Hypothetical question: If the US Treasury/ Federal Reserve were to make an announcement saying that the US will never be returning to the gold standard (and fiat currency were permanent), and the Fed would no longer hold gold in its vaults, what would be the impact? What would be the attractiveness of gold if there were a "guarantee" that it is not going to be used as a medium of exchange?
In What Has Government Done to Our Money, Rothbard explains that the free market has historically identified gold as having two primary uses - 1) medium of exchange, 2) jewlery/iconic uses.
I can appreciate the attractiveness of investing in gold when the free market is allowed to use it as a medium of exchange, and I can appreciate its attractiveness as jewlery/iconic uses. But what about when it is not used as a medium of exchange?
And I can also understand the attractiveness of gold if one believes that it will one day become a medium of exchang again. But that's why I propose the question assuming that the Fed states we will never return to a gold standard. What is the attractiveness of gold beyond its jewlery/iconic attractiveness if it cannot be used as a medium of exchange?
My thought is that the current demand for gold comes from 1) its use as jewlery, 2) the fact that the Fed holds it in its vaults and is a large buyer/seller, 3) the thought from some that gold will one day become the world's medium of exchange again, 4) investment based on speculation/confidence that the price will rise (I consider #4 to be somewhat separate because someone would only engage in #4 if he believes there will be increased demand from #1-3 or other aspects of demand that I failed to list).
Are these the reasons why people currently demand gold? Am i missing something/ a lot of things?
does the Fed receive zero tax funding? Who pays Ben Bernanke's salary?
The Fed pays its bills from its "profits" (US gov't interest payments on the debt). This includes Bernanke's paycheck. However, most of its "profits" are returned to the Treasury.
Clayton -
if the goods that you were buying for $1,000 became $2,000, why wouldn't the cost of your employer to "buy" your employment go up by the same amount? Is it just a matter of time lag? I understand your points about inflation being a punishment on savings and causing individuals to make artificial decisions about spending immediately and not saving. But i'm asking if the reason your salary does not go up by 100% is simply because of a time lag or are there other factors.
Wages are a factor of consumer demand for products and the supply of labor. Under inflationary periods, people have less purchasing power to buy the products that they had bought before. The net effect is that fewer goods and services are bought. So, you have a bit of a crunch on the demand side and on real savings, which goes into the production of goods. Wages generally lags even in good times, but these other factors also help to hold down wages.
One of the real threats on wages is unemployment. If the businessman finds there's more profit in speculating than producing goods, then factories close and employees lose their jobs. This means there will tend to be an oversupply of labor compared to demand. That tends to push wages down, not up. You also see some products disappear from the market (those with low profit margins) or become scare (those with price controls). During hard times under inflation, governments tend to go to price controls - a failed policy that always leads to shortages.
Labor wages are also one of the scapegoats of government monetary policy that leads to inflation. When times get hard and prices rise, wages are among the first to get attacked. During the Great Depression, the government instituted a wage maximum. Just another form of price control that leads to scarcity - this time employment.
As for the Businessman, here's what Rothbard had to say on profits with respect to inflation:
…the inflationary process inherently yields a purchasing-power profit to the businessman, since he purchases factors and sells them at a later time when all prices are higher. The businessman may thus keep abreast of the price increases (we are exempting from variations in price increases the terms-of-trade component), neither losing nor gaining from the inflation. But business accounting is traditionally geared to a world where the value of the monetary unit is stable. Capital goods purchased are entered in the asset column "at cost," i.e., at the price paid for them. When the firm later sells the product, the extra inflationary gain is not really a gain at all; for it must be absorbed in purchasing the replaced capital good at a higher price. Inflation leads him to believe that he has gained extra profits when he is just able to replace capital. Hence, he will undoubtedly be tempted to consume out of these profits and thereby unwittingly consume capital as well. Thus, inflation tends at once to repress saving-investment and to cause consumption of capital.
Here's a good little article: Surviving Hyperinflation that reviews a book that goes into research on what a business needs to do to get through hyperinflation (and could also be applicable to inflation in general).