Report this Comment On March 08, 2012, at 12:36 PM, catoismymotor wrote:

    Behold the ultimate fiat currency!

    http://www.tobyhilden.com/schrute_buck.html

  • Report this Comment On March 08, 2012, at 12:47 PM, caltex1nomad wrote:

    The Gold Standard can be manipulated just as easily as paper.

  • Report this Comment On March 08, 2012, at 12:51 PM, wasmick wrote:

    Please take this discussion to the relgion board where it belongs.

  • Report this Comment On March 08, 2012, at 12:59 PM, TheDumbMoney wrote:

    Dear Fool.com. PLEASE put this article up as the main item on the fool.com page. I want to see 100 comments.

    Sincerely,

    DTAF

  • Report this Comment On March 08, 2012, at 1:02 PM, TMFAleph1 wrote:

    <<Please take this discussion to the religion board where it belongs.>>

    Ha ha ha -- I second the motion!

  • Report this Comment On March 08, 2012, at 1:23 PM, aptosjoe wrote:

    David this might have been an interesting and perhaps informative discussion but your constant personal attacks and demeaning expressions of contempt recall all the school yard verbal battles of childhood. So besides "So's your old man!" all I can say is why don't you grow up and engage in an intelligent discussion without childish insults that frankly prevent the rest of us from taking your comments seriously.

  • Report this Comment On March 08, 2012, at 7:31 PM, devoish wrote:

    Alex must have studied the Long Depression in high school. I guess he hasn't gotten the memo that nearly every single mainstream economist now agrees with the classical free market economists, that the Long Depression was neither long nor a depression. In fact, most now see the 1870's as a brief recession followed by one of the most robust periods of growth in US history!

    Oops.

    "Historians long attributed the turmoil to a "great depression of the 1870's." But recent detailed reconstructions of 19th-century data by economic historians show that there was no 1870's depression: aside from a short recession in 1873, in fact, the decade saw possibly the fastest sustained growth in American history. " - david in Qatar

    Many factors fueled industrial growth in the late 19th century: abundant resources, new technology, cheap energy, fast transport, and the availability of capital and labor. Mines, forests, and livestock in the west provided raw materials for major industries, as did iron in Ohio and oil in Pennsylvania. Railroad expansion enabled businesses to move raw materials to factories and to send products to urban markets. A steady stream of immigrants arrived to work in America's mines and factories.

    Technological advances transformed production. The new machine tool industry, which turned out drilling, cutting, and milling machines, sped up manufacturing. A trail of inventions, including the telephone, typewriter, linotype, phonograph, electric light, cash register, air brake, refrigerator car, and automobile, led to new industries. Finally, business leaders learned how to operate and coordinate many different economic activities across broad geographic areas. Businesses were thus able to become larger, and the modern corporation became an important form of business organization. For more information, see Industrial Revolution: The Industrial Revolution in the United States. - The History of the United States

    Being on "the gold standard" had nothing to do with 1870's prosperity.

    best wishes,

    Steven

  • Report this Comment On March 09, 2012, at 2:40 PM, whereaminow wrote:

    That's nice Steven. It's also a separate discussion. Our article author claims that the 1870's were not prosperous. Clearly you disagree with him as I do. The root cause of that prosperity may be a matter of contention between you and I, but at least we are not as historically ignorant as our author.

    And if I could think of one quality that would qualify a person as "religious" about a subject, it might be ignorance of history. Alex Dumortier has that quality in spades.

    David in Liberty

  • Report this Comment On March 09, 2012, at 8:17 PM, rfaramir wrote:

    "childish insults... prevent the rest of us from taking your comments seriously" -Aptosjoe

    Aptosjoe, nothing prevents you from doing so. You might try to elevate the discussion yourself by actually responding to the points of brought up, instead of merely reacting to the barbs within David's arguments.

    To focus on the style instead of the content is to avoid the content.

    "However, what's the economic justification for tying the U.S. money supply to world gold mining output?"

    A free market can take into account the natural fluctuations of mine yields, technological gains, and new discoveries much better than it can the whims of those in charge of an easily manipulated currency.

    Actually, there is no justification for have a "U.S. money supply" in any official sense. Why dictate to a free people what they should use with each other in their voluntary transactions? What possible justification, short of the immoral desire to extract a rent from each one by tracking them and taxing them, can there be for interfering with their Liberty in this manner?

  • Report this Comment On March 09, 2012, at 8:49 PM, whereaminow wrote:

    Yes, I realize that I am a complete and total jacka** quite often. I've come to terms with it. It's part of my charm ;)

    Look, I think of lowly of Alex's work. It's sloppy, poorly researched, filled with condescending language, and lacks fundamental economic understanding (and I'm not talking about econ subjects that all ideological stripes agree on).

    But it ain't personal. It never is. I could gladly buy a beer for any person in this community, give em a hug and wave off all the bad feelings with a cheers. My friends and I have gotten into way worse fights than this stuff. It's just the way I am.

    David in Liberty

  • Report this Comment On March 10, 2012, at 11:00 AM, steltek wrote:

    As much as I hate GDP as a measure of productivity, since it is the standard, I'll use it. Fiat currency has led to 5-10% of GDP being used just to pay interest on entitlements in socialized democracies. And that number is growing. At what point will fiat proponents look at that number and realize it is not sustainable?

    Fiat currencies allow governments to spend irresponsibly, with absolutely no personal repercussions to that irresponsible behavior.

    Regardless, it all comes down to ethics. Fiat currencies are backed by guns/threats/violence. Gold backed currencies are backed by ... gold. Neither one is perfect, but at the end of the day I'd rather be able to trade my notes for something of some kind of value, not just the promise that a thug will stick a gun in someone's face if they don't accept my paper.

    Is there anybody out there who remembers that money is supposed to represent value -- as in a good or service? Instead it just has just become a number attached to your name, and no one seems to care how that number got there. There's a huge divergence between money and value, and that rift is only widening. The upper class hoarding money means the lower class is stuck with the least desirable labor just to continue eating.

    Enforcing ethics and real value is the only thing that will ensure fair distribution of value. Unfortunately, there are so many unethical vested interests in the current system, it's only likely to happen through revolution.

    FWIW, I personally don't care if money is backed by gold or any other measure of value. It could be backed by a basket of commodities or it could be a complex algorithm that factors in population for all I care. It just needs to represent some real value that everyone can recognize and that governments cannot manipulate for personal gain or gain of their social circles.

  • Report this Comment On March 10, 2012, at 2:07 PM, Kauaicat wrote:

    Kudos to David. Your stuff is GREAT.

    Dumartier also conveniently ignores the ongoing change in the purpose of the Federal Reserve. In 1913, its purpose was to establish a sound banking system, providing liquidity when needed to the banks.

    In the Panic of 1907, it was J.P. Morgan who stepped up to the plate with his personal fortune. Recognizing that relying on a single individual could be disasterous in the future, the Fed was formed.

    Over the years, it has now become acceptable for the Fed to not only provide liquidity to its member banks, but also prop up the stock market, prop up the Euro, and just about anything it wants to do with fiat money ultimately guaranteed by the taxpayer. All Bernanke has to do is publically suggest the mere possibility further qualitative easing, and the markets rally. In the long run, all this manipulation does is distort the markets, and make it near impossible to invest long term.

  • Report this Comment On March 10, 2012, at 2:20 PM, VettemanSF wrote:

    “But recent detailed reconstructions of 19th-century data by economic historians show that there was no 1870's depression: aside from a short recession in 1873, in fact, the decade saw possibly the fastest sustained growth in American history.”

    “And if I could think of one quality that would qualify a person as "religious" about a subject, it might be ignorance of history.”

    -whereaminow

    History says:

    The NBER dates the contraction following the Panic of 1873 as lasting from October 1873 to March 1879. At 65 months, it is the longest-lasting contraction identified by the NBER, eclipsing the Great Depression's 43 months of contraction. In the US, from 1873–1879, 18,000 businesses went bankrupt, including hundreds of banks, and ten states went bankrupt, while unemployment peaked at 14% in 1876, long after the panic ended. Following the end of the episode in 1879, the U.S. economy would remain unstable, experiencing recessions for 114 of the 253 months until January 1901.

    So Dave based on the history the “religious” moniker is yours, hands down.

  • Report this Comment On March 10, 2012, at 2:37 PM, VettemanSF wrote:

    “But recent detailed reconstructions of 19th-century data by economic historians show that there was no 1870's depression: aside from a short recession in 1873, in fact, the decade saw possibly the fastest sustained growth in American history.”

    “And if I could think of one quality that would qualify a person as "religious" about a subject, it might be ignorance of history.”

    -whereaminow

    History says:

    The NBER dates the contraction following the Panic of 1873 as lasting from October 1873 to March 1879. At 65 months, it is the longest-lasting contraction identified by the NBER, eclipsing the Great Depression's 43 months of contraction. In the US, from 1873–1879, 18,000 businesses went bankrupt, including hundreds of banks, and ten states went bankrupt, while unemployment peaked at 14% in 1876, long after the panic ended. Following the end of the episode in 1879, the U.S. economy would remain unstable, experiencing recessions for 114 of the 253 months until January 1901.

    So Dave, based on the history the “religious” moniker is yours, hands down.

  • Report this Comment On March 11, 2012, at 7:15 PM, devoish wrote:

    Good job David in Qatar,

    It is nice to see you back off from blaming monetary policy with your usual religious fervor and acknowledge other events often have an even greater impact on financial statistics.

    Trying to explain everything through the lens of monetary policy as you so often try to do misses most of the world around you.

    I don't think that Alex described the 1870's to 1900 as not being prosperous. I think he described it as having multiple financial panics which is not the same thing.

    Lower prices were caused mostly by increases in productivity due to the industrial revolution, immigration lowering labor costs, the new land given to settlers taken from native Americans and put into production.

    Those events overwhelmed any impact of an increased or decreased money supply.

    Best wishes,

    Steven

  • Report this Comment On March 11, 2012, at 8:05 PM, NOTvuffett wrote:

    I give up, having a monetary system tied to the price of a commodity wouldn't prevent the natural boom and bust cycles- but it would prevent your money from going to zero.

    The way the economy really works is beyond the ken of man. That is why Adam Smith's book is such a work of genius.

  • Report this Comment On March 31, 2012, at 6:26 PM, whereaminow wrote:

    VettemanSF,

    The NBER is at odds with every single economist, both mainstream and not. That should tell you everything you need about the NBER. It is staffed with lackeys.

    The NBER's interpretation of the Long Depression has been overthrown in every academic circle in America.

    You may have placed your "faith" in them, but it's time to come out of the darkness, my friend. There is ZERO support for an actual Depression in the 1870s. Even Keynesians, long known to be hostile to the Gilded Age, admit that it was a period of explosive growth.

    Drop your religion, please. It's been overturned by economic study.

    David in Liberty

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