What exactly is the argument against gold?

Mark Thorson has a request:

I’ve heard it said that there isn’t enough gold in the world to make it the only form of currency, but the gold bugs say that’s because gold is underpriced. If gold were priced appropriately, there would be enough gold to replace all of the world’s currency. What’s wrong with that argument?

The most fundamental argument against a gold standard is that when the relative price of gold is go up, that creates deflationary pressures on the general price level, thereby harming output and employment.  There is also the potential for radically high inflation through gold, though today that seems like less a problem than it was in the seventeenth century.

Why put your economy at the mercy of these essentially random forces?  I believe the 19th century was a relatively good time to have had a gold standard, but the last twenty years, with their rising commodity prices, would have been an especially bad time.  When it comes to the next twenty years, who knows?

Whether or not there is “enough gold,” and there always will be at some price, the transition to a gold standard still involves the likelihood of major price level shocks, if only because the transition itself involves a repricing of gold.  A gold standard, by the way, is still compatible with plenty of state intervention.

Here is one earlier post on the gold standard, you can enter “gold standard” into the MR search function for dozens more.


Tyler, you've indeed conveyed the standard argument against a 'gold standard' but you've done so without defining what that means.

The problem you discuss arises when the nominal exchange value of gold is 'pegged'. So long as the gold peg is slipped steadily, you can do everything that a fiat currency can do. The difference being that monetary policy is much more powerful under a gold exchange standard and not subject to liquidity trap effects because the transmission mechanism is not the credit channel.

When the gold peg moves, the value of all circulating coinage moves, immediately moving the price-level. We can see the tremendous power of this in the depression era econometric data.

Let's not forget silver, or Friedman's great Bimetallism Revisisted paper: http://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&ved=0CB4QFjAA&url=http%3A%2F%2Fhoohila.stanford.edu%2Fworkingpapers%2FgetWorkingPaper.php%3Ffilename%3DE-89-24.pdf&ei=Iif9ToHDPInj0QHjtsm3Ag&usg=AFQjCNEIa3DVJUpmc_Re-KxV02reyIsE3A&sig2=eq5LxGInNO_vkGXky72pYQ

I would oppose the gold standard b/c nearly everybody alive today is smarter than the man who invented it: Isaac Newton. Not!

"Why put your economy at the mercy of these essentially random forces?"

Counter: Why put your economy at the mercy of central planners, collectivists, Fed Chairmen, corrupt/idiotic congressmen and presidents (I repeated myself twice), statists, etc.?

My advice is never to underestimate the insensibilities of congressmen, presidents and tyrants.

Would you include supply and demand among "essentially random forces"?

Wouldn't a return to the gold standard involve banning fractional reserve banking, in order to prevent the money supply from expanding? If so, wouldn't that necessitate incredibly heavy government regulation of financial institutions in order to supervise each and every loan they have on their books?

Of course, that would mean small non-bank lenders would soon pop up (such as retailers who offer financing), who could offer unregulated loans, but that would also inflate the money supply and undermine the gold standard.

So to preserve the stability of the gold standard, that would then require further government regulation into any business that could offer financing (i.e., any business) in order to prevent any unregulated lending that would undermine the gold standard.

It seems to me that the gold standard is the big government price-fixing & regulatory policy, and that allowing the price of gold to be determined by the free market is the small government solution.

no FRB works fine under a gold standard. you just have bank runs. this is considered a feature not a bug by many goldbugs as it creates a huge incentive for people to want to business only with responsible banks. In the past it wasn't feasible for banks to be totally transparent with their finances but with the internet it theoretically is.

Fractional Reserve Banking would be illegal the same reason embezzlement, fraud and ponzi schemes are today, which is what you would get charged with if you attempt fractional reserve banking without a banking charter.

Mike h.

And insurance is a ponzi scheme too because if everybody has an automobile accident on the same day, the insurance companies will go belly up and very few people will be reimbursed.

Ponzi, ponzi, ponzi, ponzi.

Oh, wait.....

During a bank run people actually rush withdraw to withdraw their deposits on the same day.

More generally, the analogy between FRB and insurance companies fails to account for the difference between correlated and uncorrelated events.

Willitts, it's pretty simple. A bank run is a Nash equilibrium. Auto-mobile accidents are uncorrelated. What would you do if your claim for 1 dollar on demand from a bank, traded for 95 cents on the open market? Probably the same thing I'd do.

You can mock me, but the point remains - if you try to run a fractional reserve lending business (in the US) without a bank charter you will certainly be charged with some form of fraud; including a significant likelihood of it being called a ponzi by your prosecutor.

Mike h.

Because as Tyler pointed out, even under a gold standard there would still be plenty of 'central planners, collectivists, Fed Chairmen, corrupt/idiotic congressmen and presidents (I repeated myself twice), statists, etc.' to deal with. And then we'd have the straitjacket of a gold standard to deal with also.

I've posted this before, goldbugs think gold = no uncertainty/statism. They are mistaken.

Is there any serious economic talk about an 'other than gold' standard? Such as a BTU standard for money, where the money is pegged to the underlying value of energy. Or some other such, non-precious metal/gem standard?

There has been discussion of silver, other metals, etc. but they all [generally] fall victim to the same problems.

Mr Watts, think you might be right. Although I think suspect a Joule a Kilowatt hour is much more likely than a BTU. But it would happen by accident, and it might never look like a real currency.

Free energy is nature's own gold standard and if people loose faith in fiat currencies, it's not so hard to imagine that people will start buying more energy futures than all the power plants in the world could produce on the assumption that it will be redeemed in return for something else. But futures are not a nice, easy to use currency.

How about free banking where money is backed by nothing but bank assets. You could still use gold or some other commodity to keep the various currencies on par.

How about free banking where money is backed by what every people will accept.

You'd think the rapid decent of MF and Lehman would make free banking advocates more cautious. But this does not seem to be the case.

Banks and semi-banks are difficult to fully understand, and tend to be exposed binary confidence levels. Moving to gold and/or free banking takes this horrible dynamic and places it in the center of every town in the United States.

Free banking might be a great idea on paper. My experience in looking at the risks faced by actual banking institutions isn't huge, but it isn't zero either. I have professional qualifications and personal study which allow me to do this with relative ease compared to people like my mom and dad. Even then, looking at the exposures of banks and brokerage houses, it's hard for me to fully understand what's going on, and Tyler seems to think banks are hard to parse as well.

I do not know why we'd want to place a free bank with such a huge amount of existential uncertainty at the core of our financial system. We're crying out in our system now for "risk free assets" and free banking advocates want to replace this with S&L's around 1986

Forgive me if I'm wrong here, but under a gold standard, isn't the dollar value of an ounce of gold fixed? It seems it would have to be. Conversely, if the price of gold is determined by the free market, you can't be on the gold standard, by definition.

You have it backwards. Under a gold standard, the gold value of a dollar is fixed. (That is, each dollar bill represents a claim on some fixed amount of gold in a treasury.)

Why did OPEC jack up oil prices right after the U.S. stopped paying them in gold? Ever look at gold demand stats for the Middle East, China and India? Turkey consumes almost as much gold as the U.S.

There not potential, but frequent radically high inflation on a paper standard. Politically, gold is favorable to a global central bank and global currency (the IMF and SDRs are being groomed for this role). If there's to be a global currency, would you choose unelected, unaccountable central bankers printing fiat currency, or a commodity that no nation prints or controls?

One argument against a gold standard has been the inflation isn't enough. Gold output goes up about 1.5% a year versus population plus productivity of around 3.5% give or take, this was an argument that gold will lead to high rates of deflation......but demographic winter is setting in across the developed world.

I think the first argument is why would you favor gold over paper? There are many ways to include gold in the monetary system. The ECB reports gold as an asset on the balance sheet and reprices it every quarter. Like the ECB, people will save wealth in gold and spend fiat currency. Zoellick referred to gold as a reference price; it can play a role in the system and still be very far from what people think of when they think gold standard.

This old Krugman piece is good on the gold standard: http://www.pkarchive.org/cranks/goldbug.html

Also Milton Friedman, with some sweet animation: http://www.youtube.com/watch?v=MvBCDS-y8vc

So which "money" is actually backed by gold? Is it the Monetary Base? M2? If it's just MB, then what does that mean for the money in our checking accounts that can't currently be exchanged (en masse) for actual pieces of paper? Are they not backed by gold? Or are you backing M2? How does that work?

Or do you have to end fractional banking altogether to get it to work at all? But what happens in that case? Since the money in my checking account isn't fully backed by paper, does that mean the Treasury has to print trillions of dollars of paper money to put in bank vaults across the country so that each dollar in the M2 money supply is backed by a piece of paper, which in turn, is backed by gold? So to back the currency by gold, we'll have to run the money press to print paper money 24 non-stop for a very long time. Or are we going to build more presses? (I believe we only have two right now).

Moving on...we scrap fractional banking and print massive amounts of paper money so that every dollar in a checking account now corresponds somewhere to a piece of paper and the banks stuff their vaults with this paper. How much paper is this? IE, what's the current level of M2? How many ounces of gold does the US gov't have? What does that imply about the value of gold? It's just a simple ratio (minus maybe a stash of gold saved for future monetary expansion) Wouldn't that imply that 1 ounce of gold would be worth something crazy, like something in the hundreds of thousands of dollars? Would that mean that people currently holding the gold would instantly see their net worth increase increase a 100 fold. Would foreign banks that hold billions in gold all of a sudden have trillions of dollars of gold?

And for what? Because the people think that the gov't's promise to commit to the gold standard (or to be honest about the amount of gold it holds) is more credible than the promise to not devalue a fiat currency. It seems to me that you're just trading one gov't promise for another and I don't see why one is inherently more of a trustworthy gov't promise than the other.

For serious implementations of the gold standard, you don't scrap fractional reserve banking. Everything up through (probably) M2 is backed by gold in the sense that there is a series of transactions you can undertake to turn e.g. a CD into gold at the statutory rate - you might have to go through several banks, but all of them are obligated to pay up or go bankrupt trying, and the last one in the chain is obligated to pay up in gold coin or go bankrupt trying.

There is not enough gold coin, or bullion, to pay off everyone at once. This is not a disadvantage over what we have now, as there are not enough green presidential portraits to pay off everyone at once, and if in fact everyone simultaneously says "we don't trust the bits in the online summary of our bank account; we want the hardest currency the law allows", the system will crash whether "the hardest currency the law allows" is Benjamins or Krugerrands. Mostly, bits are more convenient than bills or bullion for major transactions, and mostly banks are careful to retain the confidence of their customers.

The first advantage of the gold standard is that the legally binding promise of gold on demand is a powerful instrument to retain the confidence of customers - unless the bank actually goes bankrupt, they get back what they put in, and if the bank actually does go bankrupt, the bankers end up with nothing. There's no clever manipulation whereby the bankers can pay off their customers with worthless paper while they get to keep the valuable paper.

The second advantage of the gold standard is that when banks start to lose said confidence, arbitrageurs (and panicky gold bugs) will start to arrange a net outflow of gold that makes it immediately clear to the bankers, in a way that cannot be papered over and is unlikely to be misunderstod, that they will face actual bankruptcy if they don't fix the problem real soon.

These are real and substantial advantages. The equally real and substantial disadvantages of the gold standard have been pointed out elsewhere. I suspect you could get the best of both worlds with an alloy or market-basket standard (NOT classic bimetallism), but there's little support for that.

As for the credibility of the one promise over the other - it's impossible to fudge on the gold promise. You can break it outright, but either the Treasury gave you 1/35 oz of gold for your dollar bill or it didn't, and if it didn't it just plain lied. There's lots of ways to pass the buck when a fiat currency gets devalued. And that's the smart way to predict a politician's or a government's behavior - not "are they honest enough to place the truth above their own self-interest?", but "how easy is will it be for them to weasel out of this one if they don't deliver?"

it’s impossible to fudge on the gold promise.

Of course that's not true. How about: at first, you can redeem a dollar bill for 1/35 oz of gold only during regular business hours - there is no way that the Treasury is going to open a 24 hour gold exchange. Then, they limit to less than $1,000,000,000 in a single transaction - reasonable enough. Then, we add a few dozen more holidays to the banking calendar. Then, only from 1-3PM. Then, only in amounts less than $1,000,000. Then, gold must be physically obtained/delivered directly from Fort Knox. Then, only in amounts less than $10,000.

There is some point at which the arbitrage is broken and the market no longer recognizes the fixed gold:USD exchange ratio. But which one? Even if the gold bugs were successful in moving a modern government to a gold standard, how could they prevent backsliding? Which stage of backsliding do true believers stake the entire system on? Is that palatable to the general population, or would they be OK with, e.g., limiting transactions to $1million?

"Useful fudges" is how social systems work. If you want absolutes, study physics.

Well, if you are at all uncertain as to when the market no longer recognizes the fixed gold:USD exchange ratio, I'd suggest looking at the London bullion and forex markets.

More generally, the sort of fudging you describe is useless in practice, and historic attempts along such lines never amount to much. The Treasury isn't going to be the one doing the actual bullion-for-bills exchange for retail customers in any event, and probably not for the smaller banks. There will always be a middleman who can offer a more convenient service at a small premium (You want gold-dispensing ATMs that really do operate 24/7? Done!), and that middleman will be able to hire people to stand in line at Fort Knox 1-3 PM with suitcases holding $999,000 in cash if that's what it takes.

So either the petty fudging doesn't drive the arbitrageurs out of business, in which case it doesn't matter, or it does - and once the professional gold-exchange middlemen can't handle the gold-for-currency demand, neither can anyone else who matters and it is now absolutely clear that the government has broken its legally binding promise.

The gold standard is so last millennium. It's time to adopt the ununoctium standard.

I mean, obviously we should be using a transactinide for transacting.

Now that would give a huge incentive to create a high money flow. Kind of the 'hot potato' standard of money multipliers.

Dear Tyler,

what is your basis for the argument that a deflationary pressure "harms output and employment"? Prices merely determine how the capital is allocated, not whether it is allocated. If anything, having capital allocated into less profitable (measured in real RoI) endeavors harms the output. Even if we disregard the Austrian position (manipulation of the price signals might lead to misallocation, i.e. ABCT), your argument still does not follow. Furthermore, what about the empirical data, such as the poster child of falling prices, consumer electronics?

In a deflationary scenario don't people postpone spending because their money buys more tomorrow?

No, for the same reason producers don't postpone selling in an inflationary scenario because they can charge higher prices tomorrow. Plus, it's incentivizing producers to provide more bang for the buck, encouraging savings instead of debt; lowering time preference, and a lot of other salutary effects.

Of course, it doesn't transfer purchasing power to banks and other upstream recipients of new dollars like inflation does, nor does it let asset owners take an unearned ride like inflation does. So naturally, establishment economists are always telling us what a catastrophe deflation would be.

Apples & oranges. Sellers (that are businesses) still need cash flow. If they don't sell today at the lower price, they will not have cash flow to pay current obligations. Consumers don't need cash flow beyond essentials. Forgoing spending today still allows them to meet their obligations and get even more tomorrow. It's like putting you money in the bank and getting interest.

Sellers can forgo selling if they have a cartel or don't need the cash, but most businesses are not that profitable.

Most people are not misers. They buy things other than essentials if it satisfies their needs. Consumer electronics is the best known counterexample to the opponents of deflation. If your argument was right, noone would buy computers, mobile phones or music players because they get cheaper all the time.

Apple stopped doing keynotes ever January precisely because consumers had shifted their purchasing behavior. If consumers don't wait for lower prices, why do stores have clearance sales?

Further, technology is subject to the increasing returns phenomenon. It's not just that the products get cheaper, but the processing power per dollar spent goes up an order of magnitude every 5-7 years.

D, the point of mentioning the technology industry was not to say that lower prices have 0 effect on when consumers choose to buy, but to show that it does not arrest their decisions. That is, the technology industry seems to be doing *pretty well* without any systematic difficulty arising from steadily dropping prices.

The problem with the argument that people will postpone purchases due to anticipated lower prices is the fact that *people are impatient*. Time preference may vary depending on the good, but it certainly can't be assumed not to exist. Your point that processing power per dollar is going up as well is yet another reason for them to postpone but, as above, clearly they *don't* indefinitely, which means that "impatience" must be all the stronger. That they don't postpone to such a degree that has been in some way harmful to the industry was entirely the point of mentioning the example, (i.e. to point out that technology firms have still been able to make sufficient sales to remain profitable, and grow, as an industry).

I did not say that lower prices do not influence the time of purchase, but that they do not delay it until infinity. The claim that they will never buy anything apart from the necessities is absurd. Rather, it leads to more saving, more prudent spending, and less debt.

Regarding price: computers do not get cheaper? First laptop I bought was over 2000 EUR, in '99. Next one was about 550 EUR, in '06. Next one, this year, was about 280 EUR. Also, they get smaller. The last one, Toshiba AC-100, is not really faster than the previous one, HP nx-6125, but it's about 1/4th of size. Also, in '99, I had to pay for a Windows licence even though I used linux, but HP came without an OS and the Toshiba has Android.

Regarding performance: the increase of performance is merely another aspect of the increase of productivity of labour/capital, which is the actual source of progress. Whether the consumers go for lower price or better performance (or other variables, such as size, weight, software, ...) depends on the relation of elasticities of demand (i.e. whether they react more to a decrease in price or to an increase in performance). Once the demand gets too price-inelastic (i.e. customers start preferring having faster computers to having more computers), the producers will adapt their strategy.

Postponing spending does not harm output. It saves capital, making it available for production.

No. There has been defaltion in IT for the last 30 years. Any problem in IT?

"A gold standard, by the way, is still compatible with plenty of state intervention."

No, a gold standard IS an example of state intervention. It may be helpful to make that point clear to people who have a problem with, er, fiats.

State intervention would be possible only under a fractional reserve system, right?

Exactly. I've been wondering lately why the Paulians don't advocate for Free Banking rather than a gold standard.

Money is, in fact, a natural phenomena. A free market for money would more than likely end in a gold standard for historical as well as physical reasons.

Here's another problem:
Imagine you're a central bank and have pegged your currency to gold. Also, like virtually every gold-based currency in history, the nominal currency in circulation exceeds the amount of gold in your storage facility, because people need currency to transact, and there just isn't enough physical gold out there to back up all the transactions in the economy.

Ok, now the economy slows down for some reason, as economies are apt to do. The nation's currency weakens against other gold standard based currencies. So arbitrageurs go to the you, the central banker, and ask to convert dollars to gold, causing a run the the gold reserves. You need to stop this exchange, and encourage people to hold dollars. How do you do that? Only one way - raise interest rates. Now what happens when you tighten credit in an already weakening economy? Ouch.

This isn't a hypothetical, it's history. Gold standard is a barbarous relic.

On a gold standard why would a currency weaken? Unless you changed the fraction of a fractional gold standard?

Because the true value of the currency isn't the gold itself, it's the promise of gold. When that promise looks less credible the currency weakens.

Fiat currency, by contrast, is backed by taxes.

It will weaken if people don't want it.

Suppose you have a balance of payments deficit. Foreigners holding your currency demand gold from your central bank. Your gold supply shrinks. The central bank can't reissue the currency it gets from these foreigners, because it lacks the needed gold. Money supply shrinks, deflation, etc., or the bank raises rates, as louis says, to encourage foreigners not to demand gold.

Rinse, lather, repeat.

Exactly right.

"You need to stop this exchange, and encourage people to hold dollars. How do you do that? Only one way – raise interest rates."

That only happens if you insist on preserving the gold peg. Move the gold peg, and the problem is resolved. I dare you to find a country that didn't move the peg from time to time. Every country did or they suspended redemption (abandoned the gold standard). So, no raising interest rates isn't the only one way.

But if you move the gold peg all the time, what happens to whole "stable value" argument? Besides, foreigners will be more likely to make a run on your gold if they fear you're going to change the peg tomorrow because they have so much currency.

There is nothing unusual between this and a currency board/exchange-rate standard. Yes, you need deep reserves to avoid getting cornered or you need to turn it around, and maintain the peg not by reflux but by open-market operations.

This leads to a subtle point, just because the CB agrees to target a gold price with open market purchases, does not then imply that free redemption is required. No, it only implies that the CB buys and sells gold to maintain a price target. That price target then becomes the policy instrument rather than targeting short-term rates in the overnight market.

I don't get it, what would be the advantage of central bank policy that targets a price of gold as opposed to interest rates, prices, FX rates, NGDP or one of the other, meaningful, factors that currently influence the world's central banks?

First, we should distinguish the medium term target from the short-term target. The CB targeting of interest rates is a short-term target (the policy instrument) that is used to achieve the medium term target (commonly, a certain inflation rate).

The benefit of using gold as the policy instrument is to avoid two problems associated with using interest-rate targeting as the policy tool: the 'zero-bound' problem and the communication problem (loosening policy is successful when it causes rates to rise, which is confusing since loosening is done by lowering the short-term rate).

Nick Rowe had a nice blog post on this in 2009:

It's no use saying that a gold standard has disadvantages: so have the non-gold standards used over the last few decades. Compare and contrast, as schoolteachers used to say.

louis is right. Go read Eichengreen's work on the role of the gold standard in the Great Depression. The US decided to run a tight monetary policy in 1929 while it was a gold surplus country. Its doing so in effect forced all the other countries on gold to do so as well, making it a global Great Depression. Thank you very much, gold standard.


The US was not paying the Saudis "in gold." They managed to organize themselves in OPEC only after Qaddafi nationalized the Getty holdings in Libya about that time. The immediate trigger of the embargo and price increase at the end of 1973 was the Yom Kippur War. Nothing to do with gold, even if old Abdulaziz before the early 50s used to keep the royal treasury in gold in a safe in the palace, and the current king lost a couple of billion in the early 80s when the Hunt brothers convinced him that the world was going to go on a silver standard (bullionism is supported in the Qur'an, and Saudi paper money has silver threads in it).

Barkely Rosser is the intellectual equivalent of a Dirty Sanchez.

The fundamental elements of a gold standard are
1. a fixed rate of exchange betwen gold and your currency
2. a requirement that the currency be convertible into gold

A mettallic money standard does not prevent fractional reserve banking. Up until 1900 the U.S. was on a bimetallic standard (gold and silver). From 1900 to the New Deal the U.S. was just on a gold standard. We had fractional reserve banks the entire time. Bank panics in the U.S. are more easily attributable to things like the National Banking Act and unit banking. Other countries on the gold standard did not experience as many problems with banking crises as the U.S.

Benefits of a gold standard:
1. It constrains the ability of the govenrment to increase the money supply and cause inflation.
2. If multiple countries are on a gold standard it reduces exchange rate risk for investors.

Problems with the gold standard:
1. Sometimes people do not like the results of the gold standard. Other things equal, trade deficits result in an outflow of gold, causing the money supply to decrease and deflation.
2. Although it constrains the ability of governments to manipulate the money supply it does not eliminate it. Several times the Bank of England tried to influence gold flows. One could argue that several recessions (e.g. 1837, '39 and 1907) were the result of these actions. Doug Irwin makes a strong case that France's manipulation of the gold standard was an important cause of the Great Depression. thus, one could argue that other countries can determine U.S. monetary policy.

Another problem is that gold is a commodity that can be produced (or, well, mined anyway). If you artificially jack the price of gold up as necessary to create enough currency, you will have a whole lot of resources being allocated to locating and mining gold, an activitiy that will produce virtually nothing of actual value for anyone. Those resources would be better off being used to create almost any other commodity you can think of.

As opposed to, oh, the UK economy being more than 30% financial services?

While today, when gold is truly useless and worthless, the mine-able sources lie under the green grass.

Oh, nevermind.

Seriously, why do you think that adoption of the gold standard results in more mines being open? Any economical concentration of gold is mined today, because gold == wealth. And the "economical" part of the expression is largely determined by available technology, not by worth of gold, which has always been very high.

"I’ve heard it said that there isn’t enough gold in the world to make it the only form of currency, but the gold bugs say that’s because gold is underpriced. If gold were priced appropriately, there would be enough gold to replace all of the world’s currency. What’s wrong with that argument?"

If gold is priced high enough to replace ALL THE CURRENCY IN THE WORLD, the price will be quite a bit more than it is today. Higher price = more people spending more money and going to greater lengths to get it out of the ground. Pretty simple.


I have a dumb question here. I'm not attempting to score a point: I don't even know if there is a point to score.

What about people and countries who dig it out of the ground? If such a country declares that every dollar bill it prints can be exchanged for a fixed weight of gold, it can keep printing money as fast as it digs up gold, with almost no other change in the goods and services produced in the economy. What effects does that have on inflation and interest rates within that country?

Countries that dig gold out of the ground can obviously exchange it for imported goods and services but what if they went on a gold standard and decided to keep the gold and print more money?

Good point. Why should South Africa be blessed simply because of a random act of nature placing gold in the ground.

I have a more democratic proposal: we should use belly lint as a currency. Each person only produces so much belly lint a year. It could be graded, and matched to the genetics of famous people, or it could be genetically tracked so as to prevent artificial belly lint from being created.

There is only so much of a supply of belly lint, just as there is only so much gold.

Plus, the belly lint supply tracks changes in the population curbing one source of inflation pressure! ;)

What, how horribly biased, Is there no grace for the Outies? Are they destined to a life of abject belly lint poverty? In addition to being pointed to at the beach. ;)

Why should Saudi Arabia be blessed simply by the random act of nature placing oil in the ground?

Same with Norway & gas, or Australia & anything used in Chinese industry.

Why should you, Bill, be blessed because of a random act of being born?

This kind of egalitarianism is nonsense.

I believe that gold-producing countries get the benefit of "printing money" while the whole world suffers the resultant inflation.

What's the difference between trading an ounce of gold for something and trading a reliable warehouse receipt for an ounce of gold for something? None.

The hypothetical country you describe is only better off by the value of the gold dug up, just as a country where aluminum is mined is only better off by the value of the aluminum dug up. Gold is metal, not magic.

I think I agree. An extrapoltion of what you say is that a country is better off as a result of the goods and services it produces. Why choose gold and ignore the rest?

Except that gold has virtually no intrinsic value to anyone. Sure it makes pretty trinkets, and is a slightly better conductor than copper, but what does copper cost? How much are golden trinkets really worth? Better to reward production of actual goods than mining of gold who's only value would be its percieved value as a medium of exchange.

Yep. Moving gold from a hole in one place and putting it in another hole is hardly distinguishable from sawing granite into polished bricks and declaring them to be a medium of exchange.

Gold has value if people want it, whether as money or something else. Apparently a lot of people do. But if they didn't you'd be right, and it would be a waste of resources to mine the stuff at all.

One of the reasons Gold became currency is probably because it has little other "real" use. Otherwise, let's say there's a fad for granite floors and there goes the stability of your gold money.

say gold goes to 50k per ounce. i want to buy a pack of paper clips. so i go to the store with 20 micrograms of gold. sounds reasonable to me.

What about something like bancor?

i've read gold & silver would have to be priced 20 times higher to go to a PM based economic system

quantitative article is here, about 2 1/2 years ago, if anyone wants to search: http://www.globalresearch.ca/index.php?context=home

Barkley Rosser is right. The gold standard is asymmetric. A country running a trade deficit loses gold and has to contract its money supply, which both slows its economy and lowers the domestic price level. Both of these work to reverse the trade deficit.

But countries running a trade surplus and gaining gold are not constrained to increase their money supplies. They can if they want to, but there's nothing forcing them to. So when the U.S. and France ran big trade surpluses in the late 1920's and early 1930's, they could have expanded their money supplies, but they didn't. Their refusal to create money when their trading partners were being forced to tighten money meant that the world money supply had to shrink. That's a recipe for disaster, and disaster is exactly what resulted.

I agree that there did seem to be an asymmetry, but this existed only under the inter-war gold standard. The only reason there was nothing compelling central banks to allow the PSFM to work is precisely because we introduced central banks to the gold standard. The normal method of causing surplus entities to comply was simply the profit mechanism. Private entities which built up overly large gold reserves had less interest bearing assets, were less profitable, and either had to trade some of their gold reserves for those assets, or lose out to more profitable competition. Central banks on the other hand could simply tax to support the lower profits from their bloated gold reserves.

Doug Irwin's recent paper on this topic is excellent for understanding the magnitude of this departure from the norm of the gold standard, but unfortunately does not go into the causes behind this departure.

The fundamental problem with a gold standard is that it costs real resources to dig the gold out of deep pits in South Africa and then place the gold in deep pits in Fort Knox. An ancillary problem is that it implies a fixed exchange rate with others on the gold standard. The gold standard "worked" when there was sufficient voluntary discipline to play by the non-inflationary rules.

If we played by the rules now, we wouldn't need a gold standard. Conversely, adopting a gold standard by itself is meaningless unless the rules are followed.

As for the deflationary problem, that could be ameliorated by moving to a symmetallic system, such that one unit of currency is worth a certain weight in gold PLUS a certain weight in silver. Now, add copper, aluminum, Toyotas, toasters, whatever, and we would have a completely indexed system, in which inflation or deflation would become meaningless terms. This could be emulated by private contracting even today, but I believe there are legal barriers.

Would any of this guarantee stable financial markets? No, it would merely avoid the effects of unexpected inflation or deflation.

In short, the gold standard is a red herring.

There, I feel much better now! :-)

I'm not pushing for a gold standard, but there's no question we've seen a lot more inflation since we switched to paper money. In principle we could do better, and we may be doing that over the last 25 years or so. But the previous history isn't all that strong an argument against changes in the relative price of gold.

Sargent has a nice quote from Ricardo and a figure that makes the point. See

It takes just as much discipline and discretion to keep a gold standard functioning as it does a fiat currency system and an elastic money supply. The gold stores are a waste of useful resources at best and a hollow form of collateral at worst.

Let's just go back to horse and buggy, sailing ships, and the pony express while we're at it.

The nostalgia for the gold standard is quaint, but there are many good reasons we don't still have it. There was no shortage of panics, depressions, and inflation when the largest nations were on metal standards. In fact, those standards caused many of the problems.

We have seen failures of central banks, but ours has worked fairly well so far. The best demonstration of the power of a central bank was Volcker crushing inflation by turning the money taps off. If we have unemployment, it's primarily because wages and prices won't adjust fast enough and labor isn't as mobile and flexible as it should be.

Not one mention of Bitcoin yet...man it's really over.

Its up to about 4 dollars and twenty cents.
Bitcoin is still strong.

The only "standard" to be desired is whatever an unhampered market settles on. Presumably, that would be gold, based on historical preference. But silver and iron, which are more common, could also be traded in exchange for less valuable goods, leaving gold for the more expensive transactions. Bimetallism only failed when the government tried to stabilize the exchange rate between gold and silver -- coercive price fixing is always a bad idea, but when applied to money, setting a ratio of exchange simply ushers in Gresham's law where an artificially overvalued currency will necessarily oust an artificially undervalued currency, which is why silver fell into disuse as a means of exchange. So there's no problem if the market settles on a variety of metals as its "standard" for exchange.

The "unhampered market" has settled on using dollars as a medium of exchange and denominator of debts. As a free economic agent, I could decide to raise my dollar prices every time the dollar price of gold rose, and let everyone know that. I could offer to borrow and lend money in gold terms (either by contract or through commodity swaps) if I chose to.
The fact is, people have no trouble using Federal Reserve obligations (i.e. dollars) as their medium of exchange, and so it's useless to talk about some counterfactual world where people mint their own competing currencies for daily use.
Also, when you have coordination problems, having a single endogenous standard imposed on the market (the dollar, the US legal system, driving on the right side of the road) could be a good thing.

I suspect that a lot of people who favour a gold standard do so because they think it is a way of limiting the actions of governments. Good luck with that. With a gold standard, governments will still be run by the rich and powerful who will dictate policy to venal politicians and find other ways to feather their own nest.

Exactly. +10.

It may be way of limiting *some specific* actions of governments. Or are you saying that actions of governments are fundamentally unlimitable in any directions? The reality seems to differ. Some very rich countries (Switzerland, Singapore) have very limited governments, despite having no shortage of rich people residing there.

The physical maintenance costs of a gold standard can't be anywhere as wasteful as the billions of dollars wasted through easy money lending and constant inflation.

The argument against the gold standard is that when the central bank becomes insolvent it can no longer afford to buy back its currency with gold at par. The gold standard's requirement of gold convertibility thus legislates the impossible, and when insolvency happens, the central bank faces a run and collapse. That's why central banks always suspended convertibility. The system we have now, a currency that is backed but inconvertible, is immune to this insolvency problem.

Is it now? Is the difference between a de facto insolvency via the high inflation rates needed to support unsustainable government debt under a fiat standard and what would happen under a gold standard really that great? How did Argentina fare in the 70's and 80's when their government racked up debt and put the printing presses into overdrive to finance their spending?

That the negative effects are spread to not only those who bought government bonds, but to all holders of the currency is not a virtue of fiat systems, it is a much more nefarious consequence of them, and of the misunderstanding of monetary economics that seems so prevalent today. There are no free lunches in this world, and no matter the monetary system, we are constrained by what we can actually produce.

That being said, I believe monetary policy is too tight in the US currently, and we could benefit from a Sumnerian NGDP target. I also think the Euro could likewise benefit from looser policy, though I have doubts that it would be anything close to a complete solution to their problems, which have been fueled by the kind of misunderstanding I just commented upon.

Those who buy government bonds may lose every fiat penny they nominally "invest" for all I care. Anyone else holding a fiat currency has made a similar choice. If you prefer gold, hold gold instead. If you prefer silver, hold silver. Better yet, hold some means of production actually producing something. These holdings are risky in a free market, because no one is compelled to consume what you produce, but no state can or should insulate investors from risk.

You can't be immune against this kind of problems that are fundamentally problems of trust. You can suppress one particular problem by pronouncing another one.

If a fiat-money country starts printing money, people will simply stop trusting them and begin using other currency, or, at worst, barter.

See: the former Soviet Union in 1990s (Ukraine had particularly high inflation), former Yugoslavia in the late 1990s, Zimbabwe today.

Blake: I'm speaking only of insolvency of the central bank, not government insolvency. If the central bank becomes insolvent for whatever reason, then a strict gold standard requires it to maintain convertibility at a rate it can't afford, and thus makes a bank run inevitable. By comparison, if the central bank can suspend convertibility, then the currency loses value in rough proportion to the bank's loss of assets. Neither option is great, but at least with a suspension of convertibility you don't get the sudden drop in the money supply that you get with a bank run.

Martin: Agreed

Marian: A bank that suspends is immune to a bank run. They don't pay out gold for their money, so it's clear that a bank run, meaning customers lining up and taking out their gold, can't happen. That said, such a bank is not immune to all problems of any kind

"Why put your economy at the mercy of these essentially random forces? "

Better than the random forces of the central banks, that tend to push the 'cause problems' button.

I'm not sure I know enough about the relevant economics to properly verbalize why I don't support a gold standard, but I'm inclined to side with the economists who oppose it in favor of those who do. Their opposition has the ring of reasoned opposition, whereas the supporters' arguments in favor have the ring of zealotry.

That said...couldn't the "gold is too variable" argument be mitigated by using (in place of gold) a basket of diverse commodities?

"A gold standard, by the way, is still compatible with plenty of state intervention."

...plenty of state intervention except the butchering of the price of money (interest rates) to below inevitably rampant inflation, to allow states to pay themselves and their favourites gold-plated pensions etc. at the expense of our children's children, among other screwed-up things.

Really sloppy post Tyler... Maybe you ought to stop by Larry White's office at enterprise and have a chat with him? There are arguments against the gold standard, but the ones you made are the bad ones. The price of gold only became unhinged after the end of Bretton Woods in 1971. Throughout all of the gold standard, the price level under the gold standard was extremely stable in the long run, and although some of the earlier work suggested that this was at the expense of short run volatility of the price level and output (eg Bordo), more recent work suggests that this is due more to poor statistical analyses and a misunderstanding of the data (eg Romer or Lastrapes, Selgin, and White).

Despite the common misunderstanding, the forces behind a working gold standard are no more random than the forces that cause a market to work. Which is more easily predictable, Ben Bernanke's decision process, which has kept markets guessing over the last 5 years, or the rate of gold mining over the last 100 years?

"Which is more easily predictable, Ben Bernanke’s decision process, which has kept markets guessing over the last 5 years, or the rate of gold mining over the last 100 years?"

A fiat standard puts you at the whim of a very small number of individuals instead of dealing with much larger and more predictable aggregates.

I think the strongest argument against gold is that the experts don't even understand the system we have and they are scared to ponder something else.

That is also the strongest argument for gold. It removes us from the whims of experts.

Of all of the harmful myths the last century of manistream economics has wrought upon us, the notion that deflation is bad is almost at the op of the list, nestled somewhere between the myth of the Paradox of Thrift and the notion that spending creates economic growth.

Economists are just failed physicists who weren/t smart enough or good enough at math to do any real science, so they became econometricians in love with their formulas and aggregates, never bothering to notice that, despite the veneer of science and complexity, their models explan nothing. Economists are nothing more than ex-post rationalizers.

God, this blog sucks now. Tyler, what happened, brah?

What happens to all the kids with 100k+ in non-dischargeable student loans when deflation sets in?

Gold is not a proper standard of value for extending credit, because powerful forces may increase (and historically have increased) its scarcity by hoarding it. The hoard of gold at Ft. Knox is a good example.

If you promise to return gold in the future in exchange for something that I provide you today, then increasing the scarcity of gold increases the value of the gold you have promised and thus increases your debt after the exchange.

The qualities that make gold most hoardable are its high scarcity and durability and the low elasticity of its supply. In a conventional story, these qualities make gold ideal money and account for a market preference for gold, but this story could hardly be further from the truth. These qualities only make gold attractive to creditors. The same qualities make gold unattractive to creditees. The story simply assumes that creditors are all powerful. "Beggars can't be choosers."

In a free market, credit is a transaction between two parties that must satisfy both, and the standard of value is a negotiable term of the satisfactory bargain. Historically, states have effectively imposed gold as a standard of value regardless of any market preference by imposing it exclusively as a legal tender. States thus favored creditors over creditees.

Arguably, states favored creditees more recently by imposing fiat standards and inflating, but recent history does not justify returning to the prior practice in my way of thinking.

If I want credit from you and you want to extend credit to me, you and I should agree on the standard of value. If we agree that I will return a hundred ounces of silver over five years in exchange for car today, then the state should respect this agreement. If we agree instead that I will return a thousand gallons of milk, the state should respect this agreement.

If the state must raise taxes, it should accept any standard that people freely choose in payment. If you and I agree to bargain with gold, the state may take a stated fraction of the gold exchanged. If we choose to bargain in silver, the state takes the same fraction of the silver. If we bargain in grade A whole milk, the state takes the same fraction of the milk. What the state does with its booty is its problem.

The state should never sell entitlement to tax revenue in my way of thinking, but if a state seeks credit, it should promise to return the most common standard of value, or any reasonably common standard, not the least common.

It seems to me that free banking would be much better than a gold standard. IMO in free banking gold might be used to keep the various currencies on par for a while but I think that in the long run the market would evolve away from gold and money would in effect be backed only by bank assets. Those assets would be loans, stock equities, land, building etc. In a competitive market currency would like collectible baseball cards in that the issuing companies know that though they can at any time print more it is best for them to maintain a certain level of scarcity and so they refrain from printing too much. On the other hand if deflation starts they can make more money by floating more money.

I agree with a proviso. People must understand that banks issuing promissory notes may not simply print more at their discretion. As you say, a particular bank's notes represent the value of that particular bank's assets (or the collateral securing its credit), relative to some standard of value. To circulate its notes, a bank must continually assure note holders of their value.

For example, each note has a unique serial number that is part of a known sequence. If note holders can effectively rule out duplicate serial numbers and numbers outside of the sequence, they can effectively measure the volume of circulating notes through statistical sampling. The web makes this sort of verification easier than ever. While I hold a particular note, I register my holding at a web site. Other holders of the same bank's notes do the same.

A bank also documents its assets and their market value, and note holders may also check the veracity of this documentation through statistical sampling. I check one of the bank's claims and record my finding at the web site. You check another claim, and so one.

In other words, effective banking in a free market is open source. I would not choose to hold a bank's notes without assurances of this sort. Of course, if you prefer to deal more discreetly with Bernie Madoff, that's up to you.

One of my biggest problems with the gold standard is the huge environmental cost of gold mining. Nowadays, gold is typically mined by processing huge quantities of ore to extract tiny amounts of gold product. Nowadays, one ounce of gold from one ton of ore is considered very good, and a few grams per ton is often economical to process. In Third World conditions the pollution from mercury, cyanide, silt, etc has devastated aquatic ecosystems and also harmed humans.

Three hundred and fifty years ago jan van Riebeeck sailed to the Cape, to establish an outpost for the VOC, the Dutch East Indies Company. This was the most commercially advanced company of its day. They encountered the San, hunter/gatherers, as well as nomadic tribes with a cattle based economy (I'm investigating the archives at the moment).

Lo an behold! The San had no use for gold. They sometimes were paid for labor, but they had to be paid in tobacco and gin, perishables! A non-perishable payment was only a nuisance for these people. And the cattle of the nomadic tribes had to be paid in copper strings, as this could be used by them to make their ritual 'money' which they used to transfer prestige, power and relatioinships (a bit like the British crown jewels, or the rings exchanged when we marry).

And think about this one: a couple of thousands of years before the first coins were minted, the Sumerians already had an advanced system of virtual money...

The point: gold is just gold. Nothing special. We'll use whatever is fit for us as money - in the case of a company selling 'on credit' the debt of the buyer is de facto money... Stamps are. Groupons are. Debet cards of horse riding schools are. Forget about gold.

Forgot to tell: in the case of the copper string 'money' it was this 'money' which led to market behaviour, in stead of the other way around.

Well, now I'm busy with this: a 'markets in everything' post: the first recorded trade between the nomadic cattle tribes and the Dutch in what today is called Cape Town, April 13, 1652: "Ruilden heden een koebeest en jonge kalf voor vier plaat koper en drie stukjes van een half vaâm koperdraad." (bartered today a cow and a young calf for four plates of copper and three pieces of copper wire of a half fathom (about 0,9 meters or three feet, M.K.)


This was a peaceful transaction. When the same VOC guys however encountered an unarmed chinese vessel in the Indian Ocean they had no scruples to rob it from its cargo. That was a market, too. No, not a free market. But - a market. And a profitable one!

Oh, but people should keep in mind the real reason for a gold standard: it is a divine metal that reflects the glory of the sun-god for divine rulers. This was first asserted in Egypt for the pharaohs, with the inertness of gold making it "eternal" and it being the only metal with a yellow color, it obviously represents the divine power of the sun-god as manifested in the divine pharaoh. Don't you people understand anythning?

You've nailed it.

"I believe the 19th century was a relatively good time to have had a gold standard, but the last twenty years, with their rising commodity prices, would have been an especially bad time"

How do you know that the commodity price rises haven't largely been because of inflation from the present monetary system? Indeed priced in gold hasn't the price of some commodities declined?

Supporters of a gold standard presumably seek to to stabilise currencies so I would like to ask the economists here if a global currency would achieve the same objective? First of all this would reduce the cost of trading with foreign countries as there would be no exchange rates and spreads to pay to middle men. Second, fluctuations in currency values purely due to speculation would be eliminated. Individual countries can still raise or borrow money through government bonds just as they do now. It seems to me that any linking of currencies to commodities (even gold) is subject to the fluctuations of supply and demand. For example what would happen if suddenly huge deposits of gold were found and gold was found to be less rare than previously thought? What if some corporation acquired a monopoly in gold resources and tried to artificially limit supply to keep prices up, as De Beers has done with diamonds? I am not an economist. I am am just putting the question out there to see what the experts say. What would the effect of a global currency be?

Just want to add example to the above. Let say in my country the typical interest rate is 2% APR and in some 3rd world country the interest rate is 20% APR. If I consider investing a lump sum in the foreign country I understand there is a risk that they might default or even worse might decide to freeze or grab all foreign assets on a political whim. However a more likely risk is that during the period my money is invested in the 3rd world country, a change in exchange rates could wipe out any profit I thought I might make with the interest rate when I repatriate my funds. With a global currency at least that risk is taken out the equation. Does that make any sort of sense?

The gold standard assumes that it is possible to somehow fix the amount of money. But as has been pointed out above, due to many factors including fractional reserve banking, it is not possible to do this. And suppose that you could fix the amount of money, are you also going to control the velocity of circulation?

So the amount of money in a system is indeterminate. Each participating entity in the system has a rough idea of how much cash on hand they have and the likelihood of realizing income in the future. With this information, they bid in the marketplace for the things they need. So a history of real purchases provides an indication of how much money there is.

The only problem with money at present is that it does not function as a store of value over periods of years. People are also looking at the cash flows of governments and see a problem when money might lose even more value in the future.

One way to reduce the loss of value is to move the saving from money into things that are "money good". Gold is one among many things that has a ready market and is money good. But there is an element of speculation involved and there is the possibility if one is not careful of losing the saving by bad market timing.

So without changing the current system entirely as would be the case with going to a gold standard, is it possible to fix the one problem with the current system, the store of value problem?

This is the proposal of Hugo Salinas-Price. Make a silver (or gold) coin money. But the problem historically with all attempts to make coins money and have them circulate alongside paper is that eventually the bullion value or the melt value exceeds the monetary value and the coins go out of circulation. So Hugo suggests that instead of have an engraved value on the coin, the coins should have a quoted price slightly higher than the cost of production.

This monetary value is then stable and separate from the market value of the metal but it does reflect the market price (and thus the amount of other money in circulation). Because the mint must participate in the market to obtain the metal to make the coins. They must make real purchase to produce a real product and sell it at a slight profit. Whenever the mint is unable to sell at a profit, the monetary value of the coins is increased. The coins maintain their purchasing power and would never go out of circulation.

My only question about this idea is what would happen in the long run. Would everyone move to holding these kinds of coins? What would happen to the price of the metal if every bit of metal had already been turned into coins and the market was bidding on the last ounce?

But in the short term, I think the idea could work.

Here is a link to an article by Hugo Salinas Price where he presents some of his thinking about money.


Comments for this post are closed