Baiting gold bugs

In short, you don’t get anything out of a gold standard that you didn’t
bring with you. If your government is a credible steward of the money
supply, you don’t need it; and if it isn’t, it won’t be able to stay on
it long anyway. (See Argentina’s dollar peg). Meanwhile, the
limitations on the government’s ability to respond to fiscal crises,
the necessity of defending against speculative attacks in times of
crises, and the possibility of independent changes in the relative
price of gold, make your economy more unstable. It’s a terrible idea,
which is why there are so few economists willing to raise their voices
in support of it.

Here is more, from Megan McArdle.  I’ll add the related sentence "Who wants a pro-cyclical money supply?", and we don’t know what the new gold/dollar par should be, which means we risk a significant deflation during the transition to a commodity standard.

In the very long run, our monetary standard might be determined by what is least susceptible to counterfeiting or alchemy/nanotechnology.  I doubt if this will help gold, and monetary economics will end up as a special case of a more general theory of encryption.  One day they’ll solve Riemann’s Hypothesis and the price level will just go poof…!

Comments

The gold standard is not equivalent to free competition of currencies. Few people truly want to return to a gold standard, most of those labeled as "gold bugs" actually support the freedom to base a currency on anything whatsover, especially in commodities. Thus, there is going to be limited concern for large changes in commodity-bundle currencies. As to the limitations on government's ability to manage an economy for good, this is not so clear and the prima facie case goes against this argument, especially when all the moral hazards and pernicious effects of monetary inflation are considered.

If it is a terrible idea, Megan's short post did nothing to explain why, and displays a weak understanding of what commodity currencies might look like compared with our present system.

To the best of my knowledge, proving or disproving the Riemann Hypothesis wouldn't have any practical consequences for cryptography (I'm a mathematician, but not a specialist in number theory or cryptography; though if I'm wrong about this, I'd be interested to see the connection.)

Also, it is important to distinguish the questions of what monetary tokens (e.g. coins, paper bills, cryptographically secured "digital cash") will be used, vs. what these tokens represent.

On a gold standard, monetary tokens represent bars of gold (which, is inconveniently heavy to lug around). Fiat currency isn't backed by anything, although it is credit against one's future tax obligations.

Since the purpose of money is to solve the Coincidence of Wants problem, it seems to me that that the only sensible option is to back a currency with a bit of everything that people want: this could be done using an ETF tracking an appropriately broad-based mixture of valuable commodities, stocks, etc.

The fundamental problem with backing a currency with a single commodity such as gold is that the value of that commodity becomes inflated by its role as the medium of exchange. (Everyone then wants to keep a bunch of gold on hand not to make jewelry or electronics, but to keep transactions liquid.)

I very much appreciate what Herbert Simon once said that “money is neither a solid substance, nor a liquid, nor gas; it is simply a state of mind. More precisely, money value is a collection of states of mind of all people who use it. These states as history shows, can change is a short time from utmost confidence in a currency to utmost skepticism, and vice versa.† Holding our collective states of mind onto a commodity has a sure flavor of beating bias. Will it send our economy into a state of depressive realism?
On a different note, if the code of a certain commodity is someday broken, something like gold could be fruitful and multiply. Wouldn’t the proof of Riemann's Hypothesis be the savior not the destroyer of the price level? Now, many encryption methods already assume the Hypothesis holds, and use the zeta -function to churn out prime numbers in abundance. The trouble is if Riemann was wrong. Then the world can keep no more secrets.

David,

I believe it means that the money supply would shrink during recessions, and expand during booms. Keynesians would say this could be disastrous, Austrians would say this would be great.

In any event, no one really argues for an enforced gold standard anyway. They just argue for the denationalization of money. Most gold bugs think the market would choose gold as its currency, just as it has in the past, and that doesn't seem like its such an unreasonable prediction. I suppose only Keynesians would argue that government is needed to force people to accept an inflationary currency and prevent excessive savings (although I still have yet to see any logic in his conclusions, given that excessive saving is possible in any good, and doesn't cause serious problems).

The harder part is probably getting the government to agree to release its monopoly on money. I suspect any politician who tries will have about as much success as Ron Paul.

Tyler, or anyone else, have you looked at the Ripple project?
http://ripple.sourceforge.net/

Baiting gold bugs is so much fun!

"The gold standard is not equivalent to free competition of currencies. Few people truly want to return to a gold standard, most of those labeled as 'gold bugs' actually support the freedom to base a currency on anything whatsover, especially in commodities."

Which would also include the freedom to base a currency on nothing. How does gold enter the picture? Why do 'gold bugs' keep talking about gold then?

I've gotten into a number of email arguments with gold bugs. They are living in the past. (The "Liberty Dollar" people are really funny. My blog has more details.)

To the best of my knowledge, proving or disproving the Riemann Hypothesis wouldn't have any practical consequences for cryptography (I'm a mathematician, but not a specialist in number theory or cryptography; though if I'm wrong about this, I'd be interested to see the connection.)

You are correct. Finding an easy way to factor large composite numbers is what would be required to break modern public key encryption systems (and many believe there may not be a feasible way to factor huge numbers in a reasonable amount of time short of quantum computation). Finding a proof of the Riemann hypothesis is a different thing altogether. The only relationship is that both are significant problems of number theory.

Obviously, if solving the Riemann Hypothesis had any practical effect on factoring, then one could simply assume the conjecture true or false and see where it leads.

As long as fiat money is legal tender, it is not backed by "nothing" ... it is backed by the nation's (and nowadays, to the extent the currency is well-accepted like the dollar, the world's) economy.

As long as fiat currency is as hard to counterfeit as gold, I don't see any reason why it has any less intrinsic value. Worth is a function of the rarity/scarcity coupled with the difficulty in producing counterfeit substitutes and wide acceptance (which naturally follows).

Yan_Li: That's one of the important insights about money I've heard, and Paul_Birch expands on it quite
a bit in his essay Honest Money.

In short, "money is information". It is the collectively held information about the net debt owned to
each person. Some implications about this insight:

-All theft of money qua money can be equivalently expressed as manipulating the public's
knowledge about a few people's net debt owed to them.

-To the extent that someone has a right to their monetary earnings, they have a right to the thoughts of
other people. (See also: debates about the "right to reputation".)

-It's no accident that many languages use the same term for arbitary monetary units, that they do for
"public belief". (In English, "credits".)

-Reparations can be extracted from someone with enough funds, without using force. The public need only
change its collective mind about how much he is owned.

The implications of the "money is information" insight alone, or even just its implications for
libertarianism, are worthy of their own discussion.

g wrote:
"I believe it means that the money supply would shrink during recessions, and expand during booms. Keynesians would say this could be disastrous, Austrians would say this would be great."

I believe that the Austrians are also against fractional reserve banking and believe that free banking would lead to an end to fractional reserve banking thus in deflationary conditions gold mining would be more profitable leading to more gold mining and in inflationary periods gold miners would go out of business thus having a leveling effect.

and we don't know what the new gold/dollar par should be,

But we do know,try the 30 year moving average of spot gold.

Which gives a rough approx of excess $ liquidity for the last 30 years.

Even if we found an efficient way to factorize large numbers, that would only break RSA encryption. There are other methods of public-key encryption which would then become standard. There would presumably be some adjustment, but we would adapt. I know there are some primality testing methods whose proof of correctness depends on the Riemann hypothesis, but that's not nearly as relevant since a polynomial time primality testing algorithm was developed. I don't believe that the Riemann hypothesis has any relevancy to the problem of factorization anyway. It has more to do with the distribution of prime numbers, which is a related (though quite distinct) problem.

Isn't fiat money backed by the value of italian automobiles?

Ron Paul told a story a few years ago that he had recently met with Greenspan. In preparation, he took a copy of an article that Greenspan had written in the sixties defending the gold standard. When Ron showed him the article, Greenspan said (AIRBT) "You know, I was thinking about that article a few days ago. I wouldn't change a thing." I believe that Greenspan used the term "to depoliticize money".

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