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Discussion with a Friend re: The Fed, Gold Standard

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wgeary Posted: Mon, Nov 12 2007 8:37 PM
I have been having a discussion with a friend about the Fed and the possibility of a gold standard. He said the following: "You really can't go back to the gold standard; there is a finite amount of gold available (even if we don't really know how much there is), and this would put a cap on the growth of the economy. You talked about loans not actually creating new money; if that were the case, which it almost certainly be under the gold standard, what would be the rationale for extending a loan? The fact is that the Fed has done an excellent job maintaining the world's largest economy. They loosen their grip on the money supply to stimulate growth, and clamp down on interest rates to try to prevent it from growing too fast. They (nor the government) do not go around printing all the money they need; unfortunately for us and our children, they simply borrow more of it from anyone willing to pony up, which lately seems to be the Chinese." I know he is wrong (about pretty much everything he says) but it seems like nothing I say can change his mind. Please help me prove him wrong.


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Bogart replied on Tue, Nov 13 2007 11:22 PM
Start with the goal which is to have as much economic growth as possible in the long run and if your friend buys that then continue by addressing the underlying the assumption that has been driven into economic thought by a combination of government, academia and the media.  That is that the economy can not grow if the number of units of currency does not grow.  This is simply not true logically and historically.  It is logically not true as the amount of stuff a unit of currency can buy can grow.  In the case of computer hardware and other electronics the amount of stuff a unit of currency can buy has gone up rapidly.  And historically, if this was true then how did the United States prior to 1913 turn itself from a backwards agrarian economy to the top tier of nations in wealth and technology?  Now you can get to the other assumption that is more horrible.  That is: A group of people can determine the price of the currency.  This is a daunting task as the value of the currency depends on individual preferences for currency versus the rest of things.  There is simply no person, computer, person and computer, or group of persons and group of computers that can determine the price of anything in anything but the next few days accurately.  This is especially true for the price of currency.Now if you get this far, you win.  The economy can grow with a stable or stagnant currency (Actually there is mining so there is some increase in the money supply although it is far less than Federal Reserve doubling the amount of currency in 7 years.) and prices are so hard to determine that only individuals can determine prices based upon their preferences at the time of exchange.  So anything that interferes with individuals exchanging things based upon accurate knowledge of the growth in currency is inefficient and therefore results in less economic growth. 


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 I had the same argument with a liberal corporate attorny.  His strongest argument against a gold standared is that, "gold producers or controllers can flood the market. Being on the gold standard puts our money supply at the whim of any other country that controls a significant amount of the world's gold."


I really dont know how to respond to that argument.

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Grant replied on Wed, Nov 14 2007 9:36 PM

I don't think you'll find many supporters of a government-backed gold standard here. Austrians typically believe that money originated from them maketplace, and should be returned to the marketplace. In my opinion, moving the US dollar to a gold standad would be an absolutely terrible idea that would result in all kinds of chaos.

I wouldn't assume that just because gold was the currency of choice in the market 100 years ago, that it would be the currency of choice now.

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JAlanKatz replied on Thu, Nov 15 2007 8:47 AM
A liberal corporate attorney? Interesting. Anyway, not being on the gold standard means the government can flood us with money, as they have done. The greatest threat to our liberty is our government, so a fiat currency is bad.
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His strongest argument against a gold standared is that, "gold producers or controllers can flood the market. Being on the gold standard puts our money supply at the whim of any other country that controls a significant amount of the world's gold."

A gold producer can certainly flood the market but eventually they would push the price of gold below what it costs them to dig it up and process it so after a while it wouldn't be worth their while to even bother. This is the same fallacious argument they use against monopolizers, they can operate at a loss for indefinite periods of time to kill off all the other competition completely ignoring the fact that a business' primary goal is to make a profit. Yeah, you can make it up in volume I suppose...

A country with significant stocks of gold flooding the market would involve them exchanging the gold for some other commodity so while it may cause temporary inflation in the other countries it would all equal out eventually because it would also cause deflation in their own country. Their exports would be come cheaper and gold would eventually flow back into their country anyway -- this time in the hands of the people instead of a central authority who could practice such shenanigans.

Who would want to flood the market anyway, they would only really hurt themselves in the long run. 

Same argument doesn't apply to a non-commodity backed currency -- they can (and will) flood the market because the marginal cost of production is so low it takes a long time to completely devalue the currency. It's already happening today though, they had to change the metal composition of the penny a while back because the copper content was worth more than one cent. 

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As we know, mining gold is as easy as snapping one's fingers...




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Niccolò replied on Fri, Nov 16 2007 12:11 AM

Your friend sounds like an idiot.

A. He's using an old vulgar type of quantity theory of money.

B. He's not taking into account the adjustable price of money, that is its purchasing power in relation to every other good on the market - ala The Value of Money by Benjamin Anderson.



The Origins of Capitalism

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