Our Money Madness
Here is my latest speech on money old and new, and the absurd notion of monetary central planning. We flatter ourselves in this technological age driven by financial innovation and mind-boggling efficiencies, that we know more than any previous generation. But there is lost knowledge, among which is the knowledge of what sound money feels and looks like, what it does, who makes it and why, and how it holds its value. As for central banking, if Wal-Mart’s slogan is "Always Low Prices," the slogan of the Fed and the government should be "Always Higher Prices." FULL ARTICLE
Comments (74)
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Published: November 21, 2005 12:32 PM
“The question is why. Why is it that Congress, the Fed, and the presidency all agree that deflation is something to be avoided at all costs?�
The answer is: They have the same puppeteers pulling their strings.
“. . . . As Rothbard further showed, the downturn was a correction of a previous inflation, a macroeconomic version of the dot-com bust, and one that was made ever worse by governmental attempts to fix the problem. As for the Fed, it did not pursue a policy of benign neglect but rather desperately attempted to inflate the money supply and was unable to do so.
The real blame for the Great Depression lies with precisely the policy that Bernanke favors, that is, a steady and relentless increase in the money supply to keep the economy humming while not sparking price increases that are politically objectionable. . . . .�
A contradiction??
“It has been war that has been the driving force in monetary depreciation throughout history.�
Amen, Amen!
Mr. Rockwell has nailed it.
He, however, omitted any reference to the amendment which allows the taxing of labor – the mechanism whereby those who profit from war force almost everyone else to pay for it.
Even austrian economists seldom mention that taxing labor ultimately requires an expanding money supply.
Published: November 21, 2005 12:36 PM
Great article.
Bernanke’s ironic "I assure this committee that, if I am confirmed, I will be strictly independent of all political influences ..." contrasts to the context in which the Fed exists as clarified by ex-Fed chairman Arthur Burns’s hilarious “the Fed chairman must do as the president wants, or the Fed would lose its independence.�
Published: November 21, 2005 1:15 PM
Hi J.D.
The austrians don't mention that taxing labor ultimately requires an expanding money supply, because, they don't hold that it does. Or at least, not to my knowledge. This isn't to say they advocate income tax, i'd say they don't. But although the two crimes are used by the same perpetrators for the same purposes, they are two independent activities.
Published: November 21, 2005 1:25 PM
Lew writes: "...let us remember that all forms of freedom seem impossible in the midst of despotic control."
Finding as I do a lot of defeatism on this site (e.g., "I'm afraid that Jim Bradley is correct - the stateless society is a fantasy"), I don't think that more vitally important words could be spoken at this pivotal moment in history -- i.e., at a time when an "Empire of Debt" (http://www.lewrockwell.com/french/french35.html) is reaching the limits of its nearly century-long plunder of the American people. For as these limits are reached, the return to sound money stands to "tie the hands of the state" to the point of vanquishing it.
No, this historic transformation won't be painless; on the contrary, since the American people's gullibility is exceeded only by their politicians' cowardice, the pain will be all the worse for having been postponed for so long. But since the modern nation-state cannot survive without phony money, and since phony money can only suspend economic reality for so long, sound money will eventually become THE reality, and those who don't like it (i.e., statists of all stripes) will nonetheless have to learn to live with it...while the rest of humanity revels in its new-found freedom.
Published: November 21, 2005 1:29 PM
Another great article. That would be great to have the references or links pointing to the transition plans by Joseph Salerno, Murray Rothbard, George Reisman and Ron Paul, since they were named in the article. Here I am asking for the most practical, concrete and comprehensive documents on the topic for each writer. Difficult to sell the vision without a sound transition plan.
Published: November 21, 2005 1:56 PM
Great article! I currently work in the field of long term care for the elderly. The biggest problem is that it's impossible to save enough to live on and pay medical bills for 20 years of retirement. So elderly people depend on relatives and Medicaid. But if we had persistent deflation of between 1% and 3% per year, it would be fairly easy to do so.
Published: November 21, 2005 3:34 PM
A good article.
Published: November 21, 2005 5:20 PM
Hello everybody!
In general I accept the idea of return to the gold-like standard. However, gold's role in the modern world has shrunk to the jewelry and corrosion-protection in electronics. No one can eat gold and nobody will. Gold is not in use in dentistry nowadays too.
So what can be done with this? A basket of commodities. Say, let's agree on introduction of universal currency unit - UCU. It should probably consist of three parts:
* Metallic (33%)
** Energy-related part (34%)
*** Food-related part (33%)
Each part can be defined in shares of real commodities, for example
Metallic (gold - 1oz, silver -50 oz, aluminum - 1000 oz, copper - 200 oz and iron - 1000 oz), in proportions relating to the real-world use of them.
** Energy-related part (uranium, oil, natural gas)
*** Food-related part (fertilizers, sugar, wheat).
For international trade any fiat currency should be expressed in UCU then.
^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
That means that market value of UCU is fixed for considerable time period (say 5 years and it's Content can be revised periodically).
That kind of currency will be much more stable and reliable as world currency. UCU should exist in two forms : electronic and real. For each real UCU central bank creates it's electronic counterpart.
In that case we won't lose existing electronic payment system, but ultimate payment will mean a delivery of hard asset to the destination point.
Published: November 21, 2005 6:30 PM
Micheal, while something like that might be more stable, I don't think the added stability would outweigh the fact that you can't really put your hands on 2/3 of the value of that money. You can't take your share of uranium or whatever the other components are, and keep their value with you. You have to trust that someone is going to, in the end, be able to actually give you that uranium, or fertilizer, or wheat, in exchange for that money... and you just can't do that. Just goes back to the government deciding to stop redeemimg gold for dollars in the 30's.
Also, all the different metals you listed don't have fixed proportions of use in the "real world". It seems far too complicated and requires too much planning to make it work. Gold is very stable; plenty stable to get the job done, and is SO much simpler in more than one way than what you've proposed.
Published: November 21, 2005 6:59 PM
Ay me lairdship! Thar's saying it! The brilliance of R.L.Stevenson should be set along side of Menger, Jevons, and Walras as a subjective revolutionist of the 19th century, albeit in the field of what Mises called "literary psychology." As with Homer's epics there is more in Treasure Island than a rough and tumble adventure story. It was perhaps the first work of popular fiction to incorporate alterating narrations by characters who are embedded in the plot. The characters are set adrif on more than a physical sea but under conditions of uncertainty and conflicting plans, and forced to deal with issues of ethics and hierarchy on the basis of their own native sense of morality. It encapsulates a bit of Crusoe commentary (Ben Gunn) regarding want satisfaction and time preference, within a far better narative concerning competition and rule-enforcement in a social context. And that is even before we get to that chest of non-fiat stuff that Lew has reminded us of in his article.
Recomended for all ages! I have three or four copies circulating among my kids.
Published: November 21, 2005 8:19 PM
> But today in China or Russian, anyone who favors
> a return of travel and moving restrictions is
> considered dangerous and deranged
I'm afraid this is a wishful thinking. In Russia, the popular and long-serving mayor of Moscow (Yuri Luzhkov, also notorious for having a billionaire wife who looks and speaks exactly like Soviet-era beyond-rude store clerk) keeps his constituents appraised partially by the maintaining unconstitutional (but nonetheless enforced) registration and restrictions on travel ("propiska"). People there are xenophobic and think that not allowing the "blacks" (i.e. natives of southern regions) in is a very good idea.
Published: November 21, 2005 9:13 PM
A very good article. A natural limitatition to government is honest money. They like to legislate around their limitations.
One point! Lew said:
"Children know what treasure is, even if central bankers do not."
Cantral bankers know quite well what treasure is, which is why they stole, hoard and own the vast majority of it today.
Published: November 21, 2005 10:25 PM
Michael: I have to agree with Alan, your idea requires "too much planning". On top of that, it overlooks the fundamental nature of money. Study Mises's money regression theorem and consider this question: is it conceivable that a basket of commodities could ever emerge as a medium of exchange in the market. It is not. Only one commodity must prevail and that is the most marketable and useful as a medium of exchange. The market chose gold almost the entire world over, before it was used in electronic components and there is no reason to assume it would reject it as money today.
The first step needs to be to put the US dollar back to a gold basis as it was before 1913. It can't be put back to the same par, but what is important is dollar redeemability in gold. Rothbard lays out the approach, it's pretty straight forward.
People must be able to hold their commodity money in their hands and their vaults and literally use it in its physical form in exchange. In this way, they can keep their banks honest with bank runs once again. Or we could go the extra mile and treat FR banking as the fraud that it is which would put an end to the need for bank runs and would eliminate the source of any significant monetary instability.
Published: November 21, 2005 11:30 PM
Fiat money and the monetary centralized planning federal reserve banking system is legalized plunder.
It just has more complicated smoke and mirrors for people to look at than other kinds of legalized plunder. It’s just another way that people use government to rip other people off in that country legally.
The beginning part of that article makes an excellent point. What is treasure?
I loved the Alan Greenspan and Arthur Burns quotes.
Alan Greenspan: "The cause of freedom is bound up with the cause of the gold standard."
Arthur Burns: "The Fed chairman must do as the president wants or the Fed would lose its independence."
Lew: "It would require that the government recognize the error of its own ways, agree to limit its power and influence, abolish the Fed, and return the control over economic structures back to the people. And you wonder why the movement for a gold standard struggles!"
Published: November 22, 2005 4:46 AM
Mr. Doveberg, I have an alternative for your consideration.
Repeal the laws that require someone to accept any particular currency (legal tender), and repeal the laws that prohibit the private minting/printing of money.
At the same time, a general effort of education and prosecution for "counterfeiting" and fraud would help people understand what was going on.
Then see what happens. Let people decide. Or, think about what is happening right now:
Before I go into a restaurant, I look at their door and make sure that I have a charge card that matches the ones on their list. I don't have to care if I'm in Japan, China, Canada, Europe or anywhere else, the charge card company takes care of the conversion.
In a purely commodity money situation, it doesn't matter if the restaurant is going to bill me in stones-weight of corn, or thimbles of heavy water, or board-feet of oak. It doesn't matter if my account is denominated in ounces of gold, quarts of gasoline or square-feet of Florida swampland. Anything and everything that can be traded is possible.
As others have mentioned in fewer words than I, to restrict people to particular commodities is inefficient, even if the only added costs are the costs to administer the restriction.
Published: November 22, 2005 8:13 AM
Does anyone know if banks exist that keep reserves in gold instead of paper at the Fed? Has anyone, or could someone, start a bank where when you deposited your paper money, the bank converted it to gold at the current price. The principal would fluctuate with the value of gold and you would get a modest interest on the deposit. Any loans the bank made would be tied to the price of gold at the time of the loan. The principal would rise or fall with the value of gold. As a result, the interest rate could be lower because the price of gold would take care of inflation.
Published: November 22, 2005 8:56 AM
Money is power. No government will ever voluntarily lessen its power. Adoption of a gold standard would make it impossible to create money by fiat, which vastly lessens the power of government.
The only way the governed can influence this is by losing faith in the government, so that government becomes irrelevant through the lack of consent of the governed.
At this time, most people are quite comfortable, well fed, and entertained to as great a degree as could be desired. It is unlikely that any great change will occur with a citizenry whose attention span is that of a five year old child, and of course the governing class is aware of this and capitalizes on it.
Published: November 22, 2005 10:13 AM
Hello, everybody
Let's get back to reality, guys. The gold standard is dead - R.I.P. Nobody wants it's return anymore (except goldbugs) since e-money is much more convenient. Just accept that Gold bullion is simple insurance against dollar collapse. That's it - end of story. If you believe in dollar collapse, that's OK. But until world trade based on USD it's not going to happen.
My point was about changing the base of international trade, not personal savings. I am a realistic goldbug, buy the way.
My point was about changing the base of international trade, not personal savings. I am a realistic gold bug, buy the way.
Published: November 22, 2005 10:15 AM
"Nobody wants it's return anymore (except goldbugs)"
You mean unrealistic goldbugs don't you? Michael, seriously, i'm unsure of who you mean by nobody. If you're talking about the establishment: the bankers and big business in collusion with big government then yes nobody in that camp wants the return of gold. Inflation suits them fine. If it mattered to me what those types wanted, i wouldn't be reading and posting on mises.org.
There is nothing about a 100% gold standard that prevents us from using paper and electronic representations for it. All a real gold standard means is that for every ounce of gold you spend, electronically, or via check or bill, or coin, it is backed by a real gold ounce in your possession. Clearing systems will reduce the volume of physical gold transferred from bank to bank. There is nothing about gold money that will put us in the dark ages technologically. It will just give us real honest money back.
Published: November 22, 2005 10:55 AM
Mr Doveberg is correct. Talk is cheap. The "gold" people refuse to estimate the dollar cost of gold in current dollars if we went to a gold standard and the amount of money that would be in circulation. I estimate gold would be at least $10,000/oz and the average worker would not have any. People would be murdered for the gold in their teeth. We would revert to pre-WW1 conditions with half the population living in poverty, 10% or less middle class and 1% with the gold.
Published: November 22, 2005 11:28 AM
Bill Wald,
Actually, various Austrians have estimated the gold-price in dollars if we went to a gold standard, including Rothbard, Thornton, Reiseman, and others. It is true that gold would be valued very highly -- much more than it is today -- but your paranoia scenarios are nothing but ridiculous FUD. People most likely would have the gold in their teeth removed and use something more economical for filling, except for flamboyant celebrities.
Since gold is highly malleable, and there are other less valuable metals that would likely serve as parallel money in a free market on money (e.g., silver, copper), it is absurd to worry about the per-ounce price of gold. Furthermore, as its price rose, more of it would be dug up, which would be societally beneficial (reducing transaction costs, etc; see Block and Barnett on the optimum quantity of money in a truly free market).
Published: November 22, 2005 11:45 AM
I just heard a caller to a talk-radio station in Ottawa this morning, speaking off the top of his head when he was prompted by the host, state that the worst possible thing a Conservative Party government could if it is elected is to put the Canadian dollar on a gold standard and "destroy all exports".
I guess he was thinking that all unionized, subsidized, protected and government workers would get paid with gold-backed dollars at the same rate and in the same numbers as right now ...
Published: November 22, 2005 11:49 AM
Some people seem to be confusing a gold standard with using gold as money. No one advocates a return to gold as the money we carry around in our pockets. A simple way to return to a gold standard would be to have the Fed target the price of gold. Greenspan used to do that when he first started as chairman. He said a few times that he wanted to keep gold at about $350. But for some reason he abandoned it, probably under pressure to inflate.
Published: November 22, 2005 11:50 AM
Roger:
A simple way to return to a gold standard would be to have the Fed target the price of gold.
That's not a gold standard. A gold standard is when you can take your dollars to any bank and exchange them, right there and then, for a fixed amount of gold.
Published: November 22, 2005 12:18 PM
Roger:
I'm one of them. And i am advocating gold as the money we carry around in our pockets, as well as gold certificates, gold credit cards, gold checking accounts, etc. I'd like to one day see prices in terms of weights or mass.
Regarding Greenspan, he has very recently stated that the gold standard, although fine, is unnecessary because the Fed maintains a gold standard for practical purposes. Since this is very incorrect, as he knows and as do many of us, you can get a feel for the impossibility of using a state apparatus such as the Fed for giving us honest money. The fed must divest itself from the control of our money and allow us back to a real gold standard with real gold as our money.
Published: November 22, 2005 12:40 PM
David Heinrich makes an essential point: the added demand for gold as money will drive up its price, and as its price goes up, so does the profitability of mining more of it. Many people would probably also sell a lot of jewelry that didn't have extreme sentimental value to be melted down and minted into coin.
And although even the very small 1/10 ounce coins could be worth $500 or $1000 or more, there is no problem with using a lower fineness, like 14K (or less) coins instead of the 22K coins like the Gold Eagle and Kruggerrand. This would allow for durable coins while keeping their value modest enough for daily use.
I would think that in addition silver would become rather popular for small purchases, though I think gold would remain the favorite unit of account. And in any event, there is no problem with storing ones gold in a warehouse, and using a gold card just like a credit card to make purchases of small items in units like grams, grains, or milligrams.
Published: November 22, 2005 3:30 PM
Rothbard's proposals are laid out in the link to "What Has Government Done With Our Money?" towards the bottom of the article and which in the current edition is included the proposal "The Case for a 100 Percent Gold Dollar". I'm sure it's somewhere on the site for free if current inflationary practice has reduced the value of your fiat money.
Published: November 22, 2005 4:55 PM
Couple this -- http://www.lewrockwell.com/orig/garris3.html -- with this -- http://www.cipe.org/publications/fs/ert/e32/e32_02.htm -- and it's a whole new (libertarian) world.
Published: November 22, 2005 5:32 PM
Mr. Doveberg
It looks like you don'd understand the nature of money.
Money is a comodity, wich, because of possesing special characteristics ends up being used as the universal medium for exchange.
The key-word here is *a* commodity. Money can't be a mix of commodities.
Money is a unit. It makes no sense to define a unit as a mix of other units. There must always be a fundamental unit underlaying the system. No 'financial creativity' can change this fact.
Also 'stability' here is a myth/fallacy. Extending your reasoning, in order to get 'total stability', we should use a mix of ALL comodities. At this point we would have a totally stable currency wich would have completly wiped out the price system :)
Published: November 22, 2005 6:37 PM
Not to quibble, but Lew's article reminded me of the silver half-dollar I had been given as a child. When there was still some tie between the dollar and gold, we could also use silver, copper, and other metals, because their values tended to move together. These days, all of our coins are made of either zinc plated with copper, or else copper and nickel alloy.
To the folks arguing for something other than a true gold standard - help us get rid of the criminal Federal Reserve, then create your own bank and money system, and give it a try!
Published: November 22, 2005 11:53 PM
I thought I should post the contents of an email on this I just sent to Lew Rockwell.
The first small detail is that you probably meant "climactic moment" and not "climatic moment" (it was tropical, of course).
The next is that gold is not a stable material for money in all times and places. This doesn't undercut the thrust of your argument, but it doesn't hurt to avoid overstating the case. Bullion has already been through a phase like junk bonds, with its value compared to other commodities more or less stable now - but the first introducers of bullion got a windfall gain just like the printers of paper money. The difference is, that game is up now so that a country - once on a bullion standard - is insulated from these drains of value. But it has happened more than once before, for instance with the arrival of New World silver centuries ago. People in sieges who trusted in gold soon found that it lost all its transaction value since there was no new supply (this is a rare case where price controls do have some use, as they don't cut back supply which has already been cut off - the only effect is on stocks). But going onto a gold or silver standard, starting from here, can produce problems - there would be a one off windfall gain to holders of gold supplies and a continuing one to gold producers. This is why Denmark had great difficulties going onto gold in the early 19th century, for instance.
The remaining point is that high prices do help some sectors; it used to be that farmers liked them, before they became net debtors and also started needing lots of inputs from the rest of the economy. Today, it is the middlemen groups who get the newly released money who benefit -they can pass on the downside to others further downstream, and they end up ahead of the game if they think of using their gains to acquire more enduring assets than purely financial ones (if they don't, they go broke too when the music stops). Inflation mediates wealth transfers to more than just the issuers of new money.
All of this has historical precedent.
Published: November 23, 2005 6:07 AM
Since it seems no one has mentioned them yet, there are already several explicitly metal-backed "currencies" being worked electronically right now, two off the top of my head are e-gold and Pecunix.
Published: November 23, 2005 11:26 AM
"Money is a unit."
Exactly! Money is a conversion factor: the ratio for converting the value of food into the value of rent or whatever.
I suggest that we use "work-hour" instead of dollar or whatever. One w-h would be the value equivalent of one person digging an hour with a shovel. This is a universal standard.
Published: November 23, 2005 11:44 AM
Would anyone like to argue that inflation is theoretically or pragmatically impossible under a 100% barter economy? If not, then the existance of money can't be the cause of inflation?
Published: November 23, 2005 11:47 AM
billwald wrote:
" One w-h would be the value equivalent of one person digging an hour with a shovel."
What person? Why would digging a hole for an hour have "value"? Value according to whom? You? Me?
The universality of gold and silver stems from the simple fact that people find such things desirable. Digging holes in the earth may be desirable for people looking for water or a cadaver, but not everyone else. This is why your standard unit for measuring value is flawed.
When you mentioned that "pre-WWI" scenario, you quickly (and in my mind, conveniently) forget that people can also exchange goods using silver and copper and not only gold. Silver is more plentiful - in fact, many Americans in the 19th Century exchanged goods using Mexican silver pesos!
Published: November 23, 2005 12:39 PM
billwald asks:
"Would anyone like to argue that inflation is theoretically or pragmatically impossible under a 100% barter economy?"
It is possible. If people started to barter stones for goods, pretty much quickly you would require a LOT of stones to purchase a pound of corn.
"If not, then the existance of money can't be the cause of inflation[...]"
This is a non sequitur.
Published: November 23, 2005 12:43 PM
Curt,
Electronic, metal-backed currencies were in fact previously mentioned, via my post that cited this article on money privatization: -- http://www.cipe.org/publications/fs/ert/e32/e32_02.htm.
Coupled with the other article I cited -- http://www.lewrockwell.com/orig/garris3.html -- it is clear (to me, at least) that a revolution is at hand and that the state will be powerless to stop it.
Published: November 23, 2005 2:24 PM
David,
I read the article you cited and i have some comments: (http://www.cipe.org/publications/fs/ert/e32/e32_02.htm )
"...Electronic digital payments technology will enable property rights claims on real assets, such as stock and bond funds, or gold, to be utilized as the medium of exchange for virtually all transactions. In sum, when businesses or individuals wish to purchase a good or service, they will provide—directly or indirectly— an electronic instruction to their bank or other financial intermediary. The instruction will state that an amount equal to the nominal value of the purchase should be transferred immediately to the account of the seller of the good or service."
Does this strike you as barter: multiple classes of securities and commodities used as “medium of exchange�. Or will prices in dollars still be appraised prior to the transaction to facilitate determining the exchange price?
"Accordingly, there will be no loss of interest earned, nor will there be any need for a traditional wholesale interbank clearing system. The buyer and seller will have transferred wealth instantaneously, without risk of nonpayment. By avoiding the use of government-produced fiat money, with all of its uncertainty and instability, some of the problems of inflation and payments insecurity will disappear."
No clearing system? An instantaneous transfer of wealth? I don’t see how this is realistic. I don't understand how real wealth and commodities can change possession instantly. There were a few years when the US had a real gold standard, and a well oiled private clearing system was a pivotal element to it.
I think this gang may not have a firm grip on the concept of money.
Published: November 23, 2005 6:45 PM
Great article! It's nice to see how truly optimistic about human nature libertarians are really shine through, as opposed to those who believe that violence wielded on a huge scale is necessary to organize society.
Published: November 23, 2005 9:04 PM
Paul,
These should help:
http://electronics.howstuffworks.com/question332.htm
http://www.smartcardalliance.org/alliance_activities/who_what_why_contactless_payments.cfm
Published: November 24, 2005 8:44 AM
"There is nothing about a 100% gold standard that prevents us from using paper and electronic representations for it. All a real gold standard means is that for every ounce of gold you spend, electronically, or via check or bill, or coin, it is backed by a real gold ounce in your possession."
Private companies would be prevented from issuing credit cards? Credit cards were invented while we were still on a gold standard.
Also, the working people must be taxed because our owners and rulers will not tax themselves. Thus has always been and always will be.
It has been worried that the poor people would learn they can vote themselves money but our poor people are not smart enough to co-operate which is one reason they are poor. Didn't take long for Congress to vote themselves a raise. They know how to co-operate when it is important.
Published: November 25, 2005 10:19 AM
P.M. Lawrence;
One development that would tend to minimize the effects of changes in value of a gold standard is the nearly instantaneous transmission of commodity prices over electronic media. Because producers, holders, buyers, and sellers are all able to exchange price information instantaneously, dislocations in supply / demand vs. price would tend to be small and short-lived.
Published: November 25, 2005 11:31 AM
One thing we tend to lose sight of is that prior to 1913, dollar bills were for all intents and purposes warehouse receipts for gold and silver physically in the possession of the US government. Coins were made of gold, silver, and copper, and had actual commodity value of roughly the same order of magnitude as their face value. After the founding of the federal reserve, dollar bills ceased to have any real value as warehouse receipts, but became simply promissory notes, a much different,less secure type of money substitute, but real commodity money still existed in silver and copper coins (gold coins of course having subsequently been outlawed by FDR). In the mid-late '60's, the real value of silver far exceeded the face value of silver coins, causing the US mint to start making them out of copper and zinc, and silver coins disappeared from circulation into piggy banks and melting pots. More recently, with the government testily reminding us of the illegality of the (mid-70's - early 80's )widespread practice of melting pennies for the copper content, in 1983 pennies were converted from a pure copper commodity money to a debased copper-plated zinc slug.
Published: November 25, 2005 11:48 AM
Vince Daliessio, while those things would speed up any transition, they would not affect the enduring consequences. That is, anyone who had better access to stocks of gold at the beginning (governments, surprise!) would simply be able to trabsfer their holdings to a different asset base faster. Speeding up their diversification would not mean better transfer of wealth to the general public, only that stocks, shares, land, etc. would be acquired from them faster.
Published: November 25, 2005 9:08 PM
Billwald:
I'm mostly not following you. A 100% gold standard implies a free and unhampered market in money. That is, there would be no possibility of "Private companies" being "prevented from issuing credit cards" by the state. The consumer would let the banks know soon enough if they liked credit cards or not. This would be the only form of prevention, if we want to use such terminology in free exchanges.
Published: November 26, 2005 3:22 AM
PM, I'm not following you here. If a true, market gold (or silver, or other money) were in place, the first beneficiary would be the gold miner, the second the person who converted the raw gold into a secure, reliable, portable form suitable for use as money, and the third the wage earner whose labor would be paid for in a stable, hard money. There would be absolutely no advantage for governments in this scheme except in the case where they use force to extract taxes or obtain monopoly minting rights. Contrast that now with the first three beneficiaries of the current system of imaginary money: the big banks, the government, and lenders. The wage earner isn't even in the picture, because any advantage he gets from a "stable" fiat currency (an oxymoron) is simply inflated or taxed away along with the majority of his capital.
Published: November 26, 2005 11:44 AM
Vince Daliessio, the issue is that you are looking at the steady state, not the transition and its enduring effects. It's also not just a question of flows but of stocks (most economics works more conveniently with time derivatives and abstracts out the effects of stocks).
Lets walk it through. Right now, most holdings of gold are in governmental or quasi-governmental physical possession. So, going onto gold gives them a one off windfall gain, with the amount varying according to whatever official release prices they use during the transition.
During the transition, people at the end of the chain will be giving up goods and services - including revenue yielding assets - to acquire the gold. Wise governments would end up with a lot of these themselves, but most likely they would wind up in the hands of middlemen just the same way as happened when governments started in with paper money issues.
There has to be some price incentive to make people take the gold, so there must always be some such wealth transfer to drive the transition (i.e. the gold can't be priced too high). Result: people at the end of the chain get gypped.
Now that's just the transition. Unfortunately, although most of the effects wash out over time, the permanent wealth transfers - the acquisition of existing investments rather than any new investment - stays in place and has an enduring effect. This is much the same regardless of the speed of the transition, facilitated by technology or not.
That's simplistic, since it's an "other things being equal" sort of thing. But, just as Microsoft has little incentive to eliminate bugs before releasing products, there is little incentive for governments and compradores (middlemen) to work to eliminate these effects of going onto gold.
Furthermore, the Danish experience of the early 19th century shows that governments may not be well placed to do anything to offset the issue anyway (Denmark had many lean trading years because it had to acquire stocks of gold to go on the gold standard).
Published: November 27, 2005 9:14 PM
It'd be nice if quotes from officials were annotated with references; I would often like to read the context of particularly strong quotes. The "Thus spake Bernanke to those worried about deflation:" bit; what speech was that, and where can I download it?
Published: November 27, 2005 10:24 PM
A google quote search yields this.
Published: November 27, 2005 10:30 PM
P.M. Lawrence writes: "Right now, most holdings of gold are in governmental or quasi-governmental physical possession."
Not so. As Michael J. Kosares writes in "The ABCs of Gold Investing":
At one time, 70 percent of the world's gold reserves were held by governments and their central banks, with the U.S. Treasury holding the single greatest portion [at 22,000 tons in 1945, over 50 percent of the world total]. Now, more than 70 percent of the gold is in the hads of private individuals worldwide. Ironically, they hold it as security against the potential breakdown of the dollar-based international financial system it was sold to defend. At the same time, many of the world's central banks, perhaps because they sense danger, are in a dollar reduction mode. The dollar, in the bigger picture, is slowly fading, and gold is once again in ascendancy."
Indeed it is, as gold is now poised to breach $500 for the first time in a generation, on its likely march to multiples of that.
Published: November 28, 2005 7:16 AM
PM:
I see your point about the dynamic effects of a government-managed "conversion". However, the preferable means would be a simple collapse of the dollar (inevitable), with the outflow of gold from the US government into private or institutional hands as collateral for the government's debts, now in default. In other words, while lining up at the bench of the "bankruptcy court", those who hold government paper will receive gold at some fraction of dollar value, as democratic a distribution of Federal gold as could be hoped for, although other assets such as property will serve as redeemable collateral too. I realize this has very little chance of happening (especially since all government debts are denominated in dollars, not gold, and therefore the Federal government would have to be made prostrate prior), but it is the only way a conversion will occur quickly without concentrating the gold in the hands of the "middlemen" you are worrying about.
Published: November 28, 2005 2:10 PM
Vince and P.M.:
You two have to slow down so that i can try to catch up with you. Can you tell me if you are concerned about the issue that Rothbard addresses below? The problem is that the banks will be granted a free gift of capital by the amount of their demand deposits (minus reserves). The possible rebuttal to that is that allowing them this onetime windfall would avoid a great economic upheaval caused by the massive contraction of bank credit that would be required to mitigate this advantage.
“From the standpoint of the free market, there is admittedly a problem with this transition to 100 percent gold. For the Federal Reserve's gold would be transferred to the commercial banks up to the value of their demand deposits by the Federal Reserve's granting a free gift of capital to the banks by that amount. Thus, overall, commercial banks, at the end of December 1981, had demand deposits of $317 billion, offset by reserves of $47 billion. A return to gold at $1,696 an ounce would have meant that gold transferred to the banks in exchange for their reserve at the Federal Reserve would also have increased their reserves from $47 to $317 billion, via a writing up of bank capital by $270 billion. The criticism would be that the banks scarcely deserve such a free gift, deserving instead to take their chances like all other firms on the free market. The rebuttal argument, however, would stress that, if a 100 percent gold requirement were now imposed on the banks, their free gift would do no more than insure the banking system against a potential holocaust of deflation, contraction, and bankruptcies.�
Published: November 28, 2005 3:30 PM
WOO. At first glance, $300-odd billion seems like a small price to pay, both to convert to a gold currency, and to avoid the sacking of depositor's money in the bankruptcies of the woefully undercapitalized banks. But isn't that what's happening already, although very slowly? Isn't one of the reasons for our negative savings rate in this country the fact that returns to savings in banks are negative after taxes and inflation? I wish I could ask Murray what he meant - did he really advocate vindication of fractional-reserve banks, or did he see this as simply a cost that would have to be dealt with one way or another?
Published: November 28, 2005 5:02 PM
Hi Vince,
It strikes me he was both advocating calling the loss a loss and getting on with it, or else he was just presenting a second of two approaches. One would be a crushing contraction of bank credit to precede going back to real money, or two, let the banks have this one last laugh as we go back to 100% money.
I don't think he was ever philosophically against aggressive deflations because they speed up adjustments and recoveries. But i guess he was acknowledging that option one would present an unusual drama. And I’ve never seen him have a single good word to say about fractional-reserve banks.
Published: November 28, 2005 5:53 PM
So the Fed transfers gold to the banks at $1700/oz. The banks then have their outstanding loans covered by gold. How does this help the working class? Existing cash would become worthless (Gresham's Law). We sell our gold teeth to pay our property taxes.
Then what? Is the electronic in circulation also valuless? Banks can't issue new credit because they unly haave sufficient gold to cover existing loans. Gold is then inflated to $5,000/oz? Is new cash money issued by the commercial banks after the gold is inflated? Do the banks buy foreign gold and pay for it with the new paper?
All this would do is accelerate the transfer of assets from the working class to our owners.
Published: November 29, 2005 11:21 AM
"All this would do is accelerate the transfer of assets from the working class to our owners."
That's been done already and the process continues on a weekly basis.
The proposal is to stop it in its tracks on a permanent basis. If we prefer, we can always perform a massive credit contraction first, which would be more fair to the people and would not confer an advantage to the banks, but it would also cause some major disruption in peoples lives for a year or two while things liquidate.
Published: November 29, 2005 11:42 AM
And existing cash would become not worthless, but each dollar would be worth and would remain worth 1/1700 oz of gold. In fact, that would become the new definition of a dollar: 1/1700 oz gold. So if you had $1700 in your wallet, it would be like (identical to) holding a 1 oz gold coin. If your house was worth 170,000, then it would be worth 100 oz. Simple.
To avoid further credit expansion on top of real gold, our society would either begin to enforce fraud, or utilize the bank run to keep the banks honest. I advocate the former, but the latter would suffice somewhat more painfully.
Published: November 29, 2005 11:51 AM
This has been an interesting thread, but I don't think transition to a gold standard is possible. The present system will have to collapse first, which will happen eventually, but the timing is uncertain.
Published: November 29, 2005 2:12 PM
I only like to describe as impossible the things that are against nature. Making men virtuous enough to rule well over other men is impossible. Abolishing the fed and bringing the dollar back to a gold basis, without a monetary collapse on the other hand, is more than possible, it's desirable and relatively simple, unlike putting a man on the moon for instance.
That it may not happen is not because of an impossibility, but rather is due simply to the predisposition of those in a position to affect this change. I think there is a great advantage to us in making and keeping this distinction.
Finally, as the history of the German mark suggests, there is nothing about the collapse of a monetary system that will render a gold standard any more likely. People must have understanding first and know why they want things to change.
Published: November 29, 2005 3:00 PM
Paul,
It seems to me that if/when the world's reserve currency collapses, there will be nowhere else to go but to gold, as it is the ultimate monetary reserve. The people won't understand it any more than they understand how to put a man on the moon, but over time it will be the best thing that could have happend to them, or at least to their progeny.
Published: November 29, 2005 3:15 PM
Well David, if it happens that way, then i guess its destiny, but the germans went from the mark to the rentenmark which was created and defined in terms of the mark, and not in terms of gold, nor of the USD.
The problem as i see it is, without an "official" declaration of the fixed relationship between the dollar and an ounce of gold, the economy will have to degenerate completely into barter before gold will have a chance to emerge from barter once again for it to be adopted as money.
That just sounds like such an extremely excruciating path to take compared to having the fed present the conversion and then close its doors.
Published: November 29, 2005 4:08 PM
Below you will find part two of Mauldin's essay on the "Dollar Asset Standard", in which he summarizes an optimistic scenario for the developed world. You can find part 1 in the same location, if you did not read it earlier when I linked to it. It is thought provoking, and I agree with some of it, especially the last part about the collapse of the welfare state, I just think the rest of it is way too optimistic and makes some fundamental errors of reasoning.
This Time It Really Is Different
Published: November 29, 2005 4:53 PM
Thanks Yancey. I tried to read it, but wow, I'd have to learn a whole new vocabulary to follow it. Is it austrian?
Published: November 29, 2005 5:44 PM
Paul,
The mark was anything but the world's reserve currency at that time, and Germany's financial markets were in such a shambles that the country was all but cut off from the world economy. The opposite is the case with the US today in that it's inextricably tied to the world economy and therefore can't get away with inflating its debts away without severe consequences. Yet it must if it is to (pretend to) meet its financial obligations to the tens of millions of Boomers who will start retiring in 2008.
In other words, it's damned if it does, damned if it doesn't.
As for those who argue that China et al. cannot afford to let the US economy tank, they simply do not understand how deeply flawed not just the US monetary system is but the global monetary system is and how impossible it will to suspend economic reality much longer. A Ponzi is a Ponzi, after all, and the longer it lasts, the worse its "correction" will be, meaning that we do indeed face an "excruciating path" back to monetary rectitude, as you can be assured that our brave representatives in Rome-on-the-Potomac will continue to fiddle while the empire burns.
Yancey,
What a coincidence, as I just finished the book to which you refer -- "Our Brave New World" -- and have been tracking the Bonner/GaveKal/Mauldin debate accordingly.
I'm with you (and Bonner) that GaveKal is way too optimistic (i.e., no, Paul, the authors are NOT Austrians), and I would add that the Asian manufacturers are not about to stand by and let the West reap all the profits while the Asians do the grunt work. Think Toyota, for example, which may need some Western branding savvy to sell its products here but otherwise has all the creative talent it needs, at far less cost, and can therefore dispense with outsourcing this work to the West.
Bottom line: We're in deep doo-doo.
Published: November 29, 2005 6:43 PM
"It seems to me that if/when the world's reserve currency collapses, there will be nowhere else to go but to gold, as it is the ultimate monetary reserve."
I suspect the reserve currency will be guns and ammo. If we crash it won't be back to 1929 but the 1429 of city states.
"And existing cash would become not worthless, but each dollar would be worth and would remain worth 1/1700 oz of gold."
"Gresham's Law" predicts that the gold money will br horded and the value of the old money will crash. Every day it will take more of the old money to buy the new money.
Published: November 30, 2005 10:38 AM
David,
I also thought the biggest fallacy, to which you obliquely referred, is that the world would divide into manufacturers and designers; I see no reason to believe that the Chinese and the Indians won't be just as good as Americans at the latter, and at a cost advantage at present exchange rates. With the sorry state of our education system, and the truly asinine subjects in which graduates now get degrees, I think the Chinese and the Indians will be fare superior engineers and designers in short order.
Published: November 30, 2005 11:05 AM
That should have read "far superior".
Published: November 30, 2005 11:06 AM
billwald,
A "crash" back to city-states would represent the massive devolution of power that the world is so desperately in need of, and insofar as "guns and ammo" were involved, I suspect this would be a lot less dangerous than our present world of mega-states and their WMDs.
In any case, the demise of the latter would signal the collapse of central banking and a return to sound money, where "hording" would go by its rightful name -- saving -- which in turn would provide the basis for the sound lending practices upon which a production (rather than a consumption) economy depends.
Yancey,
Yes, I fully agree. In fact, I recently told my nephew (a computer science/genetics student at Georgia Tech) that while there will be high demand for his services, the increased supply from Asian and India will be difficult for him to compete against.
So yeah, "it's different this time," but not at all in the way that GaveKal Research believes.
I'm sticking with Bonner and buying gold.
Published: November 30, 2005 12:06 PM
David White, Vince Daliessio, what I was describing is something like what Paul Edwards was concerned about, although the same issues arise whether it is as a bank windfall or as a middleman or a government windfall.
Vince Daliessio's preferred alternative would actually involve a dramatic interruption to the economy with much value loss. The nearest going concern equivalent would be for governments to start accepting gold for tax payments, making small tax cuts and releasing gold stocks to cover the deficit until the end of the transition, all sufficiently slowly that the effects could spread out rather than giving material localised winners and losers.
The thing is, it's not that quick release gold would get concentrated with middlemen but that on its way THROUGH there the middlemen etc. pick up enduring and revenue yielding gains - acquiring existing assets with the appearance of investing, but achieving a wealth transfer of those assets (NOT gold) rather than true investment which makes new productive capacity. There's no problem with middlemen merely passively holding gold, just with the enduring effects of what they would do with it.
In my book, today's increase in "private" holding of gold is still mostly quasi-governmental - remember that governments these days follow the fashion of being more at arms length in appearance, if not in fact. But also, that is precisely what you would get as and when the middlemen started to pick up the gold. It's what would have happened to the British gold reserves that Gordon Brown released, only that was mostly mopped up by the usual quasi-governmental players.
It may be worth mentioning that even under the gold standard, governments intervened via the bond markets and interest rates to stabilise the amount of specie around, allowing the interest rates and industrial cycles to vary instead.
Published: November 30, 2005 6:41 PM
Alongside the "digital gold currencies", soon there'll be "cybergoldbank.com" allowing you to get involved the gold loan market (it already exists and is earning profits, and paying nice dividends, and it's not even fully live yet), and "pvcse.com" trading shares. Vive la Révolution!
Published: December 7, 2005 12:04 AM
There is also a private, free-market, hard-money currency in circulation right here in the US - The Liberty Dollar;
http://www.libertydollar.org
Published: December 7, 2005 12:12 AM
Vince:
"There is also a private, free-market, hard-money currency in circulation right here in the US - The Liberty Dollar"
If it were truly a currency, would you really think it necessary to draw anyone's attention to it? The reason that a reader might be unaware of the liberty dollar as a US currency is because it is not a US currency. At best, it's something that a small and determined and tenacious group of people barter with. More likely, they still use the exchange value of silver in terms of the dollar to determine how much something costs in terms of the liberty dollar.
The belief that a private commodity money can emerge in a situation such as we have here, where there is an over century old dollar in use, is a belief that assumes Mises’s regression theorem has been refuted.
If an Austrian intends to refute Mises’s regression theorem of money shouldn’t he come out and refute it? I’m sincerely interested to hear it.
Published: December 7, 2005 9:35 AM
P.M.,
"...even under the gold standard, governments intervened via the bond markets and interest rates to stabilise the amount of specie around, allowing the interest rates and industrial cycles to vary instead."
I'm not aware of governments ever using the pretext of stabilizing the amount of specie available to justify inflation. In what period of time did this take place? I presume you are speaking of some time when there was no central banking in the US.
Published: December 7, 2005 9:43 AM