We dearly need a dollar crisis
One of the claims made against the gold standard is that there has been more stability since we adopted a paper standard than when we were under gold. The unmentioned: the problems have been papered over at the expense of our savings and the dollar's purchasing power. There has been a trade-off at work here. The more recessions are papered over, the less our money is worth. It's true that the data reveal crises under a gold standard, but their frequency shows the opposite of what it seems. It shows that the crises are self correcting--when the government lets them correct--and at no long-term cost to the currency's value.
What's more, the root of the crises in the past has not been gold but rather deviations from it: guarantees, restrictions on convertibility, too-big-to-fail policies, price fixing between gold and silver, bailouts, and the like. You have to unpack the data to understand it.
Comments (38)
Person
*puts on flamesuit* Why would you compare gold's purchasing power to the dollar's purchasing power? No one's going to store dollars in their mattress. It seems to compare damage to your savings, you'd have to compare gold's value to the value of a portfolio of high-grade bonds. How does that compare?
Published: November 8, 2007 10:14 AM
James
To hope for a dollar crisis is absolutely sick. The benefits of a gold standard should be great enough to justify the transition costs in a healthy economy. A dollar crisis would create so much suffering in the world that nothing positive could be worth it.
As an aside, a dollar crisis would probably not achieve libertarian ends. Remember the outcome of the Great Depression, the Civil War, WW2, and Vietnam?
Published: November 8, 2007 10:38 AM
George Gaskell
As an aside, a dollar crisis would probably not achieve libertarian ends. Remember the outcome of the Great Depression, the Civil War, WW2, and Vietnam?
If there's one thing that a review of economic history has taught me, it's that the US government will end badly.
Published: November 8, 2007 10:45 AM
mikey
At the end of the Weimar inflation, Germany did not reintroduce the gold standard.They merely
introduced another paper currency, backed by nothing more than a promise not to expand the supply.
Published: November 8, 2007 11:00 AM
Allan
I don't think Lew is calling for a total collapse of the dollar, just enough of a crisis to clear out the bad debt, so the economy can get back to a sound footing.
Published: November 8, 2007 11:07 AM
Allan
I think we should also clarify what kind of crises/collapses we are talking about. I think Lew is calling for deflationary crises, e.g., bank failures and bank runs. This should not be mistaken for a (hyper-)inflationary crisis, to hope for which would indeed be sick.
Published: November 8, 2007 11:42 AM
Jake
What Lew is saying, in my understanding, is not to complicated. Get rid of fiat currency and return to sound money...money backed by some specie or asset.
Oh yeah...and get rid of central banks and fractional reserve banking. :-)
Published: November 8, 2007 11:45 AM
Jake
Oh my goodness, I forgot to mention...the dollar is already in crisis...just in case no one noticed.
Published: November 8, 2007 11:48 AM
John Delano
We need enough of a crisis to get people to wake up and see what is wrong. If enough already do recognize the problem, it may be a better time than ever for it to happen, as there would be enough to know how to change things. I think many more recognize the current monetary problems than did in recent decades.
I see it as inevitable. So if it happens when people know enough not to just establish another fiat standard, suffering will be minimal, and we will have something much better after the transition.
It's more a matter of 'when', not 'if'. It may be a better time for it to happen than any other time during the past of our lifetimes.
Published: November 8, 2007 12:10 PM
mark
If i'm reading that chart right , recessions seem more frequent and last longer under the gold standard then the formal de-linking.
Further, the dollar according to the chart halved from about 1984-2004 or every 20 years.
But from say 1974 to 1984, the dollar fell by half.
I think the chart negates Lews point. It merely appears at first glance that inflation is accelerating. But when you look at it more closely, it seems that inflation is stable and not all that high.
Seems like the long trend of inflation is down.
Published: November 8, 2007 12:28 PM
steven
The dollar will decline sharply soon, domino effects will bring in economic recession and massive unemployment first. The bubble world like bubble most. They will learn lesson the hard way and gold standard is last on their mind.
Published: November 8, 2007 12:41 PM
Curt Howland
Sadly, the chart doesn't go back another hundred years. Everything on the chart is fiat currency, even if it is supposedly pegged to gold.
I notice the disbelievers in this thread are comparing "fiat supposedly pegged to gold" against "fiat without even pretending to be pegged to gold", and declaring that things aren't so bad.
That doesn't seem like such a reasonable comparison, or conclusion.
Published: November 8, 2007 12:54 PM
Nelson
The way the post is presented, it seems the author loves gold to the point that he *wants* to see economic ruin for dollar holders just because it might lead to his Midas like dream of a gold standard.
At any rate, converting dollars to gold (purchasing gold with dollars) today is not illegal. It may be wise to do so if one thinks the dollar will keep falling in comparison.
Published: November 8, 2007 1:03 PM
ed
Please, please use a logarithmic graph.
Please, please don't use inciteful language to make an argument. To give a perception that there is a need for something bad to happen never creates influence and followers of the point you are trying to make. Just, make the argument.
Published: November 8, 2007 1:41 PM
David Bratton
"At any rate, converting dollars to gold (purchasing gold with dollars) today is not illegal. It may be wise to do so if one thinks the dollar will keep falling in comparison."
But the law does prevent you from enforcing contract terms requiring payment in gold - which effectively prevents banking based on gold since the bank wouldn't ever have to give you your deposited gold back.
Published: November 8, 2007 2:22 PM
Nelson
What do you think of services like goldmoney.com? I've never tried them, and honestly I'd be a bit wary, but they seem to offer what some people here are asking for.
Published: November 8, 2007 2:58 PM
David Bratton
"What do you think of services like goldmoney.com? I've never tried them, and honestly I'd be a bit wary, but they seem to offer what some people here are asking for."
It looks to me like it's just a brokerage and a warehouse. From what I can tell, goldmoney.com doesn't provide any mechanism to get around the legal tender law or make gold contracts enforceable.
Published: November 8, 2007 4:48 PM
DickF
How did we get to discussing gold? The graph is the Consumer Price Index.
Published: November 8, 2007 4:56 PM
Contrarian Investors' Journal
Mikey said,
For examples of what will eventually happen to fiat money, look at the example of the ancient Chinese: Ancient Chinese fiat paper money
Published: November 8, 2007 6:52 PM
TLWP Sam
Your link didn't inspire confidence C.I.J. It did the obvious whine - money is either paper or electronic pulses. Yet to maintain a complex tading system you're going to still be using paper and electronic pulses that are supposedly 'backed' by gold. Somehow I doubt modern business people are going to risk physical shipping gold and silver from country to country even though they might still fall victim to 'fractional reserves'.
Published: November 8, 2007 7:31 PM
scott t
"Please, please use a logarithmic graph."
Is there some reason that the st. louis fed doesn't use a logarithmic graph?
Published: November 9, 2007 1:27 AM
scott t
"I don't think Lew is calling for a total collapse of the dollar..."
"I think Lew is calling for deflationary crises,"
"What Lew is saying, in my understanding, is..."
"I think the chart negates Lews point"
does or is lew going to respond?
Published: November 9, 2007 1:49 AM
banker
"I think the chart negates Lews point. It merely appears at first glance that inflation is accelerating. But when you look at it more closely, it seems that inflation is stable and not all that high.
Seems like the long trend of inflation is down.
"-quote
The last 20 years didn't have as many recessions as before along with higher inflation. What this chart doesn't show is the titanic amounts of debt foisted upon Americans (from federal gov down to individual). Americans would use real savings instead of borrowing 10 times their income to buy homes. Also, the trade deficit would not be so large (Say's Law). I don't know what Americans have been using to pay for all this Chinese stuff. What did the Chinese get in return? What are the Chinese going to buy with their dollars? Perhaps defense companies...
Published: November 9, 2007 3:48 AM
DickF
Banker,
It appears the Chinese are going to buy euros with all their dollars.
Published: November 9, 2007 6:57 AM
TLWP Sam
An interesting question I have is why gold has a numanistic value higher than its monetary value? Which is to say why is most gold is transformed into jewellery than coins and bars? If gold stores are increasing at 2% to 3% per year then doesn't the numanistic value of gold falls by 2% to 3% per year? Or to put it another way, as more gold enters the market from mining and recovery, people will less value gold because there more and more of it (as in what happened to aluminium).
Indeed at what point would people prefer to melt jewellery down to gold bars/coins because:
(a) gold more profitable to be held as an investment vehicle?
(b) gold becomes money again such that it's more valuable as currency?
Published: November 9, 2007 8:57 AM
Nelson
Unless the jewelry is ugly, probably never. You don't "lose" the value of gold because it is in a different form and it may gain value in Jewelry form.
Besides, I have a theory. Gold's main "intrinsic" value comes from women liking shiny jewelry.
Published: November 9, 2007 9:55 AM
Max R.
From Mises's Selected Writings, Volume 2:
"Rather than being considered a disadvantage, it should be viewed one of the merits of the gold standard that its unconditional adherence makes the central banks alert in a timely way to the fact that in their interest-rate policy they may have entered upon paths which must inevitably lead through an artificial upturn to an inevitable crisis."
Published: November 9, 2007 10:49 AM
Fundamentalist
TLWP: "...as more gold enters the market from mining and recovery, people will less value gold because there more and more of it (as in what happened to aluminium).
You will have notice that the prices of all metals have increased to near record levels lately. Gold isn't the only metal that responds to monetary inflation.
The reason gold doesn't fall in value as production increases is that the supply of $ increases even faster. While gold supplies may increase 2-3%/yr., the supply of $ increases about 12%.
If you visit the World Gold Council's web site, you'll find that gold is most popular in Asia where it is used as money. But Asians keep their gold in the form of jewelry. They don't have to melt it down when they want to spend it, they simply trade it for the paper money of their country. When they want to hedge against inflation, they trade paper money for gold jewelry. Keeping gold in the form of jewelry allows them to enjoy its beauty and monetary value at the same time.
Published: November 9, 2007 11:28 AM
Allen
Watch carefully as the central bankers push the Amero (google, youtube it) to supplement the dollar. We must not let this happen, as the Bill of Rights would end.
There is a real solution and that is to create a second central bank called the "Social Security Bank" directly supervised by congress that ONLY loans money to the Fed, money that is backed by Federal Reserve securities and the new Social Security Bank Fund. Interest income would begin paying interest outgo. The money that we put into Social Security would be purchases of long term Federal Reserve Securities. This would reverse the debt based devaluation, while covering the debt based money growth.
All fractional reserve allowance must end, and government debt securities too. Without ending these, the gold standard is hopeless.
Published: November 9, 2007 12:17 PM
IMHO
Okay, when I look at the chart I see that when you don't artificially prop up the economy by printing dollars, recessions naturally occur as a means of self-correction. Printing dollars may put a band-aid on the wound and prevent recessions, but one little slip and you're dealing with something more serious. The longer you put it off, the worse it's going to be. No one wants to bite the bullet; but if we don't, it's going to come back to bite us in the ***.
This reminds me a bit of what happens when you prevent forest fires to the point where you won't even allow a controlled burn. When a fire does finally happen, you are talking about total devastation.
Is that what you were saying Lew?
Published: November 9, 2007 1:24 PM
DickF
IMHO,
To some extent inflation actually hides recessions because of the definition and the collection of data. If you have a quarter downturn the FED can pump in money and even thought there is no real increase in goods production the money illusion is that there is no decline. A formal recession is defined as a decline in the GDP for 6 months (two consecutive quarters) but is not at all adjusted for monetary "stimulation."
Published: November 9, 2007 1:49 PM
IMHO
Dick,
I don't know why, but I remember it as 3 consecutive quarters (but that's a minor issue that I can check out).
From what I can tell, what I posted was a more basic explanation of what you said. If not, then where am I wrong about the idea that the government propping up the economy forestalls recessions...or worse.
I'm in learning mode here, so please be gentle. :)
Published: November 9, 2007 2:55 PM
Dan
While a dollar crisis like the one we're currently in will hurt, it is neccesary to seperate the wheat from the chaff. Spare the rod, spoil the child and the child today is extremely spoiled.
Published: November 10, 2007 3:17 AM
steven
I guess Lew has shown that there is a trade off between inflation and number of recessions in the chart. Change of standard(from gold to paper)has resulted in inflation.
I feel that the time frame of the chart is relatively short to gauge whether gold/paper standards is better or "shows that the crises are self correcting and at no long-term cost to the currency's value".
I believe that the benefits and problems of Paper standards will be better study in future, maybe when euro could replace the U.S. dollar as the world's primary reserve currency.
Published: November 10, 2007 11:22 AM
mikey
http://www.jsmineset.com/home.asp?RQ=EDL,1&sPID=0&linkid=3806
Try this link.Would like anyones take on this.
Published: November 10, 2007 3:48 PM
Kelly Black
From David Bratton:
"But the law does prevent you from enforcing contract terms requiring payment in gold"
Actually, this law was prospectively repealed in 1977. 91 Stat. 1227, 1229 (1977), codified at 31 U.S.C. S 5118(d)(2) (http://www.law.cornell.edu/uscode/html/uscode31/usc_sec_31_00005118----000-.html). Gold clauses were made illegal in the 1930s, and were unenforceable for 40 years. Congress then made it legal to enforce gold clauses in new contracts, but kept in place the bar on enforcing gold clauses in then-existing contracts.
I believe that Ron Paul was instrumental in making gold clauses enforceable again, but have not been able to verify that tonight.
". . . which effectively prevents banking based on gold since the bank wouldn't ever have to give you your deposited gold back."
The government has other ways (http://en.wikipedia.org/wiki/E-gold#2007_indictment) to keep gold banking at bay.
Published: November 11, 2007 11:18 PM
newson
tlwp wrote:
Your link didn't inspire confidence C.I.J. It did the obvious whine - money is either paper or electronic pulses. Yet to maintain a complex trading system you're going to still be using paper and electronic pulses that are supposedly 'backed' by gold.
an hypothetical future gold-based monetary system would obviously incorporate electronic payment systems, but that is neither here nor there. the essential point is to understand that if the users of these accounts lose faith in management's ability or integrity, there would be the option to demand physical gold. depositors of northern rock were happy with electronic book-entries until they weren't, and then queued round the block to demand cash for their deposits. this is nexus that tends to maintain the system's integrity.
Published: November 12, 2007 11:52 PM
pay
yes, our money is worth less, but we are paid more. Depreciation? So what?
Published: March 17, 2009 9:32 PM