real question about sound money

[SeanEdwards]

Maybe someone on this forum can explain something about monetary policy to me. If the currency is linked to a specific precious commodity (gold, or whatever), then how does the money supply expand? Does it require that gold be mined and deposited in some Ft. Knox type deal? I admit that I really don't understand this stuff, and have never studied macro-economics, so I'm hoping someone here can provide a link that explains exactly how a modified gold standard would work.

It seems like if the money supply was locked, then all economics becomes a zero-sum game. You can't get rich, without making someone else poor. What am I missing here? Money sure is weird. :confused:

[Swmorgan77]

Good question. Rotbhard answered it more succinctly and effectively than I could. I highly recommend taking the time to listen to the free audio book "What has government done to our money" at this link:

It's short, and its an easy read (which you wouldn't expect from an economics book).

You will understand the Gold standard issue MUCH better if you take the time to listen.

http://www.mises.org/media.aspx?action=category&ID=92

By the way Rothbard's short answer to your question is that we need not worry about having "enough gold" to allow for exchange, because the market would determine a price based on the availability of gold and so products/services would be worth less gold if it was less available. Gold's availability would not prevent it from serving as a currency, it would simply mean that it would be worth more products and services. We would need smaller quantities of it to exchange, but it does not need to be "plentiful" per se.

[BLS]

I'm not really sure, but I would think that your last statement is true.
You can't just MAKE money. If you could, everyone would do it, right?

Therefore, your last statement makes the most sense. There's a finite amount, and it's distribution dictates wealth.

My biggest concern about RP wanting to get away from paper money, is HOW will we pay for things?

[foofighter20x]

Debt As Money (http://video.google.com/videoplay?docid=-9050474362583451279) (47 min)

[briatx]

If you had a constant supply of money, as the economy expanded the money would gain value over time. Imagine that.

Unfortunately I think everything is going electronic. Its not necessarily the paper that's bad, its because its a fiat currency, backed by nothing but the goodwill of the United States, its economy, and its military.

[beermotor]

There's nothing wrong with electronic deposits and banking, either. So long as the supply is not expanding (with the whims of government), then everything is fine. You get ECONOMIC STABILITY rather than the crap we have now. Will it curtail rapid expansion? You're damn right it would! And that's the entire point! What happened after the dot com boom of the 90s? What happened after the "roaring 20s"? What you want to avoid is rapid booms and busts. That is what the Austrian Business Cycle is all about.

[goldenequity]

Another great film 4 U.

The Money Masters (http://ronpaulaudio.com/rpaudio/TheMoneyMasters.wvx)

[Original_Intent]

What is even more bizarre is if you think about our current system with the same critical view that you look at the "what if" scenario:

We have a system where how much money is in circulation is under the control of a very few people (and yes they can take money OUT of circulation as well as put it in.

These people are private bankers, this is NOT under the control of the government at all (although even if it was I am not sure that would make me feel any comfort)

They print money out of thin air and we pay them interest on it.

And with a godl standard it is not a zero sum game - as productivity rises, things are produced cheaper and even with a fixed money supply prices drop and standard of living rises. Under the current system, productivity rises AND prices also rise - the effect of inflation is hidden due to rising productivity. The consumer price Index is a dishonest way of measuring inflation and big surprise! this was changed during Clinton's administration to make people feel that inflation was under control.

[Swmorgan77]

I'm not really sure, but I would think that your last statement is true.
You can't just MAKE money. If you could, everyone would do it, right?

Therefore, your last statement makes the most sense. There's a finite amount, and it's distribution dictates wealth.

My biggest concern about RP wanting to get away from paper money, is HOW will we pay for things?

Well "getting away from paper" does not mean money can not literally be made of paper. It would just mean that it would be a certificate for X amount of gold, redeemable on demand.

[TyTodd]

Just a couple of thoughts on this discussion:

1) "Making Money" - Under the current system, with fiat money, the Federal Reserve, the IMF and World Bank are essentially creating money out of thin air. This is done either quite literally by printing Federal Reserve Notes (dollars) or by creating checks / credit for loans that are unsecured (or highly leveraged) against held asset reserves. This introduces additional money into the U.S. (and thus world economy), devaluing the dollar and causing inflation here in the U.S.

2) Increasing "Group Wealth" - Printing money or making money doesn't increase wealth, in fact it devalues the currency as noted above. Although extensive borrowing and the creation of dollars can give the appearance of short term economic expansion, the devaluing currency and the ultimate effects of inflation and the subsequent trade imbalances it engenders will inevitably overwhelm the short term appearances. At the end of the day, you can't print money and redistribute it to the general populace and expect that this will improve the standard of living... all this does is increase prices. Everyone maintains the same amount of purchasing power, it just takes more of the paper "money" to conduct the transactions. NOTE: the creation of paper money actually inevitably benefits the gatekeepers in these transactions (i.e. the wealthy on wall street) who influence the entire process and have access to new money before the effects of the dilution are felt in earnest.

3) Regarding Gold & Silver Supply - I am not an expert here, but from what I understand, the general principle is that by returning to a gold backed dollar (or legalizing competition between gold / silver and fiat currency; this is what Congressman Paul advocates) the laws of supply and demand would naturally accommodate for the limited amount of natural resources (gold) that could circulate (or be reserved to "back" the currency). Meaning, if gold isn't available in enough quantities, the open market would adjust and value the gold (and hence dollar to gold) accordingly. The whole principle behind gold and silver as currency standards is in part due to the fact that they are: a) inherently valuable (we use them for ornamentation and in industrial processes), b) fungible - two units of gold with equal weight and purity are exchangeable / inter-tradable, and c) they are inherently divisible. A diamond couldn't be used for a currency standard because diamonds aren't easily divisible into smaller units, and they can't be aggregated into larger components.

Hope that makes sense. If anyone understands these issues with more clarity, please feel free to tweak my statements :)

[austin356]

Watch this film by the mises institute. It highly articulate and can be good to watch for anyone from a school kid to an economist.

http://video.google.com/videoplay?docid=-466210540567002553&q=mises+institute&total=87&start=0&num=50&so=0&type=search&plindex=0

[TyTodd]

Sorry, I reread that post and realized I got a little off-target in all my excitement :-)

However implemented, a new gold standard or gold-backed security wouldn't necessarily get rid of paper money... it would just be exchangeable for the backing metal (gold / silver). This is essentially the system we used to have before Bretton Woods and ultimately the demise of the gold standard in 1971. Unlike Bretton Woods, which had a fixed exchange rate between gold and the currencies, the way I understand the current alternative is to return to a market-driven exchange rate.

I'm not 100% sure about the concept of a fixed amount of wealth in the world, where one country or individual could not increase his wealth without compromising another's. There is obviously an expansion of wealth occurring as we develop new intellectual property, businesses, produce new gold reserves, etc. But, you could argue that the success of these new assets would be undermining that of predecessors or other assets, and the effect might be seen as an expansion of overall wealth only on a long-term scale... meaning that wealth is relatively fixed on short term perspectives. Also, remember that as technology advances, we improve productivity, which in theory makes a higher standard of living available to all, regardless of where the overall wealth is shifting. So, this is obviously a complex issue with several off-setting factors. And, the concept of fixed wealth has very little to due with fiat vs. asset-backed money, as having a greater supply of fiat money does not change the idea that there is a fixed amount of wealth (assets which have an inherent value; i.e. excluding un-secured paper money). Just my $.02 here, as this is a complicated issue...

[Original_Intent]

No, as there were more products (competing for the same number of fixed dollars) The value of the money would skyrocket making everyone better off.

Saving would be hugely rewarded (instead of as it is now, you lose buying power if you save money)

Right now debt spending is encouraged because you repay loans with devalued inflated money.

[austin356]

I just think we should take the method Ron discussed. Make a parallel system of legal tender (w/ reformed banking laws for the complementary standard), and then let people, businesses, and the financial institutions decide.

One will win out (or maybe just complement each other even long term). Will it be the highly available credit w/ (3-9%) inflation, or slightly tighter credit w/ zero inflation long term?

I know where I would put my savings!

[Silverback]

I've given this subject a lot of thought, I've been of the opinion that the Federal Reserve act is THE root cause of nearly all our structural economic and political problems.

It's important to remember in these discussions that MONEY IS NOT WEALTH.

Money is simply a means of exchange, the means of production, real, intellectual and personal property, resources and commodities, are true wealth.

Ron's on the right track with his proposals, let me outline the bigger picture I think he's coming around to. Keep in mind the Austrian school traditionally was in favor of a Gold Standard because there was still an opportunity to save it (rather than restore it), Rons political career began after Nixon closed the gold window over just that issue.

The first thing that needs to be done is to get the budget under control.

The barriers to using alternative means of exchange, such as but not limited to metals, should be removed gradually so as not to create any big shocks.

The FRA should be sunsetted, there is a provision in the act to provide for this.

The assets (promissory notes of various kinds) held by the fed should be honored by the Treasury and allowed to mature naturally, that way we'll have a continuously diminishing revenue stream into treasury over the next 30 years or so. As those funds hit the treasury the FRNs should are destroyed (either literally or figuratively, doesn't matter) and replaced with treasury notes.

This way the money supply is constant, everyone pays their debts, and we're off the debt standard. The hard part is keeping the government from running deficits and printing money to compensate, it requires ironclad spending rules. We could still borrow money but we'd have to find somebody with savings they're willing to lend, a free market for interest rates.

Now, we're removing the barriers to using alternative currencies remember? The idea is to eliminate the force backing the paper currency and allow free competition. There's no need for a law declaring gold, or anything else, legal tender.

Anything that's reasonably liquid can be used as a means of exchange, and in this world where markets and exchanges can be accessed from any cell phone almost everything is liquid. Absent government force of law giving an advantage to worthless debt instruments, whatever is the most liquid asset rises to the top and becomes money, the relative yardstick by which all other prices are measured, all by itself.

There's every reason to believe that would be gold or silver, but it doesn't have to be, it could be oil, or microsoft stock, or whatever.

That's how gold became money in the first place, several times actually. It was only when governments intervened in the marketplace with legal tender laws (to facilitate taxation) that commodity money ran into problems.

Getting from where we are to where we need to be will take a generation, maybe two, assuming we can maintain the effort. The alternative is the complete collapse of the current system and having to start all over again.

Some say Ron is too late, some say too early, I say it's time RIGHT NOW to make the attempt, because in the next couple decades we're going to get a new monetary system one way or another, either a market based one or probably a pan-american fiat debt currency.

[TyTodd]

"No, as there were more products (competing for the same number of fixed dollars) The value of the money would skyrocket making everyone better off."

Original_Intent, I'm not sure if I understand exactly what you are arguing, so I might be misinterpreting your comment. I don't think you can look at system-wide valuation changes in currency in a vacuum. When talking about increases in the value of money or deflation, it is important to distinguish between productivity driven price decreases and currency supply limitations that drive down prices due to the scarcity of money. While productivity driven deflationary pressure will most likely not have an impact on your income, scarcity of money as a driver of deflation will ultimately cause a decrease in wages and income. So, although falling prices increase your buying power per dollar unit, the very scarcity of currency suggests that your disposable income will most likely decrease in sync with the changing value of money. Deflation reduces liquidity, provides a disincentive to invest (holding money will be worth more in the future), and can wreck havoc with banking. Banks tend to limit their lending, both due to the fact that holding money is rewarded and because falling prices mean collateral used to secure loans is decreasing in value, which puts a lot of pressure on loans and risk in the hands of the lenders. Look at the impact that deflation had in the great depression... even though prices dropped and the purchasing power of money increased dramatically, no one was better off due to all the factors mentioned above.

Hard currency or specie money systems tend to trend toward deflationary pressure, as population growth and increases in productivity put pressure on prices... there are more products, the products are produced cheaper, the amount of currency circulating is fixed, and there are more people fighting for a fixed amount of currency. Fiat money systems tend to trend toward inflation, as the money supply is always growing, especially when you have a trio like the Fed / IMF / World Bank that are constantly creating U.S. dollars out of thin air.