Hey guys, I have a question regarding sound money. I'm having an argument with someone who says that sound money would inhibit investment. Here's what the guy has to say:
"A strong gold-backed currency, high interest rates and so on would make money so expensive that investment just wouldn't really happen."
I know all about the detrimental effects of fiat money and inflation and the Fed's manipulation of interest rates, but I don't know the argument against his assertion that sound money would have it's own weaknesses.
Thanks for the help!
Jason
Interest rates as set by whom? Isn't the idea to eliminate the Fed and have the free market set interest rates? How does this necessitate high interest rates?
I'm sure I don't know the most about this but someone else may reply if I bring this back up.
The amount of money in a market has no direct effect on the total amount of productive goods. The reason sound money is better is because it provides a more reliable yardstick of true value because it cannot be manipulated by inflation like a fiat or fractional reserve money can. Aggregate investment in terms of real capital would not be any less under sound money, it would rather be directed more efficiently into the lines of production most urgently demanded by consumers because prices and interest rates could not be so distorted. In the long run the interest rate will drop with a gold standard because general prosperity will decrease people's time preferences.
capital would come from savings as it is suppossed to
interest rates would be higher, reducing the amount of malinvestments. eliminating easy money unsustainable booms, hence busts.
ask your friemd if any investments/loans/banks/business or growth happened when we did have a true gold back currency.
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We must get them to understand that government solutions are the problem!
Interest rates would fluctuate accordingly to the demand for money. High demand, higher interest rate, low demand, lower interest rate. If banks think they can make money from lending, they will lend. If the lendee's idea isn't so great, the banks won't lend.
The period between 1879 and 1893 was the most productive (or second most; I'm not sure how it compares to the period between 1950 and 2000) economic period in the history of the United States, and saw only a very minor increase in the supply of money.
SG875: "A strong gold-backed currency, high interest rates and so on would make money so expensive that investment just wouldn't really happen."
1. Not sure what "strong" means in this context. If it means that it does not decline in purchasing power as time goes on, that's a good thing.
2. Gold backed means that it could not be inflated away into loss of purchasing power. One cannot print gold coins, or enter them into a computer.
3. High interest rates. Who is talking about that? The interest rate would be whatever the market will bear. If it is high, so be it. Let's remember that the lenders are there to make a profit. If lenders set interest rates so high that investors could not borrow it, what will they do with the money they are sitting on? They have no choice but to lower rates until someone agrees to borrow.
4. "Money so expensive". Doe she think that if the money is made out of gold it will be too expensive to use in investing? What is he talking about? Does he think that if the money is made out of gold it will automatically command a high rate of interest? Why?
" Because people would rather have the gold coin than invest it in something risky. Bird in the hand and so forth."
"True enough, Until investments slow down so much that there are less goods produced, so that the gold cannot buy as much. In other words it will lose value. After all the value of money is its purchasing power, which depends on how much is out there to purchase. Supply and demand."
5. Ask him to give you historical examples of countries that had a gold standard but had no investments. There are none.
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I'm not sure low interest rates are really necessary for entrepreneurship to take place. Take a look at the federal discount rate during the Depression of 1920-21.
http://www.economicthought.net/wp-content/uploads/2010/06/discount-rates-1920-depression1.png
It seems to me that nowadays, with the current economic situation, there is some "passion" for the gold standard as a solution to all problems the world is currently facing whether on international, national or even individual level. Taking into consideration the above mentioned points, let me suggest to discuss the possibility of not using the gold standard only, but let us imagine a hybrid standard, including several precious metals together, e,g. platinum, gold, silver, (any others?) According to this scenario 1 Gold Dollar = 100 Gold cents = 500 Silver cents = 5 silver dollar = 0.5 Platinum dollar... etc. (for example) At the same time 1 Gold Euro = 1.3 gold dollar =.... =... etc. The main obstacle to the above, how would/ why would a country or a government give up control over it's money supply and/or exchange rate?
So, Is the gold or the suggested "hybrid" standard applicable only to individuals?
hmmm... wondering... if this is not an interesting topic!
I'm new here... I hope to get involved.
I don't know if I'm doing somethin inconvenient?!
Only if you believe in that ridiculous GDP equation.
You need not discuss this point. Just tell him that ‘we’ are not for sound money, but for competing currencies. If sound money really leads to fewer investments, than it will loose in such a competitive environment. We need not worry ourselves with such thing, just let all various monetary theories compete it out.
you mean no need for the gold standard or similar?
No need to pretend we know what a free market in money would lead to. The gold standard is just an educated guess. If Friedman's monetarism is right, and Mises is wrong, than inflating money will outplace sounder ones. Its that simple, really.
I agree with Merlin... people get too hyped up about the gold standard... we need competing currencies because that is the only true way curencies enter the market..
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