The gold standard... does it shift power to other nations?

[nodeal]

Having a debate on another forum (yes the interwebz is serious)...

The guy I'm arguing with is against the gold standard for many reasons, one of which is that he says if we go back on a gold standard, it shifts powers to countries that are rich in this mineral (gold), and you're screwing over countries who have none to mine.

Is this true? What is the answer to this?

[Gumba of Liberty]

Any money standard that is enforced through legal tender laws is going to have problems. This is basic supply and demand. If only gold is money because a government, like the United States, decrees that ONLY gold will be legal tender, then all market alternatives to gold i.e. silver, platinum, copper, coal, hemp, etc. cannot be used for trade as a payment of debts. If only gold is money than there will be problems with supply which makes the value of gold swing violently. Legalize competition in money and store your wealth in whatever you believe will hold its value over time. It is the individuals choice in what they value and what they believe others will value that makes money special. Fiat money is central bank funny money. The Gold Standard is government enforced money with government mints. Free market money is individually decided based on the commodity that best saves the labor of the individual by holding value over time.

[Nate-ForLiberty]

Any money standard that is enforced through legal tender laws is going to have problems. This is basic supply and demand. If only gold is money because a government, like the United States, decrees that ONLY gold will be legal tender, then all market alternatives to gold i.e. silver, platinum, copper, coal, hemp, etc. cannot be used for trade as a payment of debts. If only gold is money than there will be problems with supply which makes the value of gold swing violently. Legalize competition in money and store your wealth in whatever you believe will hold its value over time. It is the individuals choice in what they value and what they believe others will value that makes money special. Fiat money is central bank funny money. The Gold Standard is government enforced money with government mints. Free market money is individually decided based on the commodity that best saves the labor of the individual by holding value over time.

really nice explanation :)

[Bern]

Gold miners would naturally gain the benefits of first use of new gold in the same fashion that the Fed's primary dealers take advantage of new money/credit in the current system. The advantage is pretty small though because mining production is very small compared to existing supply and it can't easily be ramped up (in fact, production went backwards last quarter even as demand has increased):


...
Global gold demand in the first quarter of 2011 totalled 981.3 tonnes, up 11% year-on-year from 881.0 tonnes in the first quarter of 2010. In value terms, this translated to US$43.7bn, compared with US$31.4bn in the first quarter of 2010, an increase of almost 40%. This was largely attributable to a widespread rise in demand for bars and coins, supported by an improvement in jewellery demand in a number of key markets.
...
In Q1 2011, gold supply declined by 4% year-on-year to 872.2 tonnes from 912.1 tonnes in the first quarter of 2010. This was despite an increase in mine production of 44 tonnes year-on-year, a growth rate of 7% from year earlier levels, and negligible net producer de-hedging. The decline in total supply was due to recycled gold, which was down 6% on year-earlier levels to 347.5 tonnes from 369.3 tonnes in the first quarter of 2010 and a sharp increase in net purchasing by the official sector.
...

http://www.gold.org/investment/statistics/demand_and_supply_statistics/

In a nutshell, inflation in the gold supply occurs at a very slow and steady pace. This naturally constrains governments (even gold producing ones) from living beyond their means.

Here's a decent, easy to read essay on gold standards from CATO:

http://www.cato.org/pub_display.php?pub_id=9181

Apropos to the OP from the CATO paper:
...
“A gold standard would allow Putin to buy the United States.” Any Russian autocrat’s ability to use the proceeds from Russian gold mines to buy American assets would be no greater under a gold standard than it is today, unless the purchasing power of gold were to rise. And there is no good reason to think that would happen. The real purchasing power of gold today, under fiat money, is higher than it was before 1971, in large part because people are hoarding gold as a hedge against fiat money inflation. The current fiat system is enriching Putin more than a gold standard would.
...

[Nate-ForLiberty]

Gold miners would naturally gain the benefits of first use of new gold in the same fashion that the Fed's primary dealers take advantage of new money/credit in the current system. The advantage is pretty small though because mining production is very small compared to existing supply and it can't easily be ramped up (in fact, production went backwards last quarter even as demand has increased):



http://www.gold.org/investment/statistics/demand_and_supply_statistics/

In a nutshell, inflation in the gold supply occurs at a very slow and steady pace. This naturally constrains governments (even gold producing ones) from living beyond their means.

It is also far more expensive to mine new gold than to create new fiat money on a computer.

[Travlyr]

It is also far more expensive to mine new gold than to create new fiat money on a computer.

That's right, and that's because fiat money creation destroys jobs while mining and other honest activity creates opportunity ... much like industrial hemp would do if people were allowed by our overlords to grow it and make products out of it.

[matt0611]

Don't we in the US own more gold than any other country?

[Zippyjuan]

In a nutshell, inflation in the gold supply occurs at a very slow and steady pace. This naturally constrains governments (even gold producing ones) from living beyond their means.

Did we have slow and steady price inflation when we were on a gold standard? The Cato piece does concede that neither system is perfect.
http://en.wikipedia.org/wiki/File:US_Historical_Inflation_Ancient.svg
http://upload.wikimedia.org/wikipedia/commons/thumb/2/20/US_Historical_Inflation_Ancient.svg/800px-US_Historical_Inflation_Ancient.svg.png

Suppose we did go onto a gold standard where dollars could be exchanged for a certain amount of gold. China could then take their surplus dollar reserves and instead of buying US Treasury notes could exchange them for US gold which would decrease our supply and increase theirs.

From the CATO link:

One criticism is found to have some merit. The United States would not enjoy the benefits of being on an international gold standard if it were the first and only country whose currency was linked to gold.

[Cutlerzzz]

Did we have slow and steady price inflation when we were on a gold standard? The Cato piece does concede that neither system is perfect.
http://en.wikipedia.org/wiki/File:US_Historical_Inflation_Ancient.svg
http://upload.wikimedia.org/wikipedia/commons/thumb/2/20/US_Historical_Inflation_Ancient.svg/800px-US_Historical_Inflation_Ancient.svg.png

Suppose we did go onto a gold standard where dollars could be exchanged for a certain amount of gold. China could then take their surplus dollar reserves and instead of buying US Treasury notes could exchange them for US gold which would decrease our supply and increase theirs.

From the CATO link:

Most of those big upspikes happened during a war or with a central bank, no?

[nodeal]

some really great info here so far... really appreciate the lesson guys!

[Dr.3D]

Did we have slow and steady price inflation when we were on a gold standard? The Cato piece does concede that neither system is perfect.
http://en.wikipedia.org/wiki/File:US_Historical_Inflation_Ancient.svg
http://upload.wikimedia.org/wikipedia/commons/thumb/2/20/US_Historical_Inflation_Ancient.svg/800px-US_Historical_Inflation_Ancient.svg.png

Suppose we did go onto a gold standard where dollars could be exchanged for a certain amount of gold. China could then take their surplus dollar reserves and instead of buying US Treasury notes could exchange them for US gold which would decrease our supply and increase theirs.

From the CATO link:

Notice in that chart how after 1950, there is pretty much nothing but inflation? At least with the gold standard there were some periods of deflation.

[Southron]

If we didn't use the gold standard what would "the free market decide" as a currency?

[Travlyr]

Did we have slow and steady price inflation when we were on a gold standard? The Cato piece does concede that neither system is perfect.
That is for sure. We live in an imperfect world.

The difference between the two economic systems is that competing currencies are honest and liberty oriented while central bank planning is dishonest and tyrannical. Central planners favor privileged people over commoners. ie. The Queen of England can spend $1 billion on a wedding without ever having to work while people in Argentina, and other places in the world, try and earn enough to eat.


http://en.wikipedia.org/wiki/File:US_Historical_Inflation_Ancient.svg
http://upload.wikimedia.org/wikipedia/commons/thumb/2/20/US_Historical_Inflation_Ancient.svg/800px-US_Historical_Inflation_Ancient.svg.png

This chart shows constant erratic inflation since about 1940 or so. That is the inflation tax. It has cost savers most of their wealth in a fairly short amount of time. In 1940, one could buy 1,000,000 ounces of silver for $1 million. Today $1 million will only buy about 28,500 ounces. To add insult, those who saw the scam taking place did buy 1,000,000 ounces of silver in the 1960's which is now worth $35 million. For those who did not see the scam ... it has been a huge loss of wealth.


Suppose we did go onto a gold standard where dollars could be exchanged for a certain amount of gold. China could then take their surplus dollar reserves and instead of buying US Treasury notes could exchange them for US gold which would decrease our supply and increase theirs.
No thanks, amigo. Let's go straight to competing currencies, liberty, peace, and prosperity because it is the most beneficial way for people to live life.

[matt0611]

Notice in that chart how after 1950, there is pretty much nothing but inflation? At least with the gold standard there were some periods of deflation.

Notice also in the chart from 1870-1900 (the golden age of the gold standard and no central bank) that there was nothing but minor deflation?

[Dr.3D]

Notice also in the chart from 1870-1900 (the golden age of the gold standard and no central bank) that there was nothing but minor deflation?

And it seemed to balance itself out pretty well.... then came the era of unbacked fiat paper and nothing but inflation.

[Nate-ForLiberty]

this thread is 5 stars

[ctiger2]

Ultimately I'd think you'd want a free market gold coin standard along with competing currencies. You'd just use Gold as the money ruler to measure all the other currencies against. The most important thing in any monetary system is who controls it. Regarding the Annual Inflation Rate chart from CATO. All that's showing is the swings in the value of the Dollar, not Gold. The Inflation or Deflation that occurs is directly related to how much they were abusing or not abusing the monetary system. During the deflationary periods they were NOT abusing it and during the Inflationary times they WERE abusing it. On an honest Gold standard monetary system prices would gradually deflate over time.

[cindy25]

gold standard would shift power from governments to individuals, from debtors to savers, from takers to makers

[freshjiva]

Here's an even better solution: have both free market competing currencies and an rock solid gold standard. Allow people to then pick and choose between paper money, hard gold, silver, or cigarettes.

A simple analysis of history shows that the free market has selected gold to be the perennial store of value. Simple logic would deduce, then, that a gold standard paper would then be the choice of the free market.

If we're somehow wrong, however, and the market has decided to move on from gold to, say, used car batteries, then they can do so, but its tough to overturn 4,000 years of civilization and say that gold is dead.

Free market in currency is good, but freedom to chose what currency you want, among those being gold-backed paper, is great.

[freshjiva]

Having a debate on another forum (yes the interwebz is serious)...

The guy I'm arguing with is against the gold standard for many reasons, one of which is that he says if we go back on a gold standard, it shifts powers to countries that are rich in this mineral (gold), and you're screwing over countries who have none to mine.

Is this true? What is the answer to this?

Back to the original question, in my opinion, the answer is no, power does not "shift" to anywhere.
Whether nations are rich or lacking in gold deposits have no bearing on how "powerful" or wealthy they are. This is because gold is, as Karl Marx described it (yes, I'm quoting Marx on RonPaulForums, but bear with me!), the "commodity money par excellence." This means that gold, like all other goods and services in the economy, is form of capital that needs inputs, or productive enterprise, in order to reap it.

In simpler terms, you need to invest in labor, machinery, and intellectual capital (the art of mining) in order to reap the commodity. Thus, "money creation" (gold mining) only occurs when you invest sufficient capital into it. Therefore, gold mining costs money to make money, and so it is no different from any other commodity in the marketplace.

You could take the same argument of "one country having more of X therefore they have an unfair advantage" about anything in the world: Middle Eastern countries have oil, US has natural gas, Chile has copper, etc. You need to assemble physical capital (labor, infrastructure, machinery) using intellectual capital (mining knowledge) to yield the end product.

Consider this example: If Pakistan were to strike a massive gold mine one day, India would benefit as well. This is because Pakistani Rupees trade in the open market with Indian Rupees. Same goes with Pakistani Rupees to US Dollars, Euros, Brazilian Real, etc. Pakistani interest rates would decline (because of this new increase in money supply), which would naturally adjust the exchange rate of Pakistani Rupees relative to global currencies. Exchange rates between currencies is free market based, therefore the increase in Pakistani gold reserves would naturally be reflected in the exchange rate between Pakistani currency and US or European currencies. The net forex effect would be zero. What we'd be left with a higher world money supply capable of sustaining increased global trade.

As such, no one country benefits at the expense of another just because they are naturally endowed with gold deposits.

[ctiger2]

gold standard would shift power from governments to individuals, from debtors to savers, from takers to makers

Not if it was a Govt/Central Bank mandated fixed Gold price standard it won't. Whoever controls the money is the most important part. It would have to be a free market gold coin standard where the market determines the value of the money used. A fixed price gold standard under any central bank would be ripe for abuse just as any other type of monetary system.