Local economist: "Mining of gold causes boom & bust cycles"

[Matt Collins]

A local economist friend of mine (Chicago school) and I are having discussions about the Fed etc...


Here is what he has to say:

The problem with the gold standard is that the fluctuation in the supply of gold due to mining activity actually used to cause destructive boom and bust cycles. (It was also a problem when people turned in their gold for cash an...d vice versa.)

Before we had a Federal Reserve we had a man that served the function of Federal Reserve. His name was JP Morgan. He had to bail the country out on more than one occasion.

I explained this in great detail on my radio show the Saturday before last. Here's the way too short version. The issue is the way money and banking works. When you make a deposit, some is held back for reserves, then it is lent out. When it goes into the financial system, some of it eventually returns and a reserve is held on that, etc. That is the velocity of money. This happens multiple times. The problem is that people are easily spooked and will pull money out of financial institutions in order to make sure they don't lose everything. (See "It's a Wonderful Life" on a TV near you.) We had bank failures more than every ten years prior to the 1900s.The Fed was just one element in a long list of culprits in the real estate collapse.

Overborrowing, government meddling, investment speculation, poor regulation, low interest rates, and a host of other issues caused the problems.

Gold has gone up for the same reasons it went up in the 70s and early 80s. Fear of the messes that government can cause. When the problems got bad enough, people voted for the right kind of change and we experienced great growth. I fundamentally think that government has to be reduced to managable levels and spending must be put into check. I think the best way is to reduce government spending growth rates. When the economy then grows faster than government, the debt issues will take care of themselves.

I would appreciate your thoughts to this.

[Maximus]

I think Thomas Woods addresses this in Meltdown

[cswake]

Gold has gone up for the same reasons it went up in the 70s and early 80s. Fear of the messes that government can cause. When the problems got bad enough, people voted for the right kind of change and we experienced great growth.

The great growth was primarily due to a massive credit bubble, that they are still trying to inflate.

I think the best way is to reduce government spending growth rates.

They don't follow any other spending rules, why follow this one? Who decides the growth rate?

The problem with the gold standard is that the fluctuation in the supply of gold due to mining activity actually used to cause destructive boom and bust cycles. (It was also a problem when people turned in their gold for cash an...d vice versa.)

True. Gold is not a panacea, it did have a lot of volatility; however, it didn't permit perpetual inflation.

Before we had a Federal Reserve we had a man that served the function of Federal Reserve. His name was JP Morgan. He had to bail the country out on more than one occasion. I explained this in great detail on my radio show the Saturday before last. Here's the way too short version. The issue is the way money and banking works. When you make a deposit, some is held back for reserves, then it is lent out. When it goes into the financial system, some of it eventually returns and a reserve is held on that, etc. That is the velocity of money. This happens mutliple times. The problem is that people are easily spooked and will pull money out of financial institutions in order to make sure they don't lose everything. (See "It's a Wonderful Life" on a TV near you.) We had bank failures more than every ten years prior to the 1900s. Ryan, the Fed was just one element in a long list of culprits in the real estate collapse. Overborrowing, government meddling, investment speculation, poor regulation, low interest rates, and a host of other issues caused the problems.

He's making the case on why fractional reserve banking shouldn't exist, as well as why the government shouldn't interfere.

*edit* He'll probably balk at 100% reserves, since it removes a policy tool of a central bank. Just respond that 100% reserves were not just advocated by Austrians, but by big shot economists like Irving Fisher & James Buchanan.

[sratiug]

Morgan started the bank runs himself, as is explained in "The Creature From Jekyll Island", to get the Federal Reserve Act passed and destroy competition from the smaller banks. As long as fractional reserve banking is legal banks will always be insolvent houses of cards waiting for a breeze to blow them down.

[Travlyr]

Precious metals are going up because the Internet (truth machine) is providing people with an understanding of the origin of money; what is real money, and what is fiat.

Ron Paul says,
http://mises.org/daily/2826

The gold standard as a constitutional restraint on our government was abolished in the United States, not in 1934 nor in 1971, but in 1819 with the US Supreme Court case of McCulloch v. Maryland.[12] With this famous Supreme Court interpretation of the Constitution, the federal government acquired the sovereign power to manipulate the nation's money, from which the legal tender laws of the Civil War, the central-banking powers of the Federal Reserve System, and the ultimate prohibition on any private use of gold as money in 1934 derived. This link between sovereignty and currency manipulation has been ably argued by Henry Mark Holzer.[13]

Murray N. Rothbard says,
http://mises.org/daily/4728

It is true that the interventions of governments previous to the 19th century weakened the speed of this market mechanism, and allowed for a business cycle of inflation and recession within this gold-standard framework. These interventions were particularly: the governments' monopolizing of the mint, legal tender laws, the creation of paper money, and the development of inflationary banking propelled by each of the governments. But while these interventions slowed the adjustments of the market, these adjustments were still in ultimate control of the situation. So while the classical gold standard of the 19th century was not perfect, and allowed for relatively minor booms and busts, it still provided us with by far the best monetary order the world has ever known, an order which worked, which kept business cycles from getting out of hand, and which enabled the development of free international trade, exchange, and investment.[1]

Ludwig von Mises says,
http://mises.org/daily/4153

The demonetization of silver and the establishment of gold monometallism was the outcome of deliberate government interference with monetary matters. It is pointless to raise the question concerning what would have happened in the absence of these policies. But it must not be forgotten that it was not the intention of the governments to establish the gold standard. What the governments aimed at was the double standard. They wanted to substitute a rigid, government-decreed exchange ratio between gold and silver for the fluctuating market ratios between the independently coexistent gold and silver coins. The monetary doctrines underlying these endeavors misconstrued the market phenomena in that complete way in which only bureaucrats can misconstrue them. The attempts to create a double standard of both metals, gold and silver, failed lamentably. It was this failure that generated the gold standard. The emergence of the gold standard was the manifestation of a crushing defeat of the governments and their cherished doctrines.

[awake]

Chicago school - Pro Fed, Anti gold. In other words, You just need the right people running the Fed and you can't have an all powerful Fed with gold as money.

Some people will not get it until their artificial reality is shattered. Simply be there with the correct explanations when it happens.

[Brian4Liberty]

Does he support the monetization of the Federal Debt? What does he think happened to Greece? Printing money is better than mining gold?

If he thinks that poor regulation was a cause of the housing bubble, why would the regulators at the Fed do any better?

[EndDaFed]

A copper, tin, or nickel standard would be better than a gold standard. Gold is too scarce. Such a commodity would be open to much manipulation by those that held the most of it. I heard some suggest an energy standard. Which would make the most sense given how energy is really responsible for vast amount of wealth that is available today.

[awake]

In theory gold could possibly cause boom and bust cycles - large production increases would need to ensue for an extended period of time and mining has a very lengthy structure of production (5 to 10 years). But, he is at a loss to show evidence of it. What we do know is that fiat money is able to cause booms and bust cycles and there is ample evidence of this many times over. Not to mention the absolute ability to destroy the fiat currency through political debasement, which is not a quality of mined gold. Gold as money was decided by many thousands of years in the market as the most suitable money, fiat money of any implementation has never lasted.

People need to remember that most people who defend central money debasement are never fully aware that they are upholding the principle of coin clipping of the kings of old. It is an instrument designed to defraud and only defraud. The rest is a never ending supply of intellectual bodyguards throwing them selves on grenades that prove this, all for establishment prestige and recognition.

[Inkblots]

The best solution to monetary reform, of course, isn't a gold standard. Rather it's what Ron actually advocates: competing currencies. A free market in money, in which various private bank, foreign, and commodity-backed currencies are allowed to freely compete with the US Dollar is the truest way to put the collective knowledge of the marketplace to work in determining the price of capital and the supply of money. And in order to realize this vision, we must repeal legal tender laws so that citizens can sign enforceable contracts requiring payment in any desired currency.

In such a system of competing currencies, the average consumer will likely choose to save their money in a full-reserve gold-backed bank, that pays no interest, and may charge to hold the money safely in its vaults. However, investors and those wishing to earn a return on their savings would have the option of putting their money in a riskier fractional reserve bank. That allows the money supply to ebb and flow based on investors' confidence in the marketplace, while simultaneously allowing a de facto gold standard for everyone with less disposable income.

Under such a system the natural variation in the scarcity of any one or group of commodities, say, will be accounted for by allowing various commodity backed currencies to freely adjust in value against those maintained by, say, investment banks. The supply of money will naturally grow and contract to meet market demand: investors will increase the capital holdings of more daring fractional reserve banks during times of economic expansion, so capital will grow and become more cheaply available to businesses. During times of contraction, when businesses fail, that fractional reserve currency that existed in the form of loans to the failed businesses will be eliminated and the unneeded money will disappear from the market as the banks that issued the loans fail. And all the while, everyday savers will be safely protected by gold or commodity banked banks.