The Gold Problem
Why have a monetary system based on gold? Because, writes Ludwig von Mises, as conditions are today and for the time that can be foreseen today, the gold standard alone makes the determination of money's purchasing power independent of the ambitions and machinations of governments, of dictators, of political parties, and of pressure groups. The gold standard alone is what the nineteenth-century freedom-loving leaders (who championed representative government, civil liberties, and prosperity for all) called "sound money." FULL ARTICLE
Comments (18)
"Why have a monetary system based on gold? Because, as conditions are today and for the time that can be foreseen today,"
Mises didn't foresee a time when 90% of all "money" in circulation would be electrionic transfer.
Published: August 10, 2007 9:56 AM
"Interest is the difference in the valuation of present goods and future goods."
This definition, while widely (universally) held is just plain wrong.
The governing equation for managing a media of exchange is:
DEFAULTS = INTEREST + INFLATION.
The media manager "loans" the media of exchange which is just an efficient mechanism for trade. The media manager must get that media back. To the extent he does not recover it, he experiences DEFAULT. He must balance this DEFAULT with INTEREST charges on subsequent loans. To the extent that he does not do this he creates INFLATION.
"But if the government provides the money it wants for the payment of higher salaries by printing it or the granting of additional credits, the new money in the hands of these beneficiaries constitutes on the market an additional demand for the not-increased quantity of goods and services offered for sale."
And here Mises comes close to "getting it". "All" government spending is DEFAULT. The media it uses is never returned and the result is "always" INFLATION (but it should be higher INTEREST rates).
Todd Marshall
Plantersville, TX
Published: August 10, 2007 10:36 AM
billwald,
I'm not sure I understand your comment. Gold is electronically transferred all of the time. There are plenty of online "goldbug" businesses that exchange gold.
Published: August 10, 2007 10:44 AM
lets forget about central sound money and choose free banking.
If you want a specifically gold-backed currency, you'd have plenty of options I am sure.
Published: August 10, 2007 10:58 AM
Todd Marshall,
That is the definition of pure interest rate.
Risk and inflation premiums are added on the pure interest rate.
Even if there were no risk of default and no inflation there would be interest because of time preference.
Published: August 10, 2007 11:04 AM
Todd: the definition is NOT wrong. Interest is fundamentally the difference between present and future subjective valuation. It is the fair compensation required by the lender for the inconvenience of his discretionary act of lending.
Whether interest is featured in any interesting accounting relationships is beside the point.
Published: August 10, 2007 11:06 AM
Would you prefer a loaf of bread today or tomorrow? Would you prefer a 100 oz of gold today or tomorrow?
99.9% of people you ask will say today is better than tomorrow. How much more depends on each person you ask. Taken as a whole, the people you ask form the supply of capital (savers) and demand for capital (businesses, etc). The intersection of the two groups is the interest rate for a given quantity of capital.
Published: August 10, 2007 1:29 PM
Under a gold standard, what would happen if too many people simply hoarded gold?
Published: August 10, 2007 1:36 PM
If Mises died in 1973 (it says so at the bottom of this article), how could he have written that "Americans were once forbidden to own gold..." when that proscription ended (again, according to the article) in 1976 (I would have said 1974)?
The article is shown as having been written in 1965. Again, how could the quoted passage have been written then?
Published: August 10, 2007 2:46 PM
"If Mises died in 1973 (it says so at the bottom of this article), how could he have written that "Americans were once forbidden to own gold..." when that proscription ended (again, according to the article) in 1976 (I would have said 1974)?"
He was talking about the FDR era I believe, and that was around the 30's.
Published: August 10, 2007 2:52 PM
Under a gold standard, what would happen if too many people simply hoarded gold?
Define too many people.
Published: August 10, 2007 3:01 PM
"Under a gold standard, what would happen if too many people simply hoarded gold?"
Purchasing power money would increse.
Published: August 10, 2007 3:58 PM
I'll admit to not being one in favor of the gold standard, but that I need to study the matter more.
However, it seems to me that a society only needs gold whenever there is no other universally agreed upon basis for estabishing value.
That is, in days gone by we might have bartered goods for goods, but the basis for value was never quite uniform because it varied with the individual's assessement of value i.e. one steer is worth X amount to one, and Y amount to another.
Introducing a common currency would help bring uniformity to a society and thus make it a more stable and prosperous economy. But how to determine a common basis of value? Gold of course.
Fast forward to the 21st century. If all of the gold were to suddenly disappear tonight (forget where it went, it's hypothetical) would my home suddenly be less valuable? Would the groceries that I still need be less or more valuable? And I don't mean the immediate shocks to the overall market if the gold did go poof, but would the real value change?
No. So it seems gold has simply been the default basis for value, but that doesn't necessarily mean we have to have it.
It seems that all a soceity requires is for whatever legal infrastructure we reside within to have a common currency. In a more primitive society we would certainly revert back to gold for our value basis, but I don't see where it is needed today.
The current value of our currency is part of a circular system of personal property, our ability to move or trade that property, the government's recognition/protection of that economy, and the government's subsequent power and stability it derives from that stable economy.
Thus it is that many of the Mises wing of libertarian thought, in my opinion, regard the gold standard as preferrable not because it makes more economic sense, but because it is seen as weakening the government's control over the economy as a whole.
But that misses what I think is an important point in that the government's role in that little circle I described is of course part of the circle. It is not dependent on the govt, but govt is ultimately dependent on the society/economy as a whole.
If they print up too much money, redistribute too much wealth, tax too much, whatever, they are destroying the circle and thus their own source of power.
I'm not a big government advocate by a long shot, but going back to the gold standard simply for the sake of weakening the govt seems somewhat Pyrrhic to me.
Published: August 10, 2007 9:58 PM
Why not simply return to the American System of Political Economy:[see Henry Carrey "The Harmony of Interest"]. He was President Lincoln's Treasury Secretary. 1.) The Dollar should be linked to Gold fractionally in addition to the Industrial base of the Nation. 2.)Deficit spending is completely sound when used to CREATE IMPROVED INFRASTRUCTURE, thus increasing the energy throughput of the Economy. 3.) Do not confuse the General Welfare clause of the US Constitution with socialism. The Third Way!
Published: August 11, 2007 10:56 AM
Ray, the point is not to weaken government (however worthwhile a goal that may be); it is to limit as much as possible the effects that loose monetary policy has. A firm anchor is needed to restrict expansions in the money supply. Monetarism attempted this but failed. Gold standards, to the extent that they existed, had good success in the matter.
And if you think it is not because the gold standard makes economic sense that its advocates clamour for it, you are wrong - it is for precisely the reason that it does.
Published: August 11, 2007 5:57 PM
Is the gold standard really the panacea it's made out to be? Is not gold inherently valuable because it has physical properties which make it a good medium of exchange? So does paper.
And would not a reverting to the gold standard cause systematic recessions? Gold is a commodity like any other and it's subject to the same fluctuations and bubbles as any other commodity.
Published: August 11, 2007 7:25 PM
Al Bundy: "Is not gold inherently valuable because it has physical properties which make it a good medium of exchange? So does paper."
Are you the Al Bundy from the TV show?
The difference between paper (or digital money) and gold is that we can easily create paper money and thereby flood the economy with it, as Bernanke did last week. That's impossible with gold. It's limited supply and the difficulty of mining it makes it a very stable supply of money.
Al: "And would not a reverting to the gold standard cause systematic recessions?"
No. Not at all. Poor economists blame gold for the business cycles of the past when the real culprit was credit expansion. Even in the late Middle Ages, business cycles happened because of the spread of "bills of exchange", which were paper IOU's that worked like paper money. Some historians estimate that the volume of bills of exchange sometimes exceeded 20 times the stock of gold in the economy.
A true gold standard would be a major improvement over the current system, but it wouldn't be perfect. Under a gold system, the Fed would have to limit the money supply to a certaing proportion of the stock of gold the US gov holds. But as the experiment of the 1980's demonstrated, the Fed cannot control the money supply with any precision. The Fed's attempts to keep the money supply within very wide boundaries was an embarrassing failure which they dropped quickly. Too many factors go into the money supply equation (most of which the Fed doesn't even consider) for a cental banker to manage. As history teaches, informal credit arrangements such as the bills of exchange can undermine even a pure gold standard without paper money. Maybe Austrians should learn to live with fiat currency and use their superior knowledge of economics to make money from the business cycles it creates through superior investing.
Published: August 12, 2007 9:50 AM
Ray G.:
I see your comments here and on other matters on the site and from them I can discern two things.
The first is that you're quite capable of using your head, of perceiving logical relationships, etc. and of posing relevant questions.
The second is that you either haven't any real acqaintance with Misesian thought or else, very little and superficial--what one might get by skimming a few pages here and there.
Do yourself (and others) a favor--get and read HUMAN ACTION; nothing else will quite substitute. I can't promise easy reading but, on the other hand, am quite confident that it will answer many of the questions you raise and in a manner free of "loose ends."
Mises' (and others') support of the gold standard is in no way intended to "weaken" government--at least insofar as the government refrains from trying, again and again, to make people better off through creation of "new" money. The economic problem with such creation is always the same, regardless of the particulars of the specific intervention. I'll give you a synopsis.
Money is simply that which has come to be the most-frequently bartered (exchanged) good on account of certain qualities not necessary to enumerate here. Various commodities can be used for the purpose, even simultaneously, but there develops a tendency for one to become more frequent than all others, whether or not made official through governmental action.
People are not (and can never be) omniscient. But, that having been said, the "market" at any given time and the structure and relationship of prices on the market reflect (with extreme accuracy) what everybody in the world thinks and plans with regards to all goods and services offered. Those who perceive discrepancies with what they themselves believe to be the future of those relationships enter as buyers and sellers on the basis such judgements. Whether they were correct or not is reflected in loss or gain; overall, the market is constantly correcting (or "arbitraging") such differences in perception of the future.
As described, the market (and thus virtually everybody) participates in actually determining ("allocating" is the word generally preferred by economists) the distribution of all resources to those whose prospects (chiefly on the basis of past performance) seem most likely to result in "better" (for they, themselves, the individual--and market-participating, even as consumers-actors). Every penny spent or lent or risked on any of the speculative markets has its effect on such allocation of what we call resources. For men, the choice is either between this system, to which no other can even be imagined to be superior OR between just such imaginings--ptentially infinite in number--that would result from the substitution of some other particular allocation that some "expert" or "authority" (whether one man or several) believes would better serve what he (or they) imagine as the "common good." (And just how they separate what they imagine to be the "common" good from what he or they imagine to be their own good is left unsaid and unconsidered--as long as it is not characterized by obvious "conflicts of interest.")
EVERY intervention by authority with economic affairs, whether by taxation, regulation, price interference, or "monetary policy" diverts resources AWAY from those lines in which (according to the opinions of everybody) they would best serve and TOWARD others which happen to be favored by the opinions of the interferors (EXCEPT that, in very many such interferences, there are not even any concrete ideas as to the particular beneficiaries--we're talking muddled thinking here, not overt corruption). In other words, investment, innovation, and expansion are directed AWAY from lines most congenial to everyone and INTO many of which they disapprove.
Things which should be expensive are rendered less so--and are bought. Things which should be cheap are rendered more expensive (or even unobtainable). But the mistakes only become evident to the many in the form of a "recession," when consumers react by buying less of certain things than had been anticipated by entrepreneurs heretofore enabled in their plans by "easier" money and lower interest rates. Mistakes must be liquidated, people laid off, etc.
The damage done to the total (national or even world) economy is extensive. People are enjoying some things they wouldn't have otherwise but have been deprived of things they'd have much preferred. The damage isn't total, though. Other than time lost (and time is what lives consist in), stuff (resources) can be rearranged to serve other, hopefully more suitable, purposes. But some of the investments are "inconvertible"; i.e., they cannot be used for any other productive purpose--may even require further inputs in order to reclaim even part of the original "malinvestment." Mistakes (including malinvestment) are a regular feature of an economy under any conditions--impossible to eliminate as long as men are fallible. But in an unhampered market, such are fairly quickly eliminated (and those having caused them eliminated or much reduced in their capacity to injure the commonweal in the future) and the surviving (convertible) resources transferred into, presumably, more capable hands.
Gold is not a perfect money; nothing is "perfect." Gold is just the best medium of exchange so far discovered. The "Gold Standard" is, in every way, fully compatible with a modern system of excchange, including both electronic tranfer and credit transactions.
The failure of the "Gold Standard" lies in the fact that it, itself, is a creation of government and agreements between governments and, like all such agreements, subject to abrogation on their part. Mises' most critical error was in not appreciating this fact more fully. In advising a return to such standard, he was simply advocating return to what he had already deemed insufficient for that very reason--with no method envisioned to restrain such behavior in the future.
A long process, very coincident (but related by far more than sheer coincidence) with the spread and rise of civilization and intrinsically related to the development of "modern" (Western, industrial) civilization took place with the spread of the use of common media of exchange, of which silver and gold were the prime examples.
There are no substitutes which can even be considered close (to silver and gold but gold in particular) as media of exchange. GOVERNMENTS (everywhere) KNOW THIS! (Which is why they bother to retain the substantial stocks that they do--of what other use are they?) We are on a system of "floating" exchange rates in which all governments seek to "manage" their respective diminutions of the purchasing power of their currencies ostensibly by watching each others' currency evaluation on the market; but all, without public acknowledgement, at all times, look over their shoulders at the market price of gold. They are faced with continued, periodic recessions (with an ultimate destination of complete worthlessness for their currencies and the prospect of a global monetary catastrophe in which at least half the world population would die of starvation in very short order and the rest subject to the neccessity of a totalitarian rule never yet even imagined) or a surrender to GOLD as MONEY, a prospect they have, as yet, not even begun to consider. Those are the ONLY choices.
Published: August 13, 2007 8:35 AM