I made an account here to ask a question I have been pondering for some time.
I understand why a gold standard might be a good idea, what the problems with fractional reserve banking is, why central bankers cant get the rate right, why falling prices isnt a bad thing and so on.
Say a country adopted the gold standard. Lets call this country Switzerland. The country now uses either gold or more like - a currency 100% backed by gold. When foreigners want to buy goods from Switzerland they have to buy gold from the world market to give to the swiss. When the swiss want to buy goods from abroad they will have to sell some of their gold on the world market to get foreign pieces of paper to pay for the goods. In reality the exchange between goldbacked swiss franc and foreign currencies will be the same as the gold price.
My question is then what would happen if the price of gold suddenly surges? I know this happens with foreign currencies as well. But since a) gold surges probably have bigger magnitude (gold up 400% over 10 years) and b) there is no central bank to print money would a gold surge not prove very problematic for competiveness of a country on a gold standard?
Prices of that country´s products might suddenly explode in terms of foreign currency? I know that having a strong currency has its advantages since one can buy more inputs from abroad etc. but a very sudden rise gives no time for such adjustments?
Is this not a potential problem for that countrys industry? If yes, what could be done to fix it?
I hope i managed to clarify my question well enough. Cheers!
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shivan:When foreigners want to buy goods from Switzerland they have to buy gold from the world market to give to the swiss.
Maybe. Any individual person could trade for anything they wanted.
When the swiss want to buy goods from abroad they will have to sell some of their gold on the world market to get foreign pieces of paper to pay for the goods.
Maybe. But again, any individual person could trade for anything they wanted. Part of the good thing about gold is you can take it pretty much anywhere in the world and it will be accepted. If you have a stingy seller, you may have to go through an intermediary and exchange your gold for the local currency first, but that wouldn't be difficult. There is always someone willing to accept gold. That's part of the reason people who talk about a gold standard are inclined to believe that's the way the market would go...because gold is already universally recognized as money.
In reality the exchange between goldbacked swiss franc and foreign currencies will be the same as the gold price.
Basically. Supposing of course that the "Swiss franc" remains a completely honest fiduciary medium.
A gold "surge" in terms of what?
Again, a "sudden rise" in terms of what? Because of what?
The rise in gold i refer to is in terms of US dollars since thats the currency used to trade gold in.
The surge in gold could be caused by any number of things, but most likely breakdown of fiat money in a country. I imagine a huge gold surge when the US dollar collapses.
Its like i know the answer to my question right at the tip of my fingers but I still need someone to direct me the last mile.
shivan: The rise in gold i refer to is in terms of US dollars since thats the currency used to trade gold in. The surge in gold could be caused by any number of things, but most likely breakdown of fiat money in a country. I imagine a huge gold surge when the US dollar collapses.
I don't see what the issue is. You're talking about the people of Switzerland just deciding to transact in gold. And now you're saying "what happens if the U.S. dollar loses all it's value?"
Well. You tell me. What happens if the U.S. dollar loses it's value? It just means it will take more and more dollars to buy anything...not just gold...until eventually no one will accept dollars anymore, and the dollar will effectively be "worthless". So, yes, if the dollar collapses "gold will 'surge'" in terms of dollars...just like cotton would surge...just like pork bellies would surge...just like chewing gum would surge....just like massage therapy would surge. Everything priced in U.S. dollars would command a higher U.S. dollar price.
What difference does that make to someone who doesn't have any U.S. dollars?
I don't really understand what it is you're not understanding.
Well that you are correct, if it is only US dollars.
I guess what I was going at is that gold is a commodity. If we look at the recent rise in gold it has risen in ALL currencies, just a bit less than others. That will affect Swiss trade with all countries. It will have the same effect as an appriciating currency, which can be problematic right?
Sorry for not atticulating very clearly.
The usual thing you hear about the horrors of the gold standard is that say the price of gold goes up all over the world [because everyone is printing money but the swiss]. Then the swiss franc will be worth a lot compared to everyone else's money.
Thus, the price of a swiss watch would suddenly be very expensive everywhere [but in switzerland]. The poor unfortunate swiss would be stuck with with mountains of watches left to rot in their warehouses because nobody can afford them anymore.
Yes, swiss products will become more expensive. On the other hand foreign products will become very cheap for the swiss. They can suddenly afford to buy up everything there is in the USA, the rest of Europe, everywhere.
Of course, swiss watchmakers will also save tons of money because all the raw materials they import from around the world will be very cheap for them, allowing them to cut prices drastically.
Bottom line: Winners, over 99% of the swiss people.
Losers: those businesses that export and do not import any raw materials to make their products. [But that is in theory. In reality, for some odd reason, countries with strong currencies have had no problems whatever in exporting thier stuff. Not sure why.]
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Good answer.
The reason why i picked the swiss as an example is that they acually experienced something like this.
Instead of just enjoying their increased purchasing power the swiss decided to print some money to set a cap over the swiss franc. I assume that it was a bad idea then?
Yeah I think Dave might be onto your thought train. Maybe some resources would help. Henry Hazlitt has a chapter on this in his classic Economics in One Lesson.
See Chapter 12: "The Drive for Exports"
And for gold specifically, see here.
I think i get it now.
I guess exporters just have more political clout than the average joe which in turn influences policies.
I assume that it was a bad idea then?
Bad for the masses, good for those who get the new money first, like the govt and its pals.
I remember Peter Schiff had an interesting take on this. Instead of handing the money out the to cronies, just print up 1000 swiss franc and send it out to every swiss citizen. At least its fair that way.
shivan:I remember Peter Schiff had an interesting take on this. Instead of handing the money out the to cronies, just print up 1000 swiss franc and send it out to every swiss citizen. At least its fair that way.
Then what would be the point? What is the reason for wasting the time and resources to print up that money and distribute it out to every person equally?
That if you do want to wreck your currency, isnt it better that the benefits befalls all people in the country rather than a select few government cronies?
shivan:That if you do want to wreck your currency, isnt it better that the benefits
I do know its NOT a good idea overall. But if you DO want to do it, isnt it better that the printed up money is distributed to all people rather than few select with the right connections?