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If gold is so good...

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Koen Swinkels posted on Sat, Oct 11 2008 4:12 AM

then why don't people use it as payment right now?

to be sure, I don't mean this as a provocative question and am pretty sure that there are good reasons why people don't use gold for payment, but for an assignment I'm writing I'd like to know the exact reasons.

For example, I think I understand why full reserve banking is not practiced (I don't intend to start a debate about fractional reserve banking, so please don;t start a debate about that) even though it is superior to fractional reserve banking. Because of the latter and other reasons there is inflation and so banks that merely safeguard money and not pay interest would be at a severe disadvantage. I was wondering what a similar reason for the lack of use of gold is.

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What do you mean by word "superior"? In fact both full reserve banking and free banking are inferior to central banking, at least in certain sense. Subsidised and monopolised central banking must win over any alternative once it is established. There are laws preventing free competition, preventing you from running your own bank the way you like. Moreover central banking allows banks to drain sources from the rest of society via inflation. On the other hand any risks are "socialised", these banks are just too big to fail. No wonder you cannot compete. 

 

 

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yes, I grant all of that, but the question is whether it would not be more advantageous to use gold over fiat money in a society where fiat money has been established

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I doubt possibility of gold circulation under present conditions. Any government would certainly try to stop it. In my country there are several laws hampering usage of gold, even threatening anyone who would like not to accept fiat paper. Banking law denies possibility to accept deposits against notes. I am pretty sure it is not much different in USA. Recently FBI rushed into the office of company issuing some metal backed notes (I cannot remember the name).

Moreover  even on gold standard you need banks, even full reserve ones provide very important services. Again, it is impossible in my home country. It is even impossible to start an investment fund without having a depositor bank (that of central banking system). Gold cannot fulfill monetary function under such conditions, it cannot be general mean of payment. You would have to return many centuries back in time to use gold. I look with certain hope towards eGold and other such projects. 

Even if you did not wish to use its fiat money, you would have to pay price for its faults via tax burden. Look at the bail-out plan.

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In the US there are legal tender laws - pull out a Federal Reserve Note from your pocket and look at it, it says "This note is legal tender, for all debts public and private."  It says right on the note that it CAN NOT be refused.

Greshams Law dictates that bad money will drive out good (when the two compete because of government intervention).  If I had gold, why would I use it if I also had FRN's?  I like gold, and I want to keep it.  Of course, perhaps I can negotiate a better deal with gold, or some other economic gain could be had. 

I think that the legal tender laws are the killer.

One hundred trillion Zimbabwe dollar note

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nje5019 replied on Sat, Oct 11 2008 11:54 AM

Someone please correctly me if I'm wrong but i think gold falls under capital gains so if you trade something for gold you're supposed to pay tax on the gold that you recieve. This pretty much ruins the chance of using gold as a currency.

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Which country would that be?

-Jon

Freedom of markets is positively correlated with the degree of evolution in any society...

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those are both good points: legal tender laws and Gresham's Law, and taxes . Incidentally they are the exact same points that somebody on an e-mail list just made, so independent verification.

the other point that was made there was that e.g. the dollar has a severe advantage because it is currently being used and has been used in the past, whereas gold would have to start anew. Rothbard wrote this about it:



From "The Case for Genuine Gold Dollar:"

There is a crucial difference, however, between money and all other goods and services. All other goods, whether they be postal service or candy bars or personal computers, are desired for their own sake, for the utility and value that they yield to consumers. Consumers are therefore able to weigh these utilities against one another on their own personal scales of value. Money, however, is desired not for its own sake, but precisely because it already functions as money, so that everyone is confident that the money commodity will be readily accepted by any and all in exchange. People eagerly accept paper tickets marked "dollars" not for their aesthetic value, but because they are sure that they will be able to sell those tickets for the goods and services they desire. They can only be sure in that way when the particular name, "dollar," is already in use as money.

Hayek is surely correct that a free market economy and a devotion to the right of private property requires that everyone be  permitted to issue whatever proposed currency names and tickets they wish. Hayek should be free to issue Hayeks or ducats, and I to issue Rothbards or whatever. But issuance and acceptance are two very different matters. No one will accept new currency tickets, as they well might new postal organizations or new computers. These names will not be chosen as currencies precisely because they have not been used as money, or for any other purpose, before.

Hayek and his followers have failed completely to absorb the lesson of Ludwig von Mises' "regression theorem," one of the most important theorems in monetary economics.Devil Mises showed, as far back as 1912, that since no one will accept any entity as money unless it had been demanded and exchanged earlier, we must therefore logically go back (regress) to the first day when a commodity became used as money, a medium of exchange. Since by definition the commodity could not have been used as money before that first day, it could only be demanded because it had been used as a nonmonetary commodity, and therefore had a preexisting price, even in the era before it began to be used as a medium. In other words, for any commodity to become used as money, it must have originated as a commodity valued for some nonmonetary purpose, so that it had a stable demand and price before it began to be used as a medium of exchange. In short, money cannot be created out of thin air, by social contract, or by issuing paper tickets with new names on them. Money has to originate as a valuable nonmonetary commodity. In practice, precious metals such as gold or silver, metals in stable and high demand per unit weight, have won out over all other commodities as moneys. Hence, Mises' regression theorem demonstrates that money must originate as a useful nonmonetary commodity on the free market.

But one crucial problem with the Hayekian ducat is that no one will take it. New names on tickets cannot hope to compete with dollars or pounds which originated as units of weight of gold or silver and have now been used for centuries on the market as the currency unit, the medium of exchange, and the instrument of monetary calculation and reckoning.[7]

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Suggested by sergebeauchamp

Gresham's law certainly does not apply here because one very important condition is missing. There is no enforced exchange ratio between gold and fiat paper, therefore bad fiat cannot drive good gold out of market.

Legal tender certainly has its impact but it is far from being sufficient explanation. Though you might be forced by anyone to accept payment in fiat paper mostly business relations do not allow such hostility. Your business partners certainly wish to perpetuate mutual trust and good will, not to break it. 

Payment of taxes is very good one. Next one could be laws enforcing accounting standards. I am not sure about US, but some European accounting standards demand local currency to be used.

On the other hand I cannot see any reason why not to hold most of cash in gold while converting it to fiat or back if necessary. On a large scale transaction costs would be very small. And yet there is very little need of such service it seems.

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that last paragraph is an excellent description of the problem I'm concerned with.

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