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The Case Against Gold: Why Ron Paul is Wrong About The Gold Standard by Gregg Hilton

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shackleford posted on Sat, Jun 4 2011 9:55 AM

I'm not informed enough yet to know if this is nonsense or not. What do you think?

https://www.facebook.com/notes/gregg-hilton/the-case-against-gold-why-ron-paul-is-wrong-about-the-gold-standard-by-gregg-hil/174671762589047

"The gold standard is to economics what the flat earth theory is to astronomy: something that may have seemed to make sense back when people didn’t know any better but is ridiculous to suggest today." - Dr. Russ Anderson

"Ron Paul is saying: 'Let's make everything simple again. . . If we had a gold standard, we wouldn't need complex monetary policy. But how do we get from here to there? There might not be a way. It is just nostalgia for a time that never really existed." - Dr. Vincent Reinhart, American Enterprise Institute

“Inflation is low and relatively predictable. No Ron Paul supporter has managed to articulate to me what problem the gold standard solves. . . It's a terrible idea, which is why there are so few economists willing to raise their voices in support of it.” - Megan McArdle,  The Atlantic magazine

 

Many conservatives oppose Rep. Ron Paul (R-TX) on foreign policy and national security matters, but admire his economic agenda. The Congressman's isolationist defense policy is the complete opposite of the Reagan Doctrine, but few people on the right are challenging Paul’s economic arguments.

Since 1976, he has been promoting a return to the gold standard and is the author of four books on the topic.  His other major economic theme is abolishment of the Federal Reserve which he calls "immoral, unconstitutional, impractical, promotes bad economics, and undermines liberty." All of Paul's claims are wrong, but I will address Federal Reserve issues in a separate article.

Long ago the gold standard made sense for America, but not today.  Its advocates want to turn the clock back to the “Roaring 20’s,” but the economic growth of that decade had little to do with the gold standard and it ended in disaster.

America has now been off the gold standard for 40 years and its many flaws have been forgotten.  There are excellent reasons it was rejected by right wing icons such as Milton Friedman.  No court agrees with Ron Paul’s interpretation of "lawful money," or that paper money is unconstitutional.  Ron Paul’s “sound money” claims are not correct.

The gold standard was in effect from about the middle of the 19th century to the last quarter of the 20th century (1971). In the late 19th century the growth of the money supply had nothing to do with population or the size of the economy. The resulting deflation was disastrous and led to the free silver movement (“Don’t crucify me on a cross of gold”.) The present system can tailor the money supply to the demands of the economy, which the gold standard failed to do.

Why Did America Leave The Gold Standard?

The Bretton Woods system (1945 -1971) came to an end when the United States stopped allowing dollars to be converted into gold. The "gold window" shut and foreign governments could no longer trade dollars for gold at $35/ounce. The U.S. dollar then became a "fiat currency" backed only by the "full faith and credit of the United States.” Since then the dollar has been the world's only reserve currency.

Under Bretton Woods, government regulations mandated that banks hold fixed ratio of gold as currency reserves. There was a greater need for gold as economies expanded. No nation has returned to the gold standard since the end of the Bretton Woods system. Switzerland has plenty of gold, but they have not opted for a gold standard with good reason.

If they had been on gold in recent years they would have suffered massive deflation and an extreme recession. The rapid price rise of gold would have tripled the value of their franc against other currencies and their exports would have been completely priced out of world markets.  Our present fiat system allows the free market to determine the value of our currency.

Why Are So Few Republicans Challenging Ron Paul?

Ron Paul's presidential campaign is a serious threat to the GOP establishment, but few Republicans are challenging his outrageous claims regarding the gold standard , the Federal Reserve and America's currency reserves. There is nothing wrong with an audit of the U.S. gold reserves or the Federal Reserve. There have already been over 100 GAO audits of the Fed.

What is outrageous is when Paul claims “I think it is a possibility” there is no gold at Fort Knox!  This is where 4.8% of the world's gold is held, and it represents 8,000 metric tons. The entire world gold supply is well known and if there was an increase in supply immediate inquiries would be made by currency traders and the World Gold Council.

The dollar is the world’s prime reserve currency, and since World War II it has dominated the currency markets.  Any sale would have been known right away and it would have to be reported in the budget.  It is conspiracy theory nonsense to claim the U.S. currency reserves have been sold, but facts never stop Ron Paul.

What Are the Problems With A Gold Standard?

 

  • Many economists believe adopting a gold standard could decrease the U.S. monetary supply by about half.  This would cause massive deflation and could threaten an economic collapse.
  • Do we really want to make the size of the money supply dependent on the success of gold miners?  It would also export control of our nation’s money system to foreigners. Over 90% of the world’s gold is produced by foreigners.  In 1970’s OPEC cut-off oil, and Russia and South Africa could do the same thing with gold. Why not have our currency controlled by Americans?
  • The gold standard did not work in the past, and no country has ever been able to maintain it. It was abandoned by many nations during major wars and when there was an economic crisis.  The government printed too many gold back dollars and then refused to redeem them for gold.
  • There is not enough gold in the world for it to be a medium of exchange.
  • Ron Paul says "Congress should only permit currency backed by stable commodities such as silver and gold." Gold advocates also claim currency values would be stable if they were based on gold, but they have no evidence. Gold is highly unstable. The real value of goal has more than doubled in recent years.
  • To demonstrate that gold is stable, Congressman Paul says the value of the dollar, pegged to gold, was about the same in 1915 as it was in 1789. What he is not mentioning is that it fluctuated with inflation for 80 years and deflation for 40. 
  • Using gold and silver is not going to prevent the government from making bad monetary decisions or creating more debt. The government could still spend too much and it would still have to contend with compounding debt and interest.
  • Despite Ron Paul’s numerous claims, gold and silver are not sound money.  They can just as easily be manipulated as fiat currency. The government can easily devalue gold based dollars. They have done that in the past to make our exports cheaper.
  • They claim the government could not deficit spend under a gold standard. This is nonsense. The government would do the same thing they do now. They would borrow by issuing bonds. America did that when it was on the gold standard.
  • One of the best arguments for gold is that it can act as a good hedge against inflation. Gold advocates claim it will prevent governments from inflating the currency. That is not always true because a government can modify its gold standard.
  • From 1980 to 2001, gold lost 70% and silver lost 92% of its value, despite inflation. Inflation went up and gold and silver went down. They were no hedge.  The safety the libertarians are seeking in the gold standard does not exist.  Once again, the government can debase the value of the currency by printing too many gold backed dollars or devaluing them.
  • Even if America went back to the gold standard the currency would still fluctuate because all nations would not adopt this policy and we would trade with them.
  • Libertarians want the money supply to be privatized. Banks would issue currency backed by euros a basket of several currencies. It would accomplish nothing. The gold standard was a creations of governments, similar to fiat money. 
  • The only way to stabilize the real value of gold would be for central banks to hold large gold reserves, but that is exactly what libertarians and some Tea Party groups oppose. They want to "End The Fed." Without reserves  a gold standard is really no standard at all.
  • Gold price fluxuations would be highly detrimental, and as Professor Scott Sumner has noted:  “A 10% increase or decrease in the real value of gold seems very small when it is just a commodity. But under a gold standard that sort of shift can be accommodated only by changing the overall price level by 10%. A sudden 10% rise or fall in the price level is very destabilizing to the economy.”

Would a Gold Standard Stop Wars?

Despite past history, gold standard advocates continue to claim they are motivated by anti-war sentiments.  They claim central banks and fiat money enable war. They say a major reason to go back on the gold standard is because it would make it difficult to finance a future war.

The past gold standard did nothing to avoid war. All the nations involved in the start of World War I were on the gold standard. A gold standard would not have stopped Adolf Hitler. During the Napoleonic Wars and World War I, they simply went off the gold standard. America fought both  WW I and WW II without having to devalue gold.

Gold Would Not Give Us a Stable Monetary Base

Gold advocates claim it would give America a fixed monetary base, but gold flows can create huge swings in the broader money supply. Gold would not result in a stable monetary base. There has been a decades long search for price stability, but there are no stable commodities.

They claim gold is a good monetary indicator and point to 2008 when gold dropped 30% along with the global recession. All commodities were then a good indicator, but gold has not been a good indicator since then.  It is wrong to claim the price of gold always goes up directly to the value of the dollar going down. There is not a direct link. The price is determined by global supply and demand, not directly by the dollar.

What Happened During The Bretton Woods Era (1945 – 1971)?

This is explained by economist Bruce Bartlett who served on Ron Paul’s staff. He correctly notes Bretton Woods worked while gold constraints were ignored.  Gold was highly overvalued after the 1933 devaluation, and then the US grabbed a huge share of the world’s gold in the run-up to WWII.

  • After the war those two factors gave us an unprecedented amount of slack, so the United States could mildly inflate until gold was no longer overvalued.
  • As Bartlett notes, “once we reached that point in the late 1960s, the system immediately fell apart.  It would have collapsed even sooner if Americans had been allowed to own gold.  And if President Johnson had tried to deflate to stay on gold, Americans (if allowed to) would have hoarded gold. They would have done so in the correct expectation that the next president would devalue the dollar.  That hoarding would have had the same effect as the hoarding of the early 1930s–deflation and depression.”

 

The Gold Standard Made The Great Depression Worse

The global recession of 2008 could have become another Great Depression if America was on the gold standard. In 1929, the Hoover Administration and the Federal Reserve both made the depression worse because of their concerns about gold.

  • Today the government would react to a recession or depression by purchasing Treasury securities so there would be cash in the hands of investors. That policy did not work in the 1930s because investors used the cash to buy gold and this contributed to a gold drain.
  • The Hoover administration did not react sufficient to the economic crisis because they were worried about the currency. The countries that quit the gold standard, such as Great Britain, suffered the least.  There is a strong correlation between how long a country hewed to the gold standard and how much it suffered. This is explained by David Frum of CNN: 

But why did decision-makers make so many bad decisions? The short answer is that they were trapped. Almost all of the right decisions would have ballooned the U.S. federal budget deficit. As budget deficits expanded, investors would inevitably worry that their dollars might lose value in the future. They would demand to trade their dollars for gold at the fixed price of $20.67 to the ounce. Under the rules of the gold standard, the U.S. government would be obliged to sell.As long as the deficits continued, the U.S. government would lose gold. Threatened with the exhaustion of its gold supply, the government felt it had no choice: It had to close the budget deficit. So, in the throes of a severe downturn, the U.S. government did exactly the opposite of what economists would otherwise advise: It cut spending and raised taxes -- capsizing the economy even deeper into depression.It's very strange to hear gold standard advocates criticize President Hoover for imposing steep tax increases in 1932, the Depression's worst year. Yet the gold standard they champion was the reason for the tax increases they deplore.

 

Ron Paul is Wrong on the Constitution and the Colonial Period

Ron Paul is also wrong in his understanding of Constitutional intent regarding the coining of money and its value. He claims paper money is unconstitutional and always quotes George Washington: "Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice." What he does not say is that Congress approved paper money in 1791 “to simplify trade,” and it was Washington who signed the bill. This was two years after the Constitution was adopted. Congress also approved an early version of the Federal Reserve which was known as the “Bank of the United States.” It was authorized to issue paper bank notes.

Under the Constitution, Congress has the power to coin money "and regulate the value thereof".

The Constitution does not say the money has to be gold or silver, and it was never intended for them to be our only means of trade. The Constitution does not authorize a gold standard.

 

The Government Was Manipulating The Currency Even In The Colonial Period

This information comes from Ron Paul’s top economic advisers, the Ludwig Von Mises Institute. As they have demonstrated, the government was debasing the value of their hard money coins, to make their exports cheaper, and it caused inflation. That happened with silver coins, not fiat dollars. It demonstrates once again that gold and silver are not a hedge against inflation.

http://mises.org/books/historyofmoney.pdf

From "The History of Money" 

In their own mercantilism, the colonial governments early tried to hoard their own specie by debasing their shilling standards in terms of Spanish dollars. Whereas their natural weights dictated a ratio of 4 shillings 6 pence to the dollar, Massachusetts, in 1642, began a general colonial process of competitive debasement of shillings.

Massachusetts arbitrarily decreed that the Spanish dollar be valued at 5 shillings; the idea was to attract an inflow of Spanish silver dollars into that colony, and to **subsidize** Massachusetts exports by making their prices cheaper in terms of dollars.

Soon, Connecticut and other colonies followed suit, each persistently upping the ante of debasement. The result was to increase the supply of nominal units of account by debasing the shilling, inflating domestic prices and thereby bringing the temporary export stimulus to a rapid end. Finally, the English government brought a halt to this futile and inflationary practice in 1707. . .

In 1744, another losing expedition against the French led Massachusetts to issue an enormous amount of paper money over the next several years. From 1744 to 1748, paper money in circulation expanded from £300,000 to £2.5 million, and the depreciation in Massachusetts was such that silver had risen on the market to 60 shillings an ounce, ten times the price at the beginning of an era of paper money in 1690.

The result was that silver went up in price because of inflation of the money supply. There is nothing to stop a government from arbitrarily price fixing the value of any specie, as they have done in the past.

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Can you paste the text here? I don't use Facebook's services.

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Done.

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James replied on Sat, Jun 4 2011 10:54 AM

Our present fiat system allows the free market to determine the value of our currency.

Oh, how very arrogant.  All that happens when you claim the right to determine the value of the currency you trade in is that trade and commerce becomes a war, or zero-sum game, to be won instead of a mutually beneficial transaction.

You know someone is ill-read when they refer to Milton Friedman as a "right-wing icon".  They probably think 'Austrian economics' refers to the European country.

 - "Gold will cause deflation which will cause an economic collapse!"

A correction is necessary to prevent an inevitable collapse under the fiat system.  The sooner the correction happens, the less painful it will be.  Deflation is not the devil.  Deflation means that savers are no longer forced to subsidise debtors.  Deflation means that prices fall.

 - "We'll be slaves to the gold-mining countries!"

Gold isn't really used up, like oil is.  The total supply is barely growing, and it's not what's influencing its price fluctuations at all.

Besides, the current situation is that America's fiat currency is held up by Chinese bond and security holders.  They already control the strength of America's money far more extensively than they could by influencing the production and trade of gold.

- "No government could stick to the gold standard in the 20th Century.  They needed fiat to pay for bread, circuses and wars etc"

Fair point, but it does strike me as a bit cynical coming from someone who isn't an anarchist.  It's not so much a criticism of the gold standard as it is one of governments.  If a government can't stick to a good and necessary policy, does that mean that we abandon what's good and necessary for human prosperity, or does it mean that we abandon governments?

 - "There is not enough gold in the world to be used as a medium of exchange"

That's just silly.  It's money.  It doesn't get used up; only passed along.  Just cut it into smaller pieces.

- "Because the exchange rate between fiat currency and gold is highly unstable, gold is unstable."

Lol, yes, it's the gold that's the unstable part of that exchange. wink

- "The government can manipulate a gold standard"

Yes, first it becomes a fractional reserve system, then it becomes an even worse fractional reserve system, then it becomes a fractional reserve system in theory, then the government confiscates everyone's gold and declares a fiat currency.

Maybe it is naive for Ron Paul to try and roll us back to a better time, and not expect the government to come back to this point.  At least he's trying, though, and again it strikes me as a very cynical point of view from someone who isn't an anarchist.

- "The gold standard was a creation of governments"

Yes, this is true, the real argument for principled libertarians is for an end to legal tender laws and taxation.

Arguments for the gold standard are strategic roll-back arguments, like state's rights, nullification etc - not a penultimate, idealised, principled stance.  They're to frustrate the designs of central planners; not preach to the converted.

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Debasement can be prevented by not allowing the government to declare legal tender and not allowing the government to mandate the creation of money.  They could just collect taxes by weight of gold bullion, then governments couldn't debase it.

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"If we had a gold standard, we wouldn't need complex monetary policy. But how do we get from here to there? There might not be a way."

 

ive actually been wondering about this. is there a way to return to a gold standard that doesnt involve those who kept their savings in paper money and none in precious metals going into the poorhouse?

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flat earth theory was never a part of astronomy.  The definition of astronomy is the study of celestial objects outside of the Earth's atmosphere.

That aside, the gold standard did exist.  So it's not a time that didn't exist.

And he has proposed allowing competing currencies, and disallowing wreckless and unaccountable printing in the mean time, as a means of getting from here to there.

Complexity doesn't have anything to do with it.  Nor does it conform to the past.  Obviously, competing currencies may be more complex.  The problem is the pretense of knowledge which is called complexity in some monetary policies. 

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"The gold standard is to economics what the flat earth theory is to astronomy: something that may have seemed to make sense back when people didn’t know any better but is ridiculous to suggest today." - Dr. Russ Anderson

This makes no sense at all. The gold standard (and currency in general) came into the market naturally through evolved human understandings. These forms of exchange are specialized mechanisms in the market, something that originated from the basic idea of bartering.

As for the origins of money in the first place, Carl Menger puts it best: "I refer to the observation that the character of money as an industrial metal often completely disappears from the consciousness of economizing men because of the smoothness of operation of our trading mechanism, and that men therefore only notice its character as a means of exchange. The force of custom is so strong that the ability of a metal used as money to continue in this role is assured even when men are not directly aware of its character as an industrial metal. This observation is entirely correct. But it is also quite evident that the ability of a material to serve as money, as well as the custom on which this ability is founded, would disappear immediately, if the character of money as a material applicable to industrial purposes were destroyed by some accident. I am ready to admit that, under highly developed conditions of trade, money is regarded by many economizing men only as a token. But it is quite certain that this illusion would immediately be dispelled if the character of coins as quantities of industrial raw materials were lost." It was neither issued nor created by government. It was a consensus built upon the ideas of which economic mechanisms worked most efficiently for all people.

ive actually been wondering about this. is there a way to return to a gold standard that doesnt involve those who kept their savings in paper money and none in precious metals going into the poorhouse?

Check out Ron Paul's The Political and Economic Agenda for a Real Gold Standard or the transition proposal of Ludwig von Mises on pages 448-452 in The Theory of Money and Credit. I can't find the correct PDF online, so I can always type it up for you if you're really interested.

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 " Its advocates want to turn the clock back to the “Roaring 20’s,” but the economic growth of that decade had little to do with the gold standard and it ended in disaster."

 

LOL. I never ran into any Ron Paul supporter that went around saying "What we need is to return to the Roaring 20's! Everything was just perfect back then, especially with monetary policy." 

If anything, they will likely point out what the Federal Reserve was doing at that time and how the gold standard was being destroyed.

Obviously the writer has never read -What Has Government Done To Our Money by Murray Rothbard. Just that simple read would make most people laugh at this enitre article.

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z1235 replied on Sat, Jun 4 2011 4:08 PM

There is not a single coherent or logically consistent thought in that article. I'd have to spend a day quoting and pointing out the vacuous idiocy of each and every claim made in it. The writer is either a complete moron (in a literal, medical sense) or a shill for the fiat-money cabal, my bet being on the latter.

 

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z1235 replied on Sat, Jun 4 2011 4:31 PM

James C:

ive actually been wondering about this. is there a way to return to a gold standard that doesnt involve those who kept their savings in paper money and none in precious metals going into the poorhouse?

Those who keep their savings in paper money have been, are, and will be taken to the poorhouse regardless of gold's legal status. Also, there's no need to "return" to anything. A mere abolishment of legal tender laws and capital gains taxes would allow the market to pick what gets used as money and what as firestarter, but I wouldn't be holding my breath. 

 

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From the guy's Facebook page:

"[I'm] Just Republican, NOT a libertarian, isolationist or protectionist. I miss Bush and Cheney."

Here's part of his resume:

 

American Security Council
Executive Director · 1983 to 2005
This bipartisan nonpartisan organization focuses on a wide range of defense, foreign policy and international economic issues. For the past decade passage of the annual defense budget has not been controversial, but that was certainly not true when I worked on Pentagon funding in the 1980s. Another major project involved launching the Strategic Defense Initiative (SDI). Iran's development of nuclear weapons emphasizes the importance of SDI technology to shoot down enemy missiles.
 
National Republican Congressional Committee
Director of Public Affairs · 1981 to 1983
During this period I also served as a consultant to the Republican National Committee. I never worked at the RNC. I was instead assigned to the White House Office of Political Affairs where I focused on legislation such as Gramm Latta (the successful tax cut) and Conable Hance (the unsuccessful budget cut).

To paraphrase Marc Faber: We're all doomed, but that doesn't mean that we can't make money in the process.
Rabbi Lapin: "Let's make bricks!"
Stephan Kinsella: "Say you and I both want to make a German chocolate cake."

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Daniel Muffinburg:

From the guy's Facebook page:

"[I'm] Just Republican, NOT a libertarian, isolationist or protectionist. I miss Bush and Cheney."

Here's part of his resume:

American Security Council
Executive Director · 1983 to 2005
 
National Republican Congressional Committee
Director of Public Affairs · 1981 to 1983

Well that just about explains everything now doesn't it.

 

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James C:
"If we had a gold standard, we wouldn't need complex monetary policy. But how do we get from here to there? There might not be a way."

ive actually been wondering about this. is there a way to return to a gold standard that doesnt involve those who kept their savings in paper money and none in precious metals going into the poorhouse?

Someone else actually had a question close to this here.

Rothbard goes into this as he explains the case for a fully commodity-backed currency (as well as a practical, step-by-step plan for making it happen)...

The Case for a 100 Percent Gold Dollar, & The Case for a Genuine Gold Dollar by Murray Rothbard

 

(and you might go ahead with

just for good measure)

 

Actually, here's the full recommended reading list, in order.

 

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The first problem the gold standard has is that people in general are not interest in understanding the essence of economics, and because economics has been hijacked by otherwise unemployed mahematicians who have all conspired to make it a "difficult to understand" kind of science...

The gold standard has been wordlwide abandoned, because,,, it didn't work, you know...(nevermind that the prurchasing power of gold in 1772 was the same as in 1930). The reality is that it was abandoned, not because it was a bad system, but because it was too good!!

Then we have the appearence of John Maynard "Neutron Bomb" Keynes who told politicians, "Hey, you don't need to be shackled by gold! You can spend and spend and then spend some more because my equations "prove it".... Who in the world would think that politicians who are traditionally corrupt to the core would rather have a monetary system "binding their hands", instead of a  "new, modern economics" that allows them to spend to their heart's content??
Do I really need to answer that question?

And now I have to break a bad piece of news to you. While the gold standard is indeed the best monetary system ever, it also has the seeds of its own destruction. The reason is that banks under the gold standard would still engage in the "goldsmith's knotty game", namely, issue more depositis certificates than they had gold to back them....This however rarely lead to the shutting down of the offending bank for counterfeiting. It merely lead to a "temporary suspension of the obligation banks had to pay out gold in exchange for their notes (!). This was essentially a suspension of the gold standard and it was something done by the government many times.....as many times as required (Corruption anyone?). If you want to read more about these "timely Central Bank interventions", please read Vera Smith's "The Rationale of Central Banking"
So, what to do?

Now a piece of good news.

We could adopt what I call a "Dual level currency competition monetary system". One currency would be 100%  reserve, backed by gold to the tune of 100%. Both would circulate side by side. We could have for example the fiat dollar on the one hand and the gold dollar certificate on the other and the gold certficates issued by private banks. Payments would be made in both currencies according to the exchange rate of the day. The government inflates, you switch to the gold dollar certificate.

The result would be that such a system would act as a pressure valve in for the benefit of the fiat dollar, but the government would pay the price in the way of losing the inflationary tax resource which it has always resorted to...

In Europe they could have created a gold euro and let all the local currencies continue to circulate side by side.....there would be no problems with the so called "PIIGS" in Europe such as Greece.....In the memantime, we have these new euroburocracy with all these fat cats drawing outrageous tax free salaries paid by the little guys in Europe.......

In the meantime and back to the real world, we still revere failed "economists" (yes, think in the biggest names, including most winners of the fake Nobel Prize in Economics) who have had their growth models and forecasts discredited one after the other...These rubes have succeeded in creating the illusion of turning economics into a natural science subject, which it is not.

Is anybody listening out there!!!!

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