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Golden years

Posted By Kurt Schuler On February 23, 2012 @ 10:46 pm In Uncategorized | 19 Comments

David [1] Glasner [2] and Scott Sumner [3] recently wrote good posts on the gold standard. In my next post I will try to put the issues in a larger context, but for the moment I will take a narrower, scattershot approach of responding to some criticisms of the gold standard that I have seen in their posts and elsewhere recently.

1. Critics of the gold standard have sometimes argued as if the Great Depression discredits all kinds of gold standards. If so, the Great Depression, the East Asian financial crisis, the Great Recession, and other episodes discredit all kinds of central banking. Neither argument is correct, but if you make the first, the second is precisely parallel.

2. Note that in the 1929-1931 portion of the Great Depression, monetary policy was poor to disastrous by all four of the world’s leading central banks (the Fed, Bank of England, Bank of France, and German Reichsbank). Even though the interwar gold standard was less robust than the pre-World War I gold standard, it still took a lot of effort to sink it.

3. Scott Sumner asks, “If a gold standard requires good behavior by governments, then why not adopt fiat money?” Fiat money, including nominal GDP targeting, also requires good behavior by governments. Dozens of countries from A (Albania)  to Z (Zimbabwe) have suffered monetary disasters during the last 30 years under fiat money. Mostly the disasters have been inflations, but Scott himself makes the case that some important central banks allowed deflation during the Great Recession.

4. Another question about returning to a gold standard is whether private speculative demand, or actions by foreign governments, would make a country on the gold standard subject to extreme fluctuations against fiat currencies that would be economically disruptive. Much would depend on size. A small or even a medium-size economy might be too small relative to the world gold market to make much difference to the world gold market. Its currency would then fluctuate more than the fiat currencies of the big rich countries do against one another. A large economy (the US, China, Japan, the euro area) would be a different matter. In that case I would expect the world gold market to work differently than it does now because there would be a wide range of gold-denominated investment and arbitrage opportunities that do not currently exist. Demand for physical gold might even be lower in such a system than it is now, because some people who now hold gold bullion as protection against inflation and debt deflation might prefer interest-earning gold-denominated securities. That was the experience of the gold standard in the decades before World War I. Gold hoarding by people in countries that had had bad experience with fiat money, such as France, did not make the gold standard highly disruptive for the United Kingdom.

5. Gold coins, extensively used before World War I, disappeared from circulation during the war in most of the world and never came back into widespread use. Part of the prewar demand for gold coins was the result of government prohibitions of "small-denomination" notes. In England, the lowest prewar denomination was £5, equivalent in purchasing power to more than US$500 today! During the war, England and other countries issued small-denomination notes. David Glasner mentions that Ralph Hawtrey considered this a key difference between the prewar and interwar gold standards. I think it had little importance, and that the key difference between the two periods was that monetary authorities behaved differently. Before the war, many countries did not even have central banks (including three of the world’s largest economies, the United States, China, and India), and in those that did have central banks, their goals were different from what they became after the war began.

6. Finally, to explain the title of this post, there are plenty of songs that mention gold (David Bowie, [4] Spandau Ballet [5], the Black Keys [6], John Stewart [7] the late folk singer, etc.). There are none yet that mention nominal GDP targeting. I leave it to the ingenuity of Scott, David, and others to figure out a strategy. A country ballad? A heavy metal anthem? A bossa nova? A rap would be easiest to write, but least likely to be enduringly tolerable.


19 Comments (Open | Close)

19 Comments To "Golden years"

#1 Comment By Bill Stepp On February 23, 2012 @ 11:17 pm

Exhibit A of gold standard critics is the better performance of the economies that saw their governments quit the gold standard during the great depression. They always overlook the interventions that led to this, including their overvalued exchange rates. Hi Winnie!

And after his comment regarding Ron Paul, Scott Sumner says that even without the Fed, the government would be able to affect the economy thanks to its large inventory of gold. I know how to solve that problem.

I'm thinking Willie Nelson could help with the last issue.

#2 Comment By Paul Marks On February 24, 2012 @ 5:34 am

The key period of bad monetary policy was not 1929-1931. It was in the 1920s (in America, argueably from 1923 onwards but what happened from 1927 was just terrible).

If you will not believe me - then read Benjamin Anderson "Economics and the Public Welfare: A Financial and Economic History of the United States 1914-1946".

Anderson was a moderate - who (at least in this work) does not oppose the Fed on principle, but does oppose the inflation of the money supply by Ben Strong and his allies.

The "boom" (the credit-money inflation) causes the bust. If you want to prevent the bust (for example the 1929 bust) you must prevent the boom.

By the way (yet again) gold-as-money (or any commodity as money) is NOT the same as a gold "standard" (for the above reason - i.e. a gold "standard" allows such credit-money inflations as that of the late 1920s).

It is doubtful that a gold STANDARD would have prevented the current crises - but gold-as-money (or any commodity as money) would have done so.

Although (for the sake of fairness) I should mention that the old Chicago School (in the 1930s) argued that fiat money would also prevent such things as the 1929 crises - IF the fiat notes and coins were the only thing used as money (no credit bubble, loans that are not from real savings, on top).

#3 Comment By BillWoolsey On February 24, 2012 @ 9:14 am

The rules of the game, as best I can tell, is some kind of Currency school notion that the domestic supplies of hand-to-hand currency in each country should change on a dollar-for-dollar basis with gold imports and exports.

I think that what should happen is that the quantity of all types of money should adjust to the demand to hold it. The focus on gold flows between national borders is wrong headed.

For the most part, gold should go from the mines to the industrial users. You can, of course, describe this in terms of gold exports and imports. Mining countries should export gold to countries with jewelers.

There is nothing wrong with banks in one country expanding the quantity of money they issue in response to a demand to hold money by people in that country without importing extra gold.

Think of the U.S. under a gold standard. If people in SC want to keep larger balances in their checking accounts, is there some need for Bank of America to ship gold to the branches in SC?

Do they have to wait until gold is deposited in their SC branches?

Suppose there are two banks. Bank A, after a big marking campaign and an increase in the interest rate paid on deposits, is gaining market share from Bank B. Sure, if they settle net clearing balances with gold, Bank B will pay over gold to Bank A. But does bank A have to wait for that? The who point of gaining deposits was to accumulate more earning assets. Bank A would and should expanding its lending and purchase securities. This will tend to prevent any favorable net clearings from developing. Bank B, on the other hand, would lose gold as it lost depositors if it did nothing. But why wait? Sell off securities now. If they do this fast enough, there is no shift of gold between the two banks. But even if there is some shift of gold, the shift is much smaller than the shift in the issues of money by the two banks.

This is exactly would should be happening across national borders if there is a gold standard with multiple nations and so national borders to talk about. The notion that the quantity of money should change dollar for dollar with gold flows is wrong.

Now, I will grant that having the banks manipulate their gold reserves to stabilize the relative price of gold is not something that free banks would be likely to do. And maybe central banks in the late 19th century accumulated gold to be prepared for the next war rather than to stabilize the economy. But neither seems especially sensible to me.

#4 Comment By David Glasner On February 24, 2012 @ 11:24 am

Kurt, Just to clarify, the difference between the prewar and the interwar gold standards for which I cited Hawtrey was a formal, not a substantive, difference. I agree, and I think so did Hawtrey, that the absence of gold coinage did not matter for how the gold standard operated. And my point was that the architecture of the two gold standards was not that different. Why the interwar gold standard broke down is a complicated historical question, and I agree that central bank mistakes played a role, but the policy question is whether the institution of the gold standard mitigated or magnified the consequences of those errors.

#5 Comment By RickHull On February 24, 2012 @ 11:49 am

As critical as your last point is, you overlooked at least one counterexample: [8]

#6 Comment By Martin Brock On February 24, 2012 @ 6:24 pm

The whole idea of "a country on the gold standard" is antithetical to free banking. Free banking suggests individuals choosing their standard of value, not some state decreeing that everyone shall use gold. Most individuals, or a plurality, might choose gold at a point in time, but competition from other standards is the market force stabilizing the value of monetary gold. This competition permits a stable equilibrium.

Interest on securities promising gold might stabilize the value of gold in theory, but this theory involves monopolistic assumptions. If a bank must pay a higher interest rate to discourage redemption, the interest payments also drain reserves unless the bank passes these costs on to its borrowers. Why would borrowers go on promising gold in credit agreements under the circumstances, unless they don't have a choice? Why wouldn't they promise silver instead?

#7 Comment By MichaelM On February 25, 2012 @ 12:39 am

Even with total free choice in currency, there are some pretty complex questions related to how money interacts with the law and governments that have to be answered somehow. What does the government redeem its bonds in? When a court orders somebody to 'pay' someone else for damages, in what currency is this payment made? What currency(ies) does a government accept tax payments in?

Unfortunately, you can't entirely separate money and the state, at least not yet. Answering these questions and others like them is something like a gold, or fiat, or other standard which has almost nothing to do with banking itself. They can't be just ignored, and it's pretty important that the solution has relatively low 'transactions' cost because most of these activities are extraordinarily common. If each individual had to negotiate with a government agent to decide what currency they own would be acceptable as tax payment, then each tax day would be a logistical feat un-matched in the history of mankind.

#8 Comment By BillWoolsey On February 25, 2012 @ 8:42 am

Martin:

I disagree. Money is a network good. It is more valuable the more other people use it.

With free banking, there is a sense in which there are many monies, but if they are all tied to a common standard then most of the benefits of a network good can be provided. Merchants quote prices in a common unit (like the dollar) and take checks (or electronic equivalent) and banknotes from all the banks. The banks accept each other's banknotes and checks (including electronic payments) for deposit. Then the banks clear. This allows all the checks, banknotes, and electronic payments to trade at par, one-to-one, so that all may be accepted by merchants and other sellers as if they form a single homogenous good.

When a new bank enters the industry, it (and its potential customers) can obtain these network economies by tying its checks, electronic payments, or banknotes to all the other existing banks. While I believe that banks should be able to use some other standard, or no standard at all, using these alternative monies is inconvenient and so such a bank would have difficulty getting its money into circulation. What is this? We don't accept it. Then, who wants to use it? Then why hold it? And so the bank can't issue any.

Currently, the U.S. uses Federal Reserve liabilities as base money. Most of the money we use is privately issued, but all of it is tied directly or indirectly to federal reserve notes, and in practice,is mostly tied to reserve balances through settlements.

It is possible to shift this to some other system. Make the federal reserve liabilities redeemable in gold (or silver,) and then withdraw the federal reserve liabilities from circulation, leaving the gold (or silver.)

I don't favor this approach, but it could be done. And even if banks were free to introduce new kinds of money, not tied to the gold-defined dollar, it would be very difficult to get people to use them. Everyone else is already using the gold defined dollar. Why should I start using something else? What is this odd silver defined note. Why should I accept that?

#9 Comment By BillWoolsey On February 25, 2012 @ 9:08 am

"Suppose there are two banks. Bank A, after a big marking campaign and an increase in the interest rate paid on deposits, is gaining market share from Bank B. Sure, if they settle net clearing balances with gold, Bank B will pay over gold to Bank A. But does bank A have to wait for that? The who point of gaining deposits was to accumulate more earning assets. Bank A would and should expanding its lending and purchase securities. This will tend to prevent any favorable net clearings from developing. Bank B, on the other hand, would lose gold as it lost depositors if it did nothing. But why wait? Sell off securities now. If they do this fast enough, there is no shift of gold between the two banks. But even if there is some shift of gold, the shift is much smaller than the shift in the issues of money by the two banks."

Let's try again..

Suppose there are two banks. Bank A, after a big marketing campaign and an increase in the interest rate paid on deposits, is gaining market share from Bank B. Sure, if they settle net clearing balances with gold, Bank B will pay over gold to Bank A. But does bank A have to wait for that? The whole point of gaining deposits was to accumulate more earning assets. Bank A would and should be expanding its lending and purchase securities. This will tend to prevent any favorable net clearings from developing. Bank B, on the other hand, would lose gold as it lost depositors if it did nothing. But why wait? Sell off securities now. If they do this fast enough, there is no shift of gold between the two banks. But even if there is some shift of gold, the shift is much smaller than the shift in the issues of money by the two banks.

#10 Comment By Martin Brock On February 25, 2012 @ 10:49 am

A computer operating system is also a network good and is more valuable the more people use it, but competition for Microsoft Windows' role as the most widely used, personal computer operating system is nonetheless valuable for this reason.

Merchants quote prices in a common unit (like the dollar) and take checks (or electronic equivalent) and banknotes from all the banks.

In the nineteenth century, U.S. merchants could and did price goods differently in the notes of different banks, even while these notes all promised the same quantity of gold in principle.

Today, with electronic currency already the norm and electronic commerce rising rapidly, this practice is far easier. Amazon.com need not show me prices in dollars. It can easily show me prices in any currency I choose and it accepts, from Euros to Krugerrands.

In fact, Amazon already prices goods in many currencies. If you want prices in British Pounds, go to [9]. What I'm suggesting here is not merely theoretical. It is inevitable, and it is already happening.

In electronic commerce, pricing goods this way, even in a thousand different currencies, is not an incredible burden at all. Computers are made to do this sort of thing.

When a new bank enters the industry, it (and its potential customers) can obtain these network economies by tying its checks, electronic payments, or banknotes to all the other existing banks.

Banks already network this way with many currencies. I travel a lot in my line of work. ATMs around the world already accept my debit card and give me whatever currency I need around the corner, even though my bank account records "dollars". I've used the card in stores accepting Euros, British Pounds, Serbian Dinars, UAE Dirhams, Taiwan Dollars and Canadian Dollars, among others. I might check exchange rates and convert prices in my head, but I'm largely oblivious to the currency I'm spending.

Eventually, even in brick and mortar stores, you won't see prices on paper tags. You'll see them on an electronic device, like your mobile phone, that knows your currency preference. We'll have many currency options, but we'll easily imagine that everyone else uses our preferred currency. Changing your preference will be as easy as changing your Facebook profile. I'm not discussing far out science fiction here. I'm discussing the easily foreseeable future.

It is possible to shift this to some other system. Make the federal reserve liabilities redeemable in gold (or silver,) and then withdraw the federal reserve liabilities from circulation, leaving the gold (or silver.)

It is possible to shift the Fed system to a system in which individuals, and free associations of individuals (like a private bank), bear the liabilities, and the liabilities promise whatever standard the individuals or associations prefer. The standard could be gold or silver or platinum or oil or milk or anything else sufficiently standard.

And even if banks were free to introduce new kinds of money, not tied to the gold-defined dollar, it would be very difficult to get people to use them.

It's difficult to get people to use Android rather than iOS or Windows, but it's happening.

Actually, it's not so difficult. That's why it's happening. Apple and Microsoft are fighting bank with software patents and other monopolistic, statutory impositions. Maybe they'll win this way. Maybe they'll win this way while saying that the market decided. It's hard to say.

Why should I start using something else? What is this odd silver defined note. Why should I accept that?

You accept it, because more and more people are offering it, and if you don't accept it, you lose opportunities to trade with these people. Why accept both Visa and Mastercard? Why accept Discover or American Express? Why accept my U.S. debit card in Canada?

Needless to say, I could be wrong. One theory of globalization says that one fiat currency will eventually predominate through the world. According to this theory, the supply of dollars can and should expand at this time, because other currencies are contracting.

When the Zimbabwean dollar collapsed, another Zimbabwean state currency didn't replace it. The U.S. dollar did. Could the same thing happen in Greece? Who knows? If Greece abandons the Euro (or the Euro abandons Greece), the Greeks will adopt another currency.

Unlike some participants in this discussion, I don't believe that state money and Keynesian "cycle management" must inevitably collapse catastrophically. Fiat money and Keynesian fiscal policies generate less real economic output, but people don't see economic output that is never generated and could ultimately settle for a larger state than I prefer.

A retreat from globalization is also possible. I encountered national socialism only last week in Canada, when Canadian immigration officials at the border denied me a work permit without a "labor market opinion" from Canada's department of Human Resources and Skills Development, finding that my work in Canada does not compete with Canadian labor. I've traveled to Canada on business a dozen times in the last year or two, and my company's attorney says this decision violates NAFTA, but we're still working on it.

The Soviet Union did not collapse because its system was flawed. It collapsed because comparisons with more market oriented economies were unavoidable, so the flaws in the Soviet system were undeniable. When Trotsky said that socialism is possible only on an international scale, he was right.

Feudalism and the guild system lasted in Europe for a thousand years. Fiat money and Keynesianism can last as long. I only hope they don't.

#11 Comment By BillWoolsey On February 25, 2012 @ 10:55 am

For what it is worth, I think the sensible approach is for government to use the same bank money as any one else. In the U.S., the treasury transfers tax receipts into ordinary bank checking accounts. It does shift the funds over to its account at the Fed before spending them, but this is hardly necessary. They could write checks from a variety of banks. I don't see any particular reason why the checks couldn't just be government checks, with the specific banks being noted on the electronic code.

More generally, I do believe that contracts should count as settled when checks or banknotes that clear are tendered. If the contract is for a payment of money, and it is in some particular unit of account, then the usual expectation is that payment is made in checks or banknotes denominated in that unit of account. If they don't clear, then the debt is not settled. If they do clear, then the creditor has no recourse if his bank fails. If you don't like bank money, spend it on something you want to hold.

Judgements by courts should work on the same principle. Judges just order money in common use paid. The defendant pays over and if the checks or banknotes clear, the judgement is settled. If the plaintiff doesn't like the money, they spend it on what they do want.

If someone makes a contract promising to pay over some commodity, like gold and fails to do so, then there is no need for the court to insist that gold is given over. Pay common money equal in current value to the gold. Or, under some of other theory of contracts, pay money compensating for any loss due to failure to make honor the contract. The creditor can then take the money and buy gold if they want.

In my opinion, if someone is using bank money that is tied to something like gold, and the contract has been broken (because gold is at premium,) then if there is no contractural arrangment (like an option clause,) the depositors sue for compensation. In the end, you eventually get something equal in value to what was promised, but not necessarily what was promised when it was promised. That is the way contracts work.

I think it is a mistake to focus too much on the scenario where the government mandates that paper money or debased coins be accepted on par with "old" coins. I think that is a bad thing, but that isn't all that "legal tender" does.

Alot of the traditional business about having govenment use gold is really all about making the kingdom wealthy by making sure we have lots of gold here rather than in foreign lands. (Reserve requirements and bans on small denomination banknotes are much the same.) Oddly enough, having gold in the kingdom so that it can be grabbed by hook or crook, means that Swiss mercenaries can be hired. Further, the less gold in the "enemy" kingdoms, the fewer mercenaries they can afford. And now you know what I think gold buggism is about. Blind fealty to an unsavoray tradition.

#12 Comment By Martin Brock On February 25, 2012 @ 11:28 am

What does the government redeem its bonds in?

Blood, sweat and tears.

I fundamentally oppose the sale of entitlement to tax revenue, so I would answer, "It doesn't." This question I will ignore, but I'll suggest something if you insist.

When a court orders somebody to 'pay' someone else for damages, in what currency is this payment made?

A court could order payment in a currency that the plaintiff specifies. Of course, if payments of this kind too much impede free commerce, this approach differs little from a fiat money system with the "damaged" class dictating the currency.

What currency(ies) does a government accept tax payments in?

The currency accepted by the taxpayer. If I choose to receive income in BoA notes, I pay taxes in these notes. If I accept Liberty Dollars for goods at my store, I pay sales tax in Liberty Dollars. The government takes what it gets and sorts it all out.

With networked computers, this sorting out is not a difficult task at all. It's trivial in fact. Compared to simulating nuclear explosions, which the state does with computers routinely, it's child's play.

They can't be just ignored, and it's pretty important that the solution has relatively low 'transactions' cost because most of these activities are extraordinarily common.

I'm not ignoring the questions. Only a few decades ago, the whole idea of credit cards and debit cards was pie in the sky. A few decades later, they're ubiquitous. Even more recently, the whole idea of internet commerce was pie in the sky.

If each individual had to negotiate with a government agent to decide what currency they own would be acceptable as tax payment, then each tax day would be a logistical feat un-matched in the history of mankind.

In a democracy, people don't negotiate with their government. The government does what people want it to do. "Democracy" is little more than a political slogan, but we can discuss mere possibilities here.

This web site is a logistical feat unmatched in the history of mankind only a few years ago, and here we are.

#13 Comment By Martin Brock On February 25, 2012 @ 12:23 pm

If you don't like bank money, spend it on something you want to hold.

Agreed. The "destroyed savings" argument is nonsense, because buying gold, not to mention more productive resources, is legal. If you leave all of your wealth in a BoA checking account, that's your problem.

Judges just order money in common use paid.

A "most common money" policy seems reasonable in torts. If a plurality of transactions occur in silver in the court's jurisdiction, the court orders payment in silver. The defendant customarily determines the jurisdiction, and this policy also seems reasonable to me.

If someone makes a contract promising to pay over some commodity, like gold and fails to do so, then there is no need for the court to insist that gold is given over.

I disagree. The contract specifies gold. If the obligor cannot provide sufficient gold in a timely manner (customarily seven years), bankruptcy results, and the creditor must settle for the gold he can get. This policy discourages inflation.

The creditor can then take the money and buy gold if they want.

The obligor obtains as much gold as he can. The creditor gets this gold and only this gold. Same difference. If the creditor wants something other than gold, he shouldn't have contracted for gold.

In the end, you eventually get something equal in value to what was promised, ...

If what you get is equal in value (at the time and place of settlement) to what you were promised, then you can get what you were promised, so you might as well get what you were promised.

But you don't always get something equal in value to what you were promised, because credit is risky. Expecting states to eliminate this risk is precisely the problem. Credit is risky fundamentally. Paying statesmen to do the impossible can only be counterproductive.

I think that is a bad thing, but that isn't all that "legal tender" does.

Legal tender voids the terms of contract, just as you say. I think that is a bad idea. Voiding some contracts seems reasonable in some circumstances, when a party is a minor or incompetent for example, but we aren't discussing any of these circumstances here.

A lot of the traditional business about having govenment use gold is really all about making the kingdom wealthy by making sure we have lots of gold here rather than in foreign lands.

Bastiat tells the story this way, and I suppose he's right, but the tradition is also about making sure that established proprietors extending credit by accepting promises of gold secured by titles to property, at inflated prices, end up with both gold and the titles to the property.

#14 Comment By BillWoolsey On February 25, 2012 @ 3:47 pm

When I ask the local Piggly Wiggly, what is that in Euros, and they give me a total, then I will admit I am wrong.

By the way, we don't have many individuals or associations of individuals using a multitude of operating systems. There are a handful. The benefits of a common unit of account are greater than a common operating system.

Your approach is closer to having every individual, or every family, to have their own language and gee, everyone can use translaters.

I favor allowing people to use whatever money they want. I think that shifts between standards will slow and fitful, and don't believe there is much likelihood of many parellel standards in a single geographic area.

As I have tried to explain before, moving to a gold standard is relatively simple.

Letting people use alternatives is fine.

But I am very skeptical of your vision of everyone having their own standard. A good number of banks competing, but using the same standard is more likely.

P.S. The pre-civil war banking system was a mess. Prices, including the prices of out-of-town banknotes were quoted in terms of dollars. The discounts on banknotes involved transportation costs, not some kind of multi-money economy with flexible exchange rate. I think banknote note reporters just tell us the disadvantage of unit banking regulations. Unfortunately, advocates of free banking have yet to fully live down how much trouble this caused, and so the great "benefits" of the National Banking Act. (Mostly unit banking with a uniform currency due to regulation.)

#15 Comment By Martin Brock On February 26, 2012 @ 10:47 am

You won't ask a Piggly Wiggly employee. You'll scan a barcode with your cell phone, and the Euro price will appear there. I can practically do this already when spending dollars from my U.S. bank account in Europe. I must do a simple calculation in my head to know the price in dollars, but many European businesses already accept my debit card.

The barcode isn't even necessary in principle. My phone could read the Euro price from a price tag, retrieve an exchange rate from my bank and do the conversion. It's only automating a simple task for me. Computers don't deal well with ambiguity, like the many forms of a price tag, but a cell phone could get it right 95% of the time, and it could show me the Euro price it thinks it has read. Barcodes are already ubiquitous anyway, so the point is largely moot.

My cell phone can easily do this simple calculation for me. Only this point is relevant. Businesses know it as well as I do. They already use barcodes. They already use electronic accounting. They already use networks for settlement. They can provide me this convenience at little marginal cost to them, so they'll provide me the convenience eventually. It's only a matter of time, and the time is short.

Once businesses provide this convenience to international customers, the technology supporting competing currencies is already in place. The marginal cost of supporting competing currencies then is practically zero.

Some developing countries are ahead of the U.S. in this direction already. In parts of Africa, paying with your cell phone, rather than a credit card, is becoming the norm. The internet will soon replace more specialized networks created earlier by credit card companies, unless some statutory force impedes this development. Technology is not the impediment. The technology already exists.

As I have tried to explain before, moving to a gold standard is relatively simple.

Forcing everyone now forced to use current dollars, redeemable for entitlement to tax revenue, suddenly to use dollars redeemable for gold is relatively simple. I understand this explanation.

Moving to a gold standard without the state's coercive force is not so simple. No other move interests me. I oppose the coercive move.

But I am very skeptical of your vision of everyone having their own standard.

Everyone already has their own standard. I have U.S. dollars. Canadians have Canadian dollars. Australians have Australian dollars. Citizens of the U.K. have British Pounds. The French and Germans have Euros, and on and on. Amazon.com already accepts all of these currencies. I can see Amazon's prices in Euros or Pounds or Canadian dollars right now if I want.

A good number of banks competing, but using the same standard is more likely.

A good number of banks would use the same standard, but the notes of these banks wouldn't necessarily trade at par value.

All banks within a nation state will use the same standard only if the state effectively forces its subjects to use this standard. States may enforce standards. They already do. I'm not denying this possibility. I'm only disputing its utility.

The discounts on banknotes involved transportation costs, not some kind of multi-money economy with flexible exchange rate.

Only historians remember these difficulties, and the world has changed a lot since then. Again, what I'm discussing here is already happening. You can see it happening yourself right now with the same web browser you're using to read this post.

#16 Comment By Martin Brock On February 26, 2012 @ 11:44 am

Amazon.com already accepts all of these currencies.

Correction: There is no Australian Amazon.com. Some statutory restraint of trade presumably is the reason.

To see Amazon's prices in U.S. dollars, British Pounds, Canadian dollars, Euros and Yen, click one of these links.

[10]
[9]
[11]
[12]
[13]

You'll also see product descriptions in many different languages.

#17 Comment By Martin Brock On February 26, 2012 @ 11:49 am

And yes, that's a logistical feat unmatched in the history of mankind.

#18 Comment By Paul Marks On February 28, 2012 @ 9:53 am

I agree that buyers and sellers should be allowed to use any form of money (whether commodity or government) that they voluntarily agree upon.

However, as Carl Menger showed in his "Principles of Poltical Economy", money that comes from a market process (as opposed to government fiat money) will be a commodity money.

As for converting a government fiat money back into a commodity money. That is indeed a fairly simple process (simple economically - not simple politically).

One simply finds out how much of that commodity the government actually has in its possession and divides it by the amount of fiat money the government has produced (and still exists). For example, if the United States government wished to return to gold as money, it would find out how much gold it actually has (which may not be the same as the amount of gold it says it has) and divide this by the number of "Dollars" it has produced (that still exist) - so that each Dollar would be worth X amount of gold (of a certain level of purity).

Of course if people handed in such a Dollar (to claim the gold) the Dollar note would be destroyed. In this way the amount of gold the Dollar was said to represent would not get out of line with the amount of gold the government actually has.

Ditto for any private issuer of notes (unless they are engaged in some form of fraud - "legal" or otherwise).

Also I must point out a small error in the original article (I forgot to point it out before - I apologise).

Gold "Sovereigns" remained in fairly common use in Britain in the interwar period (my late father was dirt poor yet he remembered seeing these coins being used to buy goods and services) - even after Britain went "off the gold standard" in 1931 (this being the rather rigged "gold standard" of Bank of England Governor Montagu Norman and his friend Ben Strong of the New York Federal Reserve, what the historian Paul Johnson calls a "not in front of the children" gold "standard").

Perhaps this was due to their being fairly limited fiat money inflation (i.e. increase in the money supply) in Britain in the 1930s. Although it is true that usage was in decline - not because people did not want Sovereigns (quite the contrary), but because they did not want to give them up (so, for example, if someone presented a five Pound note [the old "white fiver" personally singed by the Bank of England person] and expected a private person to give him five Sovereigns for it - after 1931 he MIGHT find himself unsatisfied, a certain reluctance to part with gold Sovereigns was building up).

The gold Sovereign was also widely used (as money) outside of Britain - in (for example) parts of Asia and Africa (including by the British officials and military people) in the 1930s. For example, Afghan tribal elders (and other such) insisted on being paid in Sovereigns as they had strong doubts about paper money (of course World War II and the post war period was to show these doubts to be well founded).

As for silver coins - as the late F.A. Hayek was fond of pointing out, the silver sixpence remained in use (even given in change on busses as late as the early 1960s).

I am not going to deal with banking here - as most British people did not have bank accounts in the 1930s (or even in the early 1960s). A "pay packet" was just that - a packet with notes and coins in it. Just as it was with the Ford Motor Company, till they changed policy, in the United States (due to Henry Ford's anger with how certain financial enterprises dealt with his employees "pay cheques" in the 1930s).

#19 Comment By Paul Marks On February 28, 2012 @ 10:17 am

As for government bonds....

That is up to the contract the government made when it issued the bonds.

For example, the contract the Greek government just broke (broke with the full support of the European Union) with its creditors was to pay in Euros - the Greek government did not have enough Euros to pay its creditors (inspite of getting two vast bailouts from the E.U.) so creditors are going to recieve (at most) about half the number of Euros they are owned.

This is (by all resonable definitions) a partial DEFAULT - but the word "default" is thought too scary to be used, so the word "haircut" is used instead.

The United States (unlike Greece) has sold bonds (i.e. borrowed money) in terms of "Dollars" - and it creates these Dollars.

And the American authorities (the technical "private" nature of the Federal Reserve is not relevant to this) can create as many Dollars as they wish to (as the Dollar is in no way fixed to any commodity - it is a FIAT currency).

However, there is a another point to be made....

Some (not all) of the bonds the American government has sold are "index linked" - i.e. the government is supposed to pay back more Dollars if the value of the Dollar (in terms of goods and services) falls.

So we can expect more rigging of the "price index" as the American authorities produce more Dollars to pay their debts.

Eventually these "inflation proof" bonds will become harder to sell - as people start to work out they are being cheated.

This (rather than elections - which are decided by political "image" in the "mainstream media", and other such) is the true democracy of our time. When people finally work out the government is cheating them - they stop buying its bonds (I am not going to bother examining the absurd practice of the Federal Reserve lending out, newly created from NOTHING, money to banks and other such on the understanding that these enterprises will use the money to buy American government bonds - as this depends on the interest paid to the banks being greater than the interest they pay to the Federal Reserve on their "loans", an obviously unsustainable position).

Of course governments can still create money (from nothing) and directly spend it. But when the "bond selling" (and other such) process finally collapses, the true financial state of government becomes obvious (perhaps even to the voters).

A fiscal situation where about half the working age population pay no Federal income tax (there is no general Federal sales tax in the United States) and yet an ever increasing proportion of people recieve Federal government benefits, is obviously unsustainable.

Just as unsustainable as Greece.

No matter what monetary tricks are used to keep the Welfare State going for a few more months (till the November election is safely out of the way).

Both the financial system (the monetary system) and the fiscal situation (the government deficit) will very likely hit the wall in 2013 - and the tax increases (on that half of the population who actually work for a living - either direct tax increases or tax increases on the enterprises they work for) that may come in January 2013, will just make the situation even more likely to collapse over the course of that year.


Article printed from Free Banking: http://www.freebanking.org

URL to article: http://www.freebanking.org/2012/02/23/golden-years/

URLs in this post:

[1] David: http://uneasymoney.com/2012/02/12/am-i-being-unfair-to-the-gold-standard/

[2] Glasner: http://uneasymoney.com/2012/02/22/hawtrey-on-the-interwar-gold-standard/

[3] Scott Sumner: http://www.themoneyillusion.com/?p=13155

[4] David Bowie,: http://www.youtube.com/watch?v=HRD0ghlFSgk

[5] Spandau Ballet: http://www.youtube.com/watch?v=gSq8ZBdSxNU

[6] Black Keys: http://www.youtube.com/watch?v=6yCIDkFI7ew

[7] John Stewart: http://www.youtube.com/watch?v=GPjhHcLpfr4

[8] : http://www.youtube.com/watch?v=fNTBb1u6UGg

[9] : http://www.amazon.co.uk?tag=freebank07-20

[10] : http://www.amazon.com?tag=freebank07-20

[11] : http://www.amazon.ca?tag=freebank07-20

[12] : http://www.amazon.eu?tag=freebank07-20

[13] : http://www.amazon.co.jp?tag=freebank07-20

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