Comments (20)

• RDC

• Almost everyone talks about using gold as money or going back to a gold standard or whatever.

  What's wrong with silver? Wouldn't it be a better choice for money since it is cheaper than gold which means silver can be used for coins smaller denominations unlike gold which would have to be rather small?

• Published: July 6, 2004 5:37 AM

• Duodecimal

• Nothing's wrong with silver; it'll only be a problem if there's a legal tender restriction on their relative values, forcing a specific ratio of some sort. If a free market is left to determine how many ounces of silver equate to an ounce of gold (historically about 15:1, nowadays for some reason 66:1), then I don't see what'll keep people from using silver-backed certs.

  But the problem you outline involves using physical coins. If depositories issued paper backed by grams or grains of gold, or if it were handled electronically (like egold is), then the relative preciousness of gold wouldn't matter. Any quantity would support a free market.

• Published: July 6, 2004 8:10 AM

• Lucas Engelhardt

• Duodecimal is absolutely right. In fact, when we talk about "returning to gold" and such, we're not advocating the gold would be the only acceptable option. (At least, consistent Austrians aren't.) Rather, we're just asking that money have a real backing. Historically, gold and silver have both fulfilled this role. Who knows, though? Maybe in the future we'll find platinum or some other material to be even better.

• Published: July 6, 2004 8:28 AM

• RDC

• you can't "force" a specific ratio of silver to gold or what! it'll get distorted in time! ;P

  anyway, i just kinda noticed that almost every free market article on money i've read up on is about gold gold gold gold gold... and maybe that other metal that begins with an 'S'. :(

  i wonder if there's a kind of prejudice to silver. i live in the Philippines and when i try to buy silver, almost everyone laughs at me saying gold is better, nobody buys silver, etc.

  also its kinda strange here. we're not a silver-producing country. we got a lot of gold mines though... anyway, what little silver we have are just byproducts from other mining operations.

  and yet... we have ZERO silver in the central bank i heard it got "LEASED" (like what do you do with a rented bar of silver?!)

  100% of our silver production gets exported to the UK at below market rates...

  and anyone who wants silver has to import it from thailand at above market rates! weird! why can't we use our own silver since its not that big a production and the jewelry industry doesn't use much of it either.

  ...oh yeah, and the central bank seems bent on selling off all our gold. :(

• Published: July 6, 2004 10:09 AM

• pete

• RDC, here is an interesting article: about silver

• Published: July 6, 2004 11:55 AM

• mikey

• Am looking for people to critique my ideas on
  gold which have evolved over thirty years.First
  that the world is on a gold standard even though
  governments no longer convert.Since Americans
  can now legally own gold(since 1974)gold can now
  serve as the "circuit breaker" ie the real value
  people seek if they fear inflation is out of control.
  Gold prices serve as an accusing finger always ready to point at a government that has gone overboard with the printing press.
  What is actually backing todays fiat currencies?
  Nothing, except peoples trust that that governments will not dilute the supply of money .
  The desire of human beings to get on with their lives, to work,produce,and exchange is so strong that even if there was not a speck of gold,
  silver or any precious metal on the planet we
  would still find something to use as money.People
  who are producing wealth have the right to issue
  paper receipts for it, even if that wealth is
  not gold.Inflation cannot occur as long as there
  is enough real wealth to cover every single
  receipt.More later
  thanks

• Published: July 6, 2004 12:21 PM

• Steven Kane

• I say forget the gold standard. The gold standard was never what it should have been.

  What we need is private currencies, backed by precious metals. Nowadays we have digital currencies so the actual metals used as backing in the warehouses is pretty much irrelevant. Although, some PMs might have greater volitility than others, making them less desirable than gold.

• Published: July 6, 2004 12:50 PM

• David Heinrich

• Steven,

  I believe that the plan Block was advocating, which is Rothbard's plan, would mandate private currency, by getting the State out of the business of producing currency/legal tender. "Gold standard" is a bit of a misnomer, since an Austrian would support whatever the free market chose as the medium for money. It could be silver, platinum, or plutonium, for all we know. But most likely it will be silver and gold.

• Published: July 6, 2004 1:20 PM

• Lucas Engelhardt

• Hi, Mikey! You say you'd like someone to critique your ideas on gold, and I am happy to oblige!

  "First that the world is on a gold standard even though governments no longer convert.Since Americans can now legally own gold(since 1974)gold can now serve as the "circuit breaker" ie the real value people seek if they fear inflation is out of control."

  Here you muddle the idea of what the gold standard actually is. Yes, Americans can own gold. However, it is not used as money, and therefore we are not on the gold standard. Even if people fly into it at the fear of hyperinflation, that doesn't automatically establish it as money. When hyperinflation occurs, people fly from money into ALL real goods. We are on the "gold standard" about as much as we are on the "office desk standard". Both can provide "circuit breakers" to inflation, but neither are used as money.

  "Gold prices serve as an accusing finger always ready to point at a government that has gone overboard with the printing press."

  Half true. The problem, of course, is that gold prices are also subject to changes in the real supply and real demand for gold, not just inflation. Gold prices can drop in the face of inflation if a new gold lode is found.

  "What is actually backing todays fiat currencies?
  Nothing, except peoples trust that that governments will not dilute the supply of money."

  Not quite true. Fiat currencies are often also backed by legal tender laws. A more forward way of saying this is "the point of a gun". By law, American sellers must accept paper dollars as a means of payment. Confidence that hyperinflation won't happen just makes using force less necessary.

  "The desire of human beings to get on with their lives, to work,produce,and exchange is so strong that even if there was not a speck of gold,
  silver or any precious metal on the planet we
  would still find something to use as money."

  This is true. There is nothing special about gold, silver, or precious metals that make them necessary for money (POW camps tend to use cigarettes). The reason the precious metals tend to be used is that they have the best properties for being used as money. If we didn't have precious metals, we'd find something else.

  "People who are producing wealth have the right to issue paper receipts for it, even if that wealth is not gold. Inflation cannot occur as long as there is enough real wealth to cover every single receipt."

  I may be misinterpreting you, but I think what you say is half true. If I have a book, I can give someone a receipt for that book, giving them ownership of it. This is true for any real asset (even labor hours, I would say). However, there is something of a question with the second sentence: 1. What is meant by "inflation"? If you mean one of the typical definitions, you have shown no connection between different heterogeneous receipts (a receipt redeemable as a book is different from a receipt redeemable for gold or labor or a house or a car) and money. Money is the common medium of exchange, which means it must be homogeneous. Inflation is a monetary phenomenon (either in terms of the money supply or in terms of money prices), and requires that money be involved in some way. You haven't yet shown that connection.

  That's my critique, I hope it helps!

• Published: July 6, 2004 1:51 PM

• Lucas Engelhardt

• David,

  I think you're basically right. But another important point that Mises points out is that money must be established as a commodity before it is used. This is not true of digital monies, though their tie to today's fiat currencies may save them in the short run.

  Also, I would question the idea that silver and gold would both be monies in a free market. Mises's argument (in The Theory of Money and Credit) that in a free market one money will be established seems to me to be quite strong. Far stronger than Rothbard's very history tainted "silver and gold" story. With receipts for gold, there's no reason why they can't be used for small purchases. Really, the fact is, government intervened before one of the two drove the other out (Austrians realize that the market process takes time, and we hadn't yet reached the 'final' money stage yet).

  Just some thoughts.

• Published: July 6, 2004 1:57 PM

• ed

• I agree with Mikey, for the most part.

  Dave says that "(Gold) is not used as money, and therefore we are not on the gold standard."

  This is true but that just means that fiat money is "better" better defined as what people recognize as universally traded. Gold loses to fiat money for the following reasons: Difficult to identify, value, carry, or represent. If it became universal the first two would go away, and depending on the fractional banking laws banks could take care of the latter two problems with notes and electronic representation of gold. The only way for gold to replace money is for the crack up bust to take place.

  Dave stated "gold prices are also subject to changes in the real supply and real demand for gold, not just inflation. Gold prices can drop in the face of inflation if a new gold lode is found."

  This makes no sense as this would also be true if gold were money. ie if more gold were needed in computers then the value of gold would go up causing deflation in all other goods but inflation in gold. Mikey's point is valid in that gold is a good (though not perfect) baramoter of money inflation. It is highly correlated (negatively) to the value of the dollar vs foreign currencies. As the Fed shows force towards a strong dollar, gold drops. The move from $250 to $400 per oz of gold has shown that market traders have seen the Feds low interest rates as weak for the dollar and strong for gold. With the Fed raising rates gold has steadied. Is the Fed correct? Nobody knows, but the market believes the Fed will keep the dollar strong. Meanwhile, like Mikey, I'll be watching the price of gold for cues.

  Dave states "Fiat currencies are often also backed by legal tender laws. A more forward way of saying this is "the point of a gun". By law, American sellers must accept paper dollars as a means of payment."

  This is only true in a few cases. I don't have to work for money. I don't have to sell my car for money. etc etc. I must pay taxes and settle court cases in money but I am free to choose how to buy or sell something. Also, as long as gold is tradable I can always price things in gold and nearly instantaneously be paid in gold even if the buyer used fiat money. I think your suggestion is that if you owe me money and inflation happens, you are able to pay me back in the inflated money amount. This is true but as the lender I am (or should be) fully aware of the risks I take as a lender and those are priced into the interest I charge. The problem has been the history of lenders going bust and being saved by the government with taxpayers dollars which are collected at the point of the gun. That is where you are correct.

  One point I will add about the requirement for a crack up bust on money. This is the only way a gold (or commodity) based money can happen and even then it probably won't because government influencers won't let it. There is too much incentive to maintain control of printing money. The only way to get off fiat money is

  1. Educate and convince the population that money is property and is being devalued by the government

  2. Create a solution for weaning off fiat money and onto a gold standard. Like democracy in Iraq this will be painful and for every "faction" that gets hurt (ie banks) cries and lobbying will be used against any movement.

  3. Correct any property rights laws concerning and protecting money as well as fractional banking requirements as well as fraud protection etc. As an aside I believe you should be able to lend 20 oz of gold notes with only 10 oz in reserve as long as this is fully disclosed, ie not fraudulant.

  This will not happen with out a crack up bust as the banks and government are too entrenched in the current system. The problem when a crack up bust is that government can too easily change property laws at the point of a gun and declare a form of marshall law. Or they can confiscate gold. Like bringing back the draft, it will be interesting to see the response of the American population when that happens.

• Published: July 6, 2004 4:11 PM

• Lucas Engelhardt

• Well, Ed, Mikey had some problems in what he said that I (Lucas) pointed out, and you take them and add some confusion.
  In response to my statement that gold is not used as money and therefore we are not on the gold standard, you make some vague statements about gold losing to fiat for 4 reasons: difficult to identify, value, carry, or represent. This is just untrue, as you yourself half concede. Gold is relatively easily identifiable, unless I’ve been led to believe wrongly. It has identifiable properties that make you sure that the gold is gold and not something else. Valuation is no more a problem with gold than with fiat, and during the classical gold standard, there wasn’t a problem with that, either. You yourself admit that the final two problems could be solved by the banking system. And, indeed, the banking system would have every incentive to solve them in as far as they are problems.
  In as far as whether the crack up boom being the only way for gold to replace money, I think you are incorrect on two counts. 1) We don’t want to replace money with gold. We want to replace fiat money with gold money. In short, we want gold (or whatever the market decides, to be more precise) to become money. 2) Rothbard presents a very possible way to return to the gold standard immediately. Take the number of fiat dollars in existence and divide by the number of gold ounces held by the Fed. Then, redeem gold for notes and notes for gold at this rate. Notes are now backed by (meaning redeemable in) gold. No crack-up boom necessary.
  You are absolutely right concerning gold prices as a barometer of inflation, though. Sort of. Over long periods, it can be a good barometer of monetary inflation. But, it is far more direct to look at the money supply itself. Money demand changes as well, it is true. But, at least this way there is only one unseen force acting rather than 2 (real demand and supply for gold).
  If you have a dollar bill, pull it out. You’ll see on the front left hand side, just above the treasurer’s signature “this note is legal tender for all debts, public or private�. You know what this means? It means that all debts are payable in dollars. Now, if you do an instantaneous exchange of a car for 50 oz. of gold, so that there is no time lag, then you’re fine with barter. But, if there’s a time lag between the parts of the exchange, there is a “debt�. This can be paid in dollars by law, and you (the creditor) have to accept them. True, you can always buy gold with those dollars. But, so what? I can price things in loaves of bread and buy bread with all the fiat money people give me. Does that make it money? Does that mean we’re on the “bread standard�? No. Of course you as a lender will take inflation into account as far as possible. But that doesn’t change the fact that the dollar (and a lot of fiat money) is legal tender, and therefore you can be forced to accept it as a means of payment for debt.
  Your later political argument regarding the necessity of a crack-up boom was good, though. However, it only proves likeliness, not necessity. The “powers that be� do have an incentive to keep the fiat system afloat. If they didn’t, they’d have dismantled it by now. However, Rothbard’s plan is also possible once people are convinced that the gold standard is the way to go.
  Like you, though, I don’t know that a 100% reserve system is necessary based on free-market ethics (of course, as I’ve posted elsewhere, I think there are problems with the natural rights doctrine). But, I find it hard to believe that the market would establish a fractional reserve system. To truly not be fraudulent, the fractionally backed notes would have to say “This note is partially backed by gold (silver, platinum, horses, whatever), and is redeemable in gold if there happens to be enough in the vault to cover it. We try to keep at least 50% (or whatever % they decide on), but the demands of the moment might prevent that, especially in the case of a bank run. Thank you for using ‘We might have your money’ Fractional Reserve Bank.� I have a hard time believing that people would knowingly accept this system.
  So, let’s look at the main points of Mikey’s argument again:
  1. We are on the gold standard.
  2. Gold is a good indicator of inflation
  3. Fiat currencies are ONLY backed by confidence that government won’t inflate.
  4. We’ll have a money even if precious metals didn’t exist.
  5. People have a right to issue receipts for real wealth.
  6. Inflation can’t happen as long as all receipts are backed by real wealth.
  In my first post, I agreed with #4 and #5, and contested the others. Ed, you have provided no real evidence of any of them except for #2, which I accept very conditionally. The following statements that I have made against the other stand, though:
  1. Gold is not used as money, therefore, we’re not on the gold standard.
  2. Gold prices may be an okay indicator of inflation, but they’re far from perfect, as real demand and real supply changes muddle the indicator.
  3. Fiat currencies are also backed by legal tender laws. AKA: force.
  4. Inflation is a monetary phenomenon, heterogeneous receipts for real goods are not money. We need a connection between the two, and it hasn’t been provided.
  I think that sums up the points of disagreement that remain, Mikey. I hope this discussion is helping you clarify your thoughts.
  

• Published: July 6, 2004 4:56 PM

• Pellinore

• There are digital currencies which are also backed by gold and other precious metals, such as:

  http://www.e-bullion.com

  http://www.e-gold.com

  http://www.goldmoney.com

  http://www.pecunix.com

  And a relatively thriving economy which uses them. I think that most of the problems surrounding the alleged absence of a gold economy are more in perception than reality, since such an economy has been growing in plain sight for nearly a decade now. Collectively the above-mentioned companies enjoy tens of thousands of users, and there are thousands of merchants who accept one or more of them in payment for goods and services.

• Published: July 6, 2004 8:55 PM

• RDC

• Nothing is going to happen until people start minting their own small change to compete with the current fiat money.

  It's not like we can expect the government to do it anyway... ;P

  I suggest that 1 troy ounce (480 grains) of either silver and gold be taken as the unit of currency since precious metals are priced in troy ounces. (No more of that confusing 90% of 416 grains)

  It can be divided into whatever fractional change you want as long as they add up to 480 grains of pure metal.

  To protect the coins from being withdrawn whenever there is a change of available supply, I recommend that there be no established ratio between gold and silver and fiat currency. Let people decide among themselves.

  As for issuing promissory certificates, I suggest they compete against each other and the issuer must have a 100% reserve requirement.

  Has anyone here heard about the NESARA bill? It sounds alright to me, but is it really economically sound?

• Published: July 6, 2004 9:00 PM

• Anonymous Coward

• RDC: Are you aware of NORFED.org -- they mint silver coins (which they don't call "coins", for legal reasons), called "Liberty dollars", and apparently they're quite widely accepted.

  The internet gold currencies (e-gold, Pecunix, etc.) are very interesting, and allow for very small denominations.
  The most exciting development of late: http://open2exchange.com/buy.sell...000018

• Published: July 8, 2004 10:51 AM

• Pellinore

• Yes, NORFED's American Liberty Dollar (and its digital counterpart) are also interesting, especially in that they address the challenge of having a value-backed circulating offline currency. Circulation tends to be in "pockets" of activity, the Austin area for example has something like 200 merchants that accept the ALD, which is not bad for a soemwhat strange-looking privately-minted currency that can't be deposited into a bank or used to pay the power bill (yet!)

  Open2Exchange is an innovative service, as is most of the offerings that come out of that company (same company that started the above-linked e-currency Pecunix, as well as http://www.pvcse.com and http://www.garzoo.com)

  
  Pellinore

• Published: July 8, 2004 5:14 PM

• just curious

• ...one thing about "legal tender" laws that no one talks about is pricing. Ok, so I have to accept Fed notes for payment. But I don't have to accept them at any particular price. Prices are still determined by exchange. The legal tender laws really don't make much of a dent in that either way.
  (although long-term contracts get severely distorted by the fact that they can be settled with an inherently unstable currency...how about contracts that contain a "Fed" penalty for paying with fiat currency, instead of something else?)
  

• Published: July 9, 2004 12:56 PM

• DAW

• Fact; Economic transactions are taking place in multiples of millions of economic decisions per minute.
  Many gold bugs use golds scarcity as a link to some monetary discipline....or somehow link gold as a plausible hedge against one calamity or another. The fact is that Gold has becomea commodity for the jewelry industry with no extensible value beyond its current uses.

  To put the hedge argument to test just think about this; GE Corp processes transactions at near 5 times the rate of the entire world gold market during comperable periods of time. Where does that leave every single transaction outside of GE's needs for a hedge against calamity? In a true collapse cans of Baked Beans to the hungry or bullets to the frightened, might both be horded and demand more by weight than gold.

  While accumulating information on the gold supply, my ulterior motive isnt to bash gold but to form perspective on its plausability in relation to the broad arguments gold bugs make. I've begun linking Gold and certain other commodities in a supply demand model that points out their relative merits.

  By way of example;
  Farm Land which grows corn. Did you know that 68 million acres produce 9.5 billion bushels of corn? That corn at 2.5 per Bushel is a 23.8 billion dollar annual production. Which is the same value as the world gold market over the last 5 years.

  By drawing a comparison the investor caught up in the web of the gold bug, should pause, and recognize that these acres are producing 4/5ths more than commodity gold over a 5 year span.

  Farm Land is scarce, so is Gold. Farm Land produces an annual return, gold produces a subjective return, because the predominate value is jewelry which is a subjective asset. Golds scarcity is somewhat of a misnomer as well because gold gets lost, but does not go away, its quite durable. When you go to sell gold jewelry you will always get less per gram or ounce than raw golds quoted price.

  Meaning the subjective value of gold could instantly be set to a rate where new supply would appear in abundance, but the buyers could not sustain their offers unless the demand dynamics for gold were somehow changed permitting a never ending spiral in price.

  If the gold price were momentarily placed much higher the market might/would be flooded with supply, as jewelry would be converted en mass to utilitarian exchange. There are claims about extraterrestrial demand for gold, maybe if those claims were proven true, I too would become a gold bug once again.

  We could decide tomorrow that Indium Phosphide is prescious...because its a foundation for a whole range of exotic electronics parts....its very scarce right now, hard to make....why not just go lay some in and begin to spread the word..>? The FUD mongers are busy making the gold case...let em, in a growing world economy there are billions of choices made everyday by consumers great and small; Ive noticed I am spending more for bits of light lately...how bout you.

  A return to a gold Standard...if so I pity the poor kid in Ecuador who needs a new shirt.

• Published: July 12, 2004 10:32 PM

• Lucas Engelhardt

• DAW,

  I have few confessions to make...

  1) I was not convinced of the need for a gold standard until relatively recently (within the last year, though I don't remember the exact date). I am now.

  2) I don't own any gold, except for what's in my high school class ring.

  You have a serious provlem in your thinking in that you confuse people that advocate holding gold as a hedge and those of us who advocate a gold standard. I'll admit, as far as a hedge goes, land is probably just as good as gold. Unlike gold, it can be rented or leased out easily, and (like gold) it's supply is not increasing at a very rapid pace.

  But, there is a big problem with this line of argument as far as the gold standard is concerned. Specifically, it has nothing to do with it. What many of us (at least I) want is not for people to buy gold as a hedge, but rather for it to be reinstituted as money. We don't expect a return on the dollar bills sitting in our wallets. Likewise, we shouldn't expect a return from the gold money sitting in the bank vaults.

  The reason we advocate a 100% reserve gold commodity money system is two fold: justice (I tend not to use this argument, because I think it's the shakier of the two), and economics.

  The economic reason is simple: fiat money and/or fractional reserves allow for credit expansion which leads to business cycles. (Mises.org offers a great deal of research on this process. Just check out the Study Guide on Business Cycles. Or for a good, short book on the topic check out The Austrian Theory of the Trade Cycle and Other Essays.) The story though is short. Credit expansion leads to distorted interest rates. More investment projects get started, though there aren't resources saved to complete them all. Eventually this fact is revealed, and interest rates rise. Projects have to be abandoned. In the end, resources were wasted as some of the resources used in the abandoned projects aren't convertible into useful projects. Thus, business cycles, at the very least cause waste. Wasting resources is bad for economic efficiency, thus business cycles are bad for economic efficiency, thus fiat money and fractional reserve banking are bad for economic efficiency. QED

  But, as I've stated before, we're not stuck on gold. If the market preferred Indium Phosphide and establised it to be used as money, I'd be fine with that. The problem we have today is that our money is the result of government intervention (legal tender and government sponsored fractional reserve banking), not of market process. I advocate gold simply because it would be a relatively easy commodity to reestablish as money. If my sources are right, we have approximately 250 million gold oz. in the vaults of the Federal Reserve. This works out to about $6000 in currency and demand deposits per oz (calculated as M1 divided by oz. of gold). Thus, the Fed could easily declare redeemability at that rate. At this point, we are immediately on the gold standard again. True, this would "redistribute" wealth temporarily and cause a passing adjustment in the gold market. However, when put in the face of not having a systematic business cycle, this may be a small price to pay. At the very least, it is a temporary one.

  As for the poor kid in Ecuador that needs a new shirt, I pity him now. Of course, the Ecuadorian economy is dollarized, so it would really benefit from a gold backed dollar! (Not to mention that the poor kid in Ecuador has seen the hyperinflation that can happen with fiat money! It happened to him personally if he's more than 5 years old!)

• Published: July 13, 2004 9:54 AM

• Anonymous Coward

• There's an interesting pair of articles ("Why?" and "The Plot Thickens") on www.goldeconomy.com
  The author thinks the US is preparing to go back on the gold standard, within months!

• Published: July 13, 2004 9:32 PM