Metal based currency

[seapilot]

Watched PBS "what is the value of the dollar" they explained about the Gold Standard and the Bretton Woods System and the eventual debasement with the abandonment of the Bretton Woods System by Nixon.

There is a lot of people on this forum with much more knowledge than I about monetary policy as I have only been reading articles for about 2 years. Now the big problem is a finite amount of gold to back our currency and when in deficit we had to give a bigger share to other countries and got out of balance of trade. They had more gold than we did hence there were more dollars not backed by as much gold making them worth less.

Hypothetical scenario, what would happen if the U.S returned to the gold/silver/copper standard only domestically and traded internationally with a currency backed by something such as aluminum or nickle?

Thus have 2 types of currencies only Gold currency couldnt be traded internationally only aluminum/nickle which would lessen the chance of a gold deficit while strengthing and inflation proofing the currency within the country while trading freely aluminum/nickle on the international market.

[theseus51]

Well, the bigger problem is that government, when given the option to print money, always do. Even when we were on the gold standard, it wasn't a true gold standard because the government kept printing more money, at a much faster rate than they were increasing their stockpile of gold.

I think the way you describe it, it seems like we would just be trading actual commodities, rather than money. Instead of aluminum, we could just as well be trading toothpaste or candy. We give them something of value (aluminum), for other things of value (whatever we import). You wouldn't need a new currency, just trade the actual metals. If I'm understanding your idea correctly. It seems like there's an extra step though. Cause to get all this aluminum to trade, you would have to buy it (probably with gold), making the system repetitive with the system of gold -> aluminum -> import items.

Unless we have a huge stockpile of aluminum to export back home. But if that's the case, we would just export the aluminum and receive gold. Then use the gold to buy whatever we needed. Everywhere would accept gold, but if you use aluminum, only certain places would want aluminum. And if they don't want aluminum, we couldn't trade with them.

[jon_perez]

After all the reading I've done, I've realized there is really nothing wrong with a fiat currency as long as it is not created irresponsibly. But that's a big IF. Politicians will always try to spend more than they have.

The US has been on and off the gold standard multiple times in history. During times of gold as money, you get the problem of deflation and a limited money supply. During times of fiat, you get the problem of wanton printing and inflation.

Multi-metallism has its own set of problems too. See the wikipedia entry on "bimetallism" to appreciate why.

Each approach has its own set of pros and cons. In today's markets, gold (and other commodities) are a good (but not perfect) barometer of when the central banks are printing too much money and a free, liquid (minimally if not completely untaxed) trade in gold and silver and other commodities can prevent the central banks' abuse from going unchecked.

If we go deeper into the argument, we see that the Libertarian argument of taxation and big government being at the root of all evil makes sense. Taxation is what gives fiat money its power and distorts the value of things. Without the socialist state apparatus giving subsidies (out of your pocket) to favor this or that entity, the market is freer to determine the correct value of things.

I'm not as extreme a libertarian as the others in this forum, because I believe that there are areas where government (e.g. 'public') mechanisms can be beneficial to the society 'as a whole' (whatever that means but also the real end of all this debate in case some people have forgotten it), but if you look at the way the US works today, I think it's a safe bet that the size of government has already gotten out of hand.

[jon_perez]

Well, the bigger problem is that government, when given the option to print money, always do.Correct. Hence the political justification behind the creation of an 'independent' central bank. If you think you can't trust the Fed, then what makes you think you can trust the Treasury either ?

The Treasury would be under the control of the party in power or worse, both parties in collusion so abuse of the money supply might even arguably be worse. Viewed from this perspective, the whole Libertarian program of shrinking government and reducing taxation starts to make more and more sense.



Even when we were on the gold standard, it wasn't a true gold standard because the government kept printing more money, at a much faster rate than they were increasing their stockpile of gold.Correct again. The temptation to print more paper money is irresistible and will cause any artificially set price of gold to ultimately fail.

However, I don't agree with the idea of gold serving as the sole form of money. Money is the lubricant of the economy, and you need sufficient quantities of it. I happen to think that the notion of "debt-backed" money is not as evil as it is being made out to be, but only as long as the money "creation" power is not abused. Contrary to the myths being spread by the recent propaganda fad, the true backing of money is not 'gold' but the things that it can buy or the productivity and output of the economy that the currency operates in. Gold is actually just as arbitrary as paper money except it has the characteristic of being 'impossible to counterfeit', and of being rarer (not necessarily a good thing).

I think one good explanation for why we have inflation is not conspiracy, but rather that, while central bankers are taught to watch out for inflation and keep it low, they are positively terrified of deflation and will virtually always make money cheaper - give it away if they must - if inflation approaches the 0% line. The Keynesian doctrine that central banks operate under today states that 'a little inflation is a good thing' but that 'deflation is to be avoided at [almost] all costs'.

The guiding philosophy behind today's central banking concept is a mechanistic view of the economy as a device with buttons and levers (monetary policy) which can be adjusted (centrally, by the government) for the 'greater good'. It's actually amazing that this idea works to some extent, but it can also be easily abused and is vastly imperfect. One problem is that economics absolutely does not exist in a vacuum apart from politics.

The libertarian/Austrian/Classical Economics solution being offered is that by decentralizing such powers and letting the 'market' work itself out, you gain much more efficiency and this is presumed to always ultimately (in the long run) end up doing the most good. Keynes, of course, had a beef with this view and we remember his quote "in the long run, we are all dead." :D



I think the way you describe it, it seems like we would just be trading actual commodities, rather than money. Instead of aluminum, we could just as well be trading toothpaste or candy. We give them something of value (aluminum), for other things of value (whatever we import). You wouldn't need a new currency, just trade the actual metals. If I'm understanding your idea correctly.Go back to barter, in other words. Short of a total meltdown (ala Zimbabwe) this is not going to happen. Electronic and paper money is just way too convenient for people to give up.

[jon_perez]

Hypothetical scenario, what would happen if the U.S returned to the gold/silver/copper standard only domestically and traded internationally with a currency backed by something such as aluminum or nickle?The problem with a currency backed by aluminum, nickel or some other commodity would mean that the value of that currency is pegged to the world demand level for that commodity. Fiat is arguably still the most flexible form of money if only there were not an inbuilt bias to create so much of it.

Greater public awareness of the money creation process is one important thing needed to curtail abuse.

[fsk]

I have a lot of good bits on sound money on my blog. Look there if you want a good analysis.

[Tom228]

I keep wondering why fiat money is such a taboo amongst some people. Sure has problems but so does the gold standard or anything of the sort.

[Bradley in DC]

I'm not as extreme a libertarian as the others in this forum

Understatement of the forum. :p

[jon_perez]

Understatement of the forum. :pTroll. :p