A theory on why the "gold standard" failed

[Bungeebones]

In the Constitution the signers enabled a mostly bi-metallic money system (gold and silver) with perhaps some inkling of accommodation for some base-metal coinage. And in there was some rather vague (in my opinion) process by which the Secretary of the Treasury was supposed to maintain a steady ratio of gold to silver by buying or selling either one. In other words the US Constitution was written with the specific intent that the government was to play the role of “market maker” in the precious metals area. That was where they made their mistake. They should have just made the coins and let the market determine their relative value.


To elaborate a little, the gold coins were all denominated with the same term “dollar” as the silver coins were. But who was to say, or rather who was the authoritative source to say whether the gold Five dollar piece was in fact worth five Silver One dollar coins? Obviously it wasn't the stamp that gave them their values but rather the relative value or ratio of the value to silver to gold. By missing that basic truth the framers of the Constitution had mistakenly set out on a doomed and futile attempt at fixing the price of gold to silver perpetually.


I found some listing of historic US gold coins that has a One dollar gold coin (1858 Indian Head U.S. Gold Dollar). It weighs 1.672 grams of 90% gold and 10% copper. Kitco.com lists the current gold/silver ratio of the market prices at 63.36 to 1.


I'll first convert grams to oz. 1.51 grams (9-5) = 0.053334230467766 oz. Gold = $1 (supposedly)
That amount times the ratio of 63.36 X 0.053334230467766 = 3.379256842 oz. Of silver today needed to equal the gold melt value of that coin. Since a One Dollar silver coin contains 1 oz of silver the silver in the coin has lost a lot of its value relative to gold since that coin was minted.


So here's my point... if they had merely labeled the gold coins “Gold” instead of “dollar” the market would have been forced to calculate the value of the gold coin based on the market value at the time of the transaction. I understand the calculation and price discovery then at that time would have been difficult but today with the Internet the calculation is simple. We could easily correct their error by refraining from putting the word “dollar” on anything other than the Silver dollar. This could be an easy first step towards returning to at least a partial sound money system.


And while we are at it there is no reason why 100 copper pennies should be decreed to be the same value as a Silver dollar so remove “cents” from their name as well as from the other base metal coins.


Bitcoin won't have any of those troubles because it is divisible to 8 decimal places and there is no need of a different coin “to make change”.

[acptulsa]

I see no evidence at all that the gold standard failed.

Yeah, the bimetallic standard had some issues, especially after they discovered some strikes like the Comstock Lode. But that's different.

The reason we're not on the gold standard any more is the bankers manipulated the piss out of it and the newspapers used that to manipulate public opinion until they beat down public opinion against fiat money to the point where they could sell it to a simple majority of the public. Read William Jennings Bryan's Cross of Gold Speech sometime. Pure propaganda.

And since then, we've received none of the benefits our great grandparents were promised, and have paid the price many times over with falling wages and evaporating savings. How, exactly, does that make the gold standard a 'failure'?

[Ronin Truth]

Gold and Economic Freedom
by Alan Greenspan

Published in Ayn Rand's "Objectivist" newsletter in 1966, and reprinted in her book, Capitalism: The Unknown Ideal, in 1967.

An almost hysterical antagonism toward the gold standard is one issue which unites statists of all persuasions. They seem to sense — perhaps more clearly and subtly than many consistent defenders of laissez-faire — that gold and economic freedom are inseparable, that the gold standard is an instrument of laissez-faire and that each implies and requires the other.

In order to understand the source of their antagonism, it is necessary first to understand the specific role of gold in a free society.

Money is the common denominator of all economic transactions. It is that commodity which serves as a medium of exchange, is universally acceptable to all participants in an exchange economy as payment for their goods or services, and can, therefore, be used as a standard of market value and as a store of value, i.e., as a means of saving.

The existence of such a commodity is a precondition of a division of labor economy. If men did not have some commodity of objective value which was generally acceptable as money, they would have to resort to primitive barter or be forced to live on self-sufficient farms and forgo the inestimable advantages of specialization. If men had no means to store value, i.e., to save, neither long-range planning nor exchange would be possible.

What medium of exchange will be acceptable to all participants in an economy is not determined arbitrarily. First, the medium of exchange should be durable. In a primitive society of meager wealth, wheat might be sufficiently durable to serve as a medium, since all exchanges would occur only during and immediately after the harvest, leaving no value-surplus to store. But where store-of-value considerations are important, as they are in richer, more civilized societies, the medium of exchange must be a durable commodity, usually a metal. A metal is generally chosen because it is homogeneous and divisible: every unit is the same as every other and it can be blended or formed in any quantity.

Precious jewels, for example, are neither homogeneous nor divisible. More important, the commodity chosen as a medium must be a luxury. Human desires for luxuries are unlimited and, therefore, luxury goods are always in demand and will always be acceptable. Wheat is a luxury in underfed civilizations, but not in a prosperous society. Cigarettes ordinarily would not serve as money, but they did in post-World War II Europe where they were considered a luxury. The term "luxury good" implies scarcity and high unit value. Having a high unit value, such a good is easily portable; for instance, an ounce of gold is worth a half-ton of pig iron.

In the early stages of a developing money economy, several media of exchange might be used, since a wide variety of commodities would fulfill the foregoing conditions. However, one of the commodities will gradually displace all others, by being more widely acceptable. Preferences on what to hold as a store of value will shift to the most widely acceptable commodity, which, in turn, will make it still more acceptable. The shift is progressive until that commodity becomes the sole medium of exchange. The use of a single medium is highly advantageous for the same reasons that a money economy is superior to a barter economy: it makes exchanges possible on an incalculably wider scale.

Whether the single medium is gold, silver, seashells, cattle, or tobacco is optional, depending on the context and development of a given economy. In fact, all have been employed, at various times, as media of exchange. Even in the present century, two major commodities, gold and silver, have been used as international media of exchange, with gold becoming the predominant one. Gold, having both artistic and functional uses and being relatively scarce, has significant advantages over all other media of exchange. Since the beginning of World War I, it has been virtually the sole international standard of exchange. If all goods and services were to be paid for in gold, large payments would be difficult to execute and this would tend to limit the extent of a society's divisions of labor and specialization. Thus a logical extension of the creation of a medium of exchange is the development of a banking system and credit instruments (bank notes and deposits) which act as a substitute for, but are convertible into, gold.

A free banking system based on gold is able to extend credit and thus to create bank notes (currency) and deposits, according to the production requirements of the economy. Individual owners of gold are induced, by payments of interest, to deposit their gold in a bank (against which they can draw checks). But since it is rarely the case that all depositors want to withdraw all their gold at the same time, the banker need keep only a fraction of his total deposits in gold as reserves. This enables the banker to loan out more than the amount of his gold deposits (which means that he holds claims to gold rather than gold as security of his deposits). But the amount of loans which he can afford to make is not arbitrary: he has to gauge it in relation to his reserves and to the status of his investments.

When banks loan money to finance productive and profitable endeavors, the loans are paid off rapidly and bank credit continues to be generally available. But when the business ventures financed by bank credit are less profitable and slow to pay off, bankers soon find that their loans outstanding are excessive relative to their gold reserves, and they begin to curtail new lending, usually by charging higher interest rates. This tends to restrict the financing of new ventures and requires the existing borrowers to improve their profitability before they can obtain credit for further expansion. Thus, under the gold standard, a free banking system stands as the protector of an economy's stability and balanced growth. When gold is accepted as the medium of exchange by most or all nations, an unhampered free international gold standard serves to foster a world-wide division of labor and the broadest international trade. Even though the units of exchange (the dollar, the pound, the franc, etc.) differ from country to country, when all are defined in terms of gold the economies of the different countries act as one — so long as there are no restraints on trade or on the movement of capital. Credit, interest rates, and prices tend to follow similar patterns in all countries. For example, if banks in one country extend credit too liberally, interest rates in that country will tend to fall, inducing depositors to shift their gold to higher-interest paying banks in other countries. This will immediately cause a shortage of bank reserves in the "easy money" country, inducing tighter credit standards and a return to competitively higher interest rates again.

A fully free banking system and fully consistent gold standard have not as yet been achieved. But prior to World War I, the banking system in the United States (and in most of the world) was based on gold and even though governments intervened occasionally, banking was more free than controlled.

Periodically, as a result of overly rapid credit expansion, banks became loaned up to the limit of their gold reserves, interest rates rose sharply, new credit was cut off, and the economy went into a sharp, but short-lived recession. (Compared with the depressions of 1920 and 1932, the pre-World War I business declines were mild indeed.) It was limited gold reserves that stopped the unbalanced expansions of business activity, before they could develop into the post-World War I type of disaster. The readjustment periods were short and the economies quickly reestablished a sound basis to resume expansion.

But the process of cure was misdiagnosed as the disease: if shortage of bank reserves was causing a business decline — argued economic interventionists — why not find a way of supplying increased reserves to the banks so they never need be short! If banks can continue to loan money indefinitely — it was claimed — there need never be any slumps in business. And so the Federal Reserve System was organized in 1913. It consisted of twelve regional Federal Reserve banks nominally owned by private bankers, but in fact government sponsored, controlled, and supported. Credit extended by these banks is in practice (though not legally) backed by the taxing power of the federal government. Technically, we remained on the gold standard; individuals were still free to own gold, and gold continued to be used as bank reserves. But now, in addition to gold, credit extended by the Federal Reserve banks ("paper reserves") could serve as legal tender to pay depositors.

When business in the United States underwent a mild contraction in 1927, the Federal Reserve created more paper reserves in the hope of forestalling any possible bank reserve shortage. More disastrous, however, was the Federal Reserve's attempt to assist Great Britain who had been losing gold to us because the Bank of England refused to allow interest rates to rise when market forces dictated (it was politically unpalatable). The reasoning of the authorities involved was as follows: if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain's gold loss and avoid the political embarrassment of having to raise interest rates. The "Fed" succeeded; it stopped the gold loss, but it nearly destroyed the economies of the world, in the process. The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom. Belatedly, Federal Reserve officials attempted to sop up the excess reserves and finally succeeded in braking the boom. But it was too late: by 1929 the speculative imbalances had become so overwhelming that the attempt precipitated a sharp retrenching and a consequent demoralizing of business confidence. As a result, the American economy collapsed. Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures. The world economies plunged into the Great Depression of the 1930's.

With a logic reminiscent of a generation earlier, statists argued that the gold standard was largely to blame for the credit debacle which led to the Great Depression. If the gold standard had not existed, they argued, Britain's abandonment of gold payments in 1931 would not have caused the failure of banks all over the world. (The irony was that since 1913, we had been, not on a gold standard, but on what may be termed "a mixed gold standard"; yet it is gold that took the blame.) But the opposition to the gold standard in any form — from a growing number of welfare-state advocates — was prompted by a much subtler insight: the realization that the gold standard is incompatible with chronic deficit spending (the hallmark of the welfare state). Stripped of its academic jargon, the welfare state is nothing more than a mechanism by which governments confiscate the wealth of the productive members of a society to support a wide variety of welfare schemes. A substantial part of the confiscation is effected by taxation. But the welfare statists were quick to recognize that if they wished to retain political power, the amount of taxation had to be limited and they had to resort to programs of massive deficit spending, i.e., they had to borrow money, by issuing government bonds, to finance welfare expenditures on a large scale.

Under a gold standard, the amount of credit that an economy can support is determined by the economy's tangible assets, since every credit instrument is ultimately a claim on some tangible asset. But government bonds are not backed by tangible wealth, only by the government's promise to pay out of future tax revenues, and cannot easily be absorbed by the financial markets. A large volume of new government bonds can be sold to the public only at progressively higher interest rates. Thus, government deficit spending under a gold standard is severely limited. The abandonment of the gold standard made it possible for the welfare statists to use the banking system as a means to an unlimited expansion of credit. They have created paper reserves in the form of government bonds which — through a complex series of steps — the banks accept in place of tangible assets and treat as if they were an actual deposit, i.e., as the equivalent of what was formerly a deposit of gold. The holder of a government bond or of a bank deposit created by paper reserves believes that he has a valid claim on a real asset. But the fact is that there are now more claims outstanding than real assets. The law of supply and demand is not to be conned. As the supply of money (of claims) increases relative to the supply of tangible assets in the economy, prices must eventually rise. Thus the earnings saved by the productive members of the society lose value in terms of goods. When the economy's books are finally balanced, one finds that this loss in value represents the goods purchased by the government for welfare or other purposes with the money proceeds of the government bonds financed by bank credit expansion.

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

http://www.constitution.org/mon/greenspan_gold.htm

[Bungeebones]

I see no evidence at all that the gold standard failed.

Yeah, the bimetallic standard had some issues, especially after they discovered some strikes like the Comstock Lode. But that's different.

The reason we're not on the gold standard any more is the bankers manipulated the piss out of it and the newspapers used that to manipulate public opinion until they beat down public opinion against fiat money to the point where they could sell it to a simple majority of the public. Read William Jennings Bryan's Cross of Gold Speech sometime. Pure propaganda.

And since then, we've received none of the benefits our great grandparents were promised, and have paid the price many times over with falling wages and evaporating savings. How, exactly, does that make the gold standard a 'failure'?

It didn't really fail because it never really existed. Noone, not even goverments can permanently fix the markets. Like I said, there is no basis to think that one could permanently establish the exchange rate of gold to silver to nickel to copper. Perhaps it explains how we ended up having paper as money. But thinking about it, there is no price fixing saying one piece of paper is worth one, another very much the same piece of paper is worth 100.

[Madison320]

I'd rather see gold itself used as currency as opposed to a gold backed currency. Things would then be priced in gold.

[osan]

While you raise some valid points, the suggestion that the gold standard failed is indefensible. If you meant the gold standard as suggested in the Constitution, then you may have a valid argument. But gold AS MONEY in sé can by no means be credibly assessed a failure. The long and raving success of gold as a medium of exchange and, most importantly, a store of value renders the notion that failed as ridiculous on its face.

It was precisely the dismantling of the paper dollar as a demand-convertible currency that sent our "money" to Davey Jones' locker. Were we on a convertible standard today, we would be having few of the economic problems with which we now suffer and the coyotes would never have been able to steal us blind in the ways they did, employing the worthless bull$#@! currency known as the "Federal Reserve Note" as the instrument of choice.

[osan]

I'd rather see gold itself used as currency as opposed to a gold backed currency. Things would then be priced in gold.

I would submit that gold-backed and demand redeemable paper is the better practical solution, all else equal. My reasoning is as follows.

Gold is a finite commodity, and rare at that. The human population is growing by leaps and bounds. This means that the per capita ratio of gold is diminishing because the rate of growth in the gold stocks is less than the rate of population expansion. This presents certain practical problems which I shall attempt to make clear using a very simple example.

Imagine the world human population stands at ten. For simplicity's sake we will assume the gold stock as static with 10 ozt. worldwide. We may imagine a circumstance where the ten human beings go about their lives in freedom and prosperity, each using what gold he may have to purchase life's necessities and innocently sinful pleasures.

Then one day one of the humans gives birth, leaving the population at 11. When that person grows to adulthood, he will also be looking to use gold as his means of exchange. But where will the gold come from, assuming the ten ounces exist as ten one-ounce coins? Either someone will have to go without or the coins will have to be re-minted into at least 11 0.9091-ozt. coins.

But let us assume instead all ten ounces are represented by 100 0.1-ounce coins. This works out well enough until the population grows to 101, which then necessitates a decision to re-mint or have someone go without.

This becomes troublesome. Add to that the loss of weight due to wear and one day a 1-ounce coin becomes noticeably less than that.

Paper, even the high quality cotton rag from which FRN's are printed, is far less valuable and far easier to "re-mint", that being a matter of engraving new plates for lower individual denominations. With this scheme, as the populations grows beyond the money supply, new bills of smaller denominations may be printed. This works because the fixed supply is now being shared among a larger pool of individuals and therefore the unit-ounce of gold becomes ever more valuable, which is particularly good for those with savings.

Such a system would still have its problems. For instance, if the base denomination of paper currency is 1/1000 ozt. of gold, if all the gold in reserve was in the form of 1-ozt. coins, someone will have to whip out the scale and a pen knife to whittle 1/1000th of an ounce from a coin. So as we see, the scheme is not quite perfect, but I do believe it could be made to work very well on a daily basis. This particular fly in the monetary ointment is at least in part remedied by the presence of silver as another base.

The fact is that gold and silver have functioned marvelously as money. They have NEVER ONCE failed under "normal" circumstances. People are the only elements in the equation that can be said to have failed, and the fact is that ANY system can be scammed. Not even bitcoin is immune because in the end it is nothing but an inanimate thing subject to the (mis)applications of their human users.

It is precisely for this reason that I have already said that there is absolutely NOTHING wrong with the FRN in principle, except for the debt-interest element. Eliminate its intrinsically usurious character and the FRN is, in principle, nearly as good as gold, save in the area of currency inflation where gold has it resolutely beaten. But even without the usury feature of the FRN, the currency is weak because as a matter of course human beings are not trustworthy to the door to administer such things honestly. When honestly and capably managed, the FRN is every bit of gold's equal. When mismanaged, the FRN loses many of its redeeming qualities. This is where gold shines as money, 1/2 pun intended.

Even with a gold standard, we failed to keep the crooks at bay. Those scoundrels dismantled the standard and saddled us with pure debt-currency. Gold was unable to save us, thereby making clear that gold can save us only from certain sorts of human shortcoming, but not from others. In the end, it is we who pooch each other and ourselves with our endless hanky panky.

[NoOneButPaul]

If we could trust someone to store and divide it we could all transaction with debit cards backed by gold in micrograms.

A true gold standard is possible in that sense but, AS ALWAYS, who do you trust with the gold and how are they held accountable for the PHYSICAL backing?

[NoOneButPaul]

Also, I believe the gold standard failed because banking panics were caused by runs, which were caused by a lack of paper confidence, and runs on GOLD caused economic crashes. The gold got blamed when it was the paper's fault, bankers used this to scare the people into passing the Federal Reserve Act - to bring stability to it all!

AND HERE WE ARE... 100+ years later... sure is stable

[erowe1]

Some of the points in the OP are good.

But you never say what you mean about the Gold standard failing. What do you mean by that?

[ClydeCoulter]

I think the standard was actually the silver dollar (Spanish silver dollar?) and gold coins made in proportion to the ratio of gold to silver. (to be nick picky)

[oyarde]

I think the standard was actually the silver dollar (Spanish silver dollar?) and gold coins made in proportion to the ratio of gold to silver. (to be nick picky)

Ahh , a Spanish silver 8 Reale pc.

[Bungeebones]

http://www.fame.org/HTM/Vieira_Edwin...lar_EV-002.HTM

What Is A "Dollar"?
An Historical Analysis Of The Fundamental Question In Monetary Policy
by

[eduardo89]

Since a One Dollar silver coin contains 1 oz of silver the silver in the coin has lost a lot of its value relative to gold since that coin was minted.

A silver dollar contains about 0.77 ounces of silver.

[osan]

If we could trust someone to store and divide it we could all transaction with debit cards backed by gold in micrograms.

Well yes, we could but that would be no better than paper in many ways.

A fixed gold supply as money in a world of expanding populations must of necessity result in deflation, which is a great thing for those with gold holdings in some form. Deflation is the mirror image phenomenon to inflation. Too much currency, prices inflate. Too little, they deflate. The problem should be obvious, yet so few appear to see it: a key factor in the stability of an economy is the maintenance of per capita monetary units within a fairly tight tolerance - just guessing that +/- 2-3 percent is probably the ballpark limit.

I suspect one of the reasons gold worked so well in the ancient world was that the population, though growing, did so only slowly and with that rate the gold supply was able to keep pace. Today, growth is accelerating toward exponential rates and therefore if gold were to become the global standard, deflation would almost have to be the result, all else equal.

This is why unbacked paper is, in principle, superior to gold under today's conditions - again, all else equal. Unfortunately, all else is not equal and far from it in fact. The ratio of US monetary units per person has skyrocketed and therefore we have experienced what I would assess to be non-trivial currency inflation. That it has not taken off in the manner of Zimbabwe to date may be indicative of several factors, but I would be almost willing to bet money I do not have that the nature of electronic "money" is one of the central reasons this has not happened. That, and the fact that so many of the available jobs are now gone from the land, making the US a buyer's market in terms of labor. That being the case, employees and prospects are in no position to make demands for raises. By that virtue, the system remains at least superficiallystable for the time being. To what degree this brand of control maybe maintained and for how long is perhaps anybody's guess.

The ratio of units per person is irrelevant. What counts is that it is maintained to within tolerance. Note that this is the average ratio. Some people will have more and others will have less. If, for example, the new currency is the "gibbet" and these are minted, printed, or otherwise issued to a volume that averages 10,000 per person, some will eventually acquire more and others will have less. Savers, for example, will likely have more while spenders will likely have less and spendthrifts even less. Those who work diligently and smartly will tend to take in more per unit hour of labor in a given field and those who slack may find themselves without work. Those who educate themselves to a profession will likely do better than those who settle for digging ditches. This is how the world works and always has, punctuated with the occasions detours into juvenile insanity such as what happened in Russia and China. So long as that ratio is maintained, the economy would remain stable and presumably optimally prosperous, all else equal as always.

We actually have a VERY simple and EASY solution before us. Firstly, the percent tolerance for maintenance of the arbitrarily chosen ratio would have to be determined. For giggles let is call it +/- 2.5% and set the absolute number at $100K per capita. That would mean that MB would be in the ballpark of 31 trillion dollars, which is fine, but if that number is too frightening or otherwise difficult to grok, cut it to $1K-per and now MB reduces to $31 billion. I content the former figure is actually better because it provides a finer economic mesh than the latter, and coupled with unit divisions such as cents the mesh is even better, but let us not focus on that here.

So we have $31T in brand new United States Notes printed up. Let us also not worry about the practical problem of how to distribute them but assume that everyone got their proper share and nobody lost out. Before that can happen a few conditions must be set and satisfied. Firstly, the Federal Reserve Bank is dismantled in toto with all currency duties returned to the US Treasury (this is all assuming no quantum leaps into ancap paradise in the wake of Jesus' return engagement).

Secondly, the primary raison d'être of the Treasury where currency is concerned would be to faithfully maintain the average ratio of 100$K per capita into perpetuity or until the sun goes nova, whichever comes first. Proper discharge of that duty will require they be provided with accurate census figures. Assuming this accuracy, any incompetent failure to maintain the ratio within tolerance, if not immediately corrected, would in the case of having issued insufficient funds (missing the low tolerance) result in immediate dismissal of all responsible parties with loss of pension and no ability to hold government positions or any government office, elected or otherwise, for life. You're done forever - go push a broom.

In the case where you issue too much money and are unable to recall the excess funds, the same fate awaits all responsible plus one year at hard labor for ever 10 basis points over the tolerance to which money was issued. If it is proven in court that you issued the excess into the economy with knowledge of what you were doing, the penality is death by hanging in a public square to the jeers of a rightly pissed off crowd, each member wanting the privilege of being the one to stretch your neck.

The president has ZERO say over how much money is issued. Any attempt to influence the Treasury on this issue that is discovered constitutes prima facie proof of treason and the president is removed from office, his neck to be publicly stretched from a tree branch on the south lawn.

Some may think the themselves, "holy $#@!, that's way extreme", and they would be correct. The other half of that truth is the fact that is must be like that because if not, nobody is going to take the rules seriously. People will try even when their necks are on the line. Therefore, when those are caught, they must be dealt with in brutality for the precise same reasons a woman must do so with the rapist who is attacking her. Lives literally hang in the balance on such issues as the economic health of the nation. I will assert openly and with zero lack of certitude that the manipulators of this nation's economy are responsible for the deaths of Americans because when an economy goes limp there are always a few who die because of it. This is sad enough when unavoidable economic forces come into play. When it is the result of purposeful machination on the part of those occupying privileged positions, it is nothing less than murder. This is a no-screwing-around issue in my book and it should be treated with the vigor so many Americans devote to cases of child rape and abortion. This issue, I assure you, is far and away more significant in terms of the gross numbers of people affected.

Commit to these two simple things and this nation would be on its way back to hale stock in short order. Well, a few other things it would also behoove us to do, but this is a fast, simple, and relatively easy first step. I believe doing this would do more to restore this nation than any other single thing we could do.

A true gold standard is possible in that sense but, AS ALWAYS, who do you trust with the gold and how are they held accountable for the PHYSICAL backing?

This is true of ANY monetary scheme. Unbacked paper would be absolutely fine were it administered capably and honestly. Once again, the weak link in these schemes comes in the form of the people. In a more ideal world I would be more than happy with pure electronic currencies such as the "credit" from the old Star Trek series. So long as the vestment ratio (my term for it) is maintained on pain of an unspeakably brutal death, the economy would remain robust, barring meteor strikes, Satan's legions bursting forth from the earth's volcanoes, and the like.

The question on my mind is this: why are none of the economists talking about this? Or are they? Inquiring minds want to know.

[Madison320]

I would submit that gold-backed and demand redeemable paper is the better practical solution, all else equal. My reasoning is as follows.

Gold is a finite commodity, and rare at that. The human population is growing by leaps and bounds. This means that the per capita ratio of gold is diminishing because the rate of growth in the gold stocks is less than the rate of population expansion. This presents certain practical problems which I shall attempt to make clear using a very simple example.

I think you're missing that fact that gold will increase in value under your scenario. So less gold will still buy the same amount of stuff as population and productivity increase.

[FindLiberty]

Gold "failed" 'cause it's so much faster and easier to print and debase fiat paper (or today's computer "bits") when creating new money out of thin air.

Can't ever create (or extract a tax share of) trillions in physical gold that would be required to fund all sorts of unpopular or under-the-radar gubermental mischief that we have today.

[fisharmor]

Gold "failed" 'cause it's so much faster and easier to print and debase fiat paper (or today's computer "bits") when creating new money out of thin air.

I think gold "failed" because when gold is debased it's obvious.
Even a cursory review of historical coinage shows that coins were debased. AFAIK that's where the word "debase" comes from... adding base metals.
But you can tell right away whether something funny is going on with your money, if it's all of a sudden a different color and/or weight.
So gold "failed" because with paper money, it's less obvious to everyone what is going on.

In the Constitution the signers enabled a mostly bi-metallic money system (gold and silver) with perhaps some inkling of accommodation for some base-metal coinage. And in there was some rather vague (in my opinion) process by which the Secretary of the Treasury was supposed to maintain a steady ratio of gold to silver by buying or selling either one. In other words the US Constitution was written with the specific intent that the government was to play the role of “market maker” in the precious metals area. That was where they made their mistake. They should have just made the coins and let the market determine their relative value.

I don't see anything in the Constitution that says congress has the power to outlaw competitors, with respect to ANY of congress' powers.
There is no power within congress to make competitors to the US Post Office illegal: yet here we are.
The same thing happened with money. Everyone assumes that since the state declared it has the power to do X, that necessarily means that everyone else doing X must be stopped.
That's a logic epic fail, particularly in a place where freedom ostensibly has some importance.

[ctiger2]

All Gold standards fail because men undermine (cheat) the system. Simple as that. Whatever new monetary system they come up with will be undermined and cheated as well. Unless Jesus runs it.

[Madison320]

All Gold standards fail because men undermine (cheat) the system. Simple as that. Whatever new monetary system they come up with will be undermined and cheated as well. Unless Jesus runs it.

The best we can do is make it harder to cheat.

[acptulsa]

The best we can do is make it harder to cheat.

Which is one area where the gold standard does not fail.

And the only way in which fiat does--it wouldn't have ever been created and sold if it didn't make it easier to cheat.

[osan]

I think you're missing that fact that gold will increase in value under your scenario. So less gold will still buy the same amount of stuff as population and productivity increase.

No, I made that precise point in my references to deflation.

[Seraphim]

Government gold standards are just a price control - and price controls don't work. It's that simple.

[Bungeebones]

What a lot seem to be missing is why in the h__l should a government declare one metal "the standard" over another? Especially when the Constitution said it was a silver standard to begin with? You can't have two different length rulers, or pounds or gallons so why use a double standard for money?

When a government declared gold the standard it became the standard (by fiat) by which all other metals were compared. It doing so it necessitated the creation of someone to determine the exchange rate between the different "monies". At that point the government began engaging in price fixing.

I can bring that reality right into the modern world by looking at the current silver to gold ratios (currently at around 67 to 1). That is the relative value today. But by stamping "XX DOLLARS" into a gold coin they establish into infinity the exchange ratio of that coin with a silver one that says "ONE DOLLAR". They should have only gone as far as calling the gold minted coin a gold coin rather than a sum of "Dollars".

Once we realize that, and combine it with modern communication and computing power we could easily make new gold coins but without the word "dollar" stamped in them. When they would be used in a purchase the merchant would simply have to look up the current exchange rate to place on the coin rather than looking at its face.It

[eduardo89]

What a lot seem to be missing is why in the h__l should a government declare one metal "the standard" over another? Especially when the Constitution said it was a silver standard to begin with?

The Constitution does not say anything about any metal being the standard for currency. The Constitution only prohibits the States from making anything but gold and silver coin legal tender.

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

The federal government does not face that same restriction.

Futhermore, the federal government has the authority to coin money and to regulate the value of it:

To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures;

It does not say that the standard must be silver. Congress has the authority to decide the standard.

[mrsat_98]

Gold standard failed because of fractional reserve banking. Next ?

[Bungeebones]

The Constitution does not say anything about any metal being the standard for currency. The Constitution only prohibits the States from making anything but gold and silver coin legal tender.



The federal government does not face that same restriction.

Futhermore, the federal government has the authority to coin money and to regulate the value of it:

It does not say that the standard must be silver. Congress has the authority to decide the standard.

Within the Constitution there are at least a couple examples using the word "Dollar".

a. The "dollar" in the Constitution. Both Article 1, Section 9, Clause 1 of and the Seventh Amendment to the Constitution refer explicitly to the "dollar" - in the one case, permitting "a Tax or duty * * * not exceeding ten dollars for each Person" the States saw fit "to admit" prior to 1808; and, in the other, guaranteeing trial by jury "[i]n suits at common law, where the value in controversy shall exceed twenty dollars.” The Constitution does not define this "dollar.” But, in the late 1700s, no explicit definition was necessary: Everyone conversant with political and economic affairs knew that the word imported the silver Spanish milled dollar.
http://www.constitution.org/mon/what_is_a_dollar.htm

The framers did try to use gold in addition to the silver standard by giving the treasurer the authority to buy either metal to manipulate the price.

Want to see an excellent piece on the results of using two different standards at the same time see this http://www.bbc.com/news/magazine-27509559.

They should add the American dollar to the examples. You can't have a gold dollar equal to a silver dollar without some sort of price fixing. The founding fathers really blew it on that one and, so, should be in the list (probably at the top).