The Gold Standard?

[Mano Negra]

"If you want to learn about economics, then try a different forum. This forum is called BAExpats - Expat Life. It has nothing to do with economic theories."

Well I was enjoying the other thread until Karla posted this and it brought me to my senses. She is obviously right (how could anyone so arrogant be otherwise), we should all get back to talking about dog shit and broken pavements and not have the temerity to think that the Life part of Expat Life might somehow be influenced by the economic climate we find ourselves in. Shame on you if (like me) you were influenced to flee Europe and become an expat because you disagreed with the predominant economic theory and predicted years of misery and disintegration. I know, I should concentrate on writing about the poor quality of peanut butter or the lack of ......(insert any other form of junk food that we can't get here and apparently can't live without).

BUT given a load of people have suddenly appeared who seem to be interested in economics perhaps someone can explain something I have never understood (and to give you a bit of background, many years ago I was head of derivatives for a large bank and confidently predicted the demise of gold as a financial instrument given all the shiny new derivative products we were busy inventing. My view was also shared by Gordon Brown who jollily sold the UK's Gold reserves only to watch its astronomical rise in value thereafter).

So my question. What is the attraction or advantage of a Gold backed currency? From my point of view Gold is not phenomenally useful as a metal (I would prefer to build a tower block using steel), has a high cost of carry (secure storage), yields no income, doesn't taste that good, doesn't grow or reproduce, is bloody difficult to get out of the ground, and is an industry that attracts some of the most creative (read liars) promoters in the world. Yet it has been deemed to have an intrinsic value since pretty much the beginning of time. Why?

And how can a currency be any more stable if it is backed by something whose value partly fluctuates by how much can be dug out of the ground at any one time?

I would guess that the main reason for the strength in the gold price is that it is accepted as a store of value that is the only universal alternative to using the dollar as a reserve. So why don't we just create a basket of all the worlds major currencies and issue a "reserve certificate" against it? Because the US would be F***d if we did?

The fact that I dont understand this may explain why I did not have a very illustrious career!!! Perhaps Karla can help me out? I would gladly pay her if she helps me become the next head of the IMF (worth it just for the orgies!!). Or is she actually head of the IMF and therefore able to speak with authority? And possibly in French??? Sexy!

 

[Canick]

a quote from ex Fed chairman Alan Greenspan in 1966 speech, before he flip-flopped:
still interesting today.

"In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.

This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard.

###

Alan Greenspan
[written in 1966]

http://www.321gold.com/fed/greenspan/1966.html

 

[Mano Negra]

Interesting article but it still doesn't explain the intrinsic value of gold or gold backed assets other than the common (cultural?) agreement to accept it as such. What advantage can it possibly have over a basket reserve currency/certificate? I find the luxury argument specious and naive. Then again Greenspan did write this 40 odd years ago so maybe he was young and naive, and then went on to preside over the bastardisation of the banking system that has bought most economies to their knees.

 

[el_expatriado]

Greenspan sold out.

 

[PhilipDT]

To quote Richard Thaler"Why tie to gold? why not 1982 Bordeaux?"

Basing a currency on gold would make the issuing countries risk essentially having their economies held hostage buy gold producing nations. Imagine basing a currency on Oil and having groups like OPEC essentially controlling the value of your money.

 

[PhilipDT]

Yet it has been deemed to have an intrinsic value since pretty much the beginning of time. Why?

Humans like shiny things. So do most animals for that matter. It grabs the eye.

 

[duanestorey]

> What is the attraction or advantage of a Gold backed currency?

One of the main reasons is that's it is scarce. You can't easily create new gold (not for less than the cost of the gold you are creating), so what's available is the amount that's been extracted from the ground. By contrast, fiat currency isn't scarce, so governments continually create new currency, which erodes its value, and hurts anyone who saves money in that currency.

Gold actually has a lot of good uses. It's one of the most corrosive resistant metals around, and one of the best conductors. That it's not in demand in certain industries is an advantage IMO (platinum and palladium suddenly became used in industry, and their prices shot up).

>> And how can a currency be any more stable if it is backed by something whose value partly fluctuates by how much can be dug out of the ground at any one time?

The value of gold hasn't really changed over time, just the price of it in fiat dollars. For example, around the time of the great depression an ounce of gold would have bought you a really nice suit. An ounce of gold today still buys you a really nice suit, even though the price of that ounce (in fiat USD) has changed dramatically.

>> So why don't we just create a basket of all the worlds major currencies and issue a "reserve certificate" against it?

Some people are advocating for that. There's something called Special Drawing Rights (SDR) which represent baskets of currencies. But ultimately it's just a basket of fiat currencies that aren't tied to anything with real value, so is it much better? I would argue not really, although it might give the illusion of stability.

 

[arlean]

Miles Lewis I kind of wonder if you are kidding us--or being a good teacher in introducing a subject--considering your experience.

Of course the gold standard keeps governments from inflating and destroying the currency and bankers from robbing countries. Right now if you get a mortgage on a house, the bankster just puts figures on a ledger. It costs him nothing. There IS no money. You now owe, lets say, $100,000 that cost no one anything but will cost YOU years of slavery as you have to pay real hard-earned money. Too bad you can't just write figures on a check and send it in with no money in the bank, which is essentially what they are doing to you when they make the loan!

And if the banksters pull the plug, bring down the economy, and you lose your house, they foreclose and take ownership of something of real value that cost them nothing but cost you plenty. A gold standard puts limits on this entire scam.

Having said that, one of my relatives buys and sells gold--coins, jewelry. I never cared about jewelry until I started seeing a lot of the real stuff. I can't explain it, but there is just something about gold . . . .

A person who wants to separate economics from expat life is just showing their financial ignorance. They, of all people, NEED the discussion.

 

[Matt84]

Lewis thanks for opening a thread on this topic. I too wanted to continue reading and maybe contributing to the earlier thread.

For now I have a couple of observations based on some of the above posts

@comparison with oil and OPEC
The whole point of calling some mineral, paper, or tally stick, currency or money, is to differentiate it from barter.
Money is a crystallized, materialized, abstract concept. In this way it is unique, It exists only if we believe in it, and as a consequence we have concrete measurable proof of its physical existence, and significance). Humans go to a great extend to make their currency useless for animals or people outside the system (rai stones).

@comparison with 1982 Bordeaux
The Diamond 'Cartel' would be a better example. But gold and silver have different properties than either wine or diamonds. They are too tasty and shiny and deceive human perception. Not abstract enough when you can wear it or drink it.

@gold being unique or having an intrinsic value.

It doesn't, just about any other materialized objective standard would serve the same purpose. It does have intrinsic properties that made it (along with other 'noble' metals) easy to measure and quality-control from an early point in history.

So does silver. Around the time of the biggest market crash before the FED and the (re)introduction of fiat money in the States, Gold and Silver contested for the monopoly of currency. The following is an excellent essay on the subject that sheds some light on the thinking of that decisive time.

You may define a mass delusion; you cannot explain it really. It is a malady of the imagination, incurable by reason, that apparently must run its course. If it does not lead people to self-destruction in a wild dilemma between two symbols of faith it will yield at last to the facts of experience.

But the lesson of the 1890s, the facts of experience, seem buried in history under the massive stone of 1929.

The problem/opportunity, as I see it, is that money allows us to manipulate time. An IOU (or Credit in general) takes into account future wealth and devalues the present currency with no certain guarantee of success.

Miles Lewis asks what's the deal with gold. I ask the same question but add, what's the deal with other forms of currency? with fiat currency? Does it facilitate credit? Obviously. Is it a necessary condition for growth?

What I've gathered is that there have been so far two alternatives in our human experience after giving up barter:

1)Money backed by some mineral standard with (more or less) universal value

2)or money created and deemed acceptable by a ruler as valid (and encouraged) payment for taxes.
Since both the currency created and the taxes payed are both artificial, but the consequences of not paying them are very physical, it achieves the same crystallization of an abstract concept as gold or silver do. Maybe a bit cruder, but again how crude is to extract, refine and smelt gold anyway?

It would seem the case that all fiat money in history has been issued by rulers for the payment of taxes

Taxes are ultimately extracted by organized force. The stronger and more organized the force, the more it resembles the properties of noble minerals.
An economy can be suddenly and quickly enlarged by incorporating new territories and peoples and forcing them to pay taxes in this new currency. This should (and many historians argue, in the case of Rome and England) stimulate economic growth.

The Roman Empire experimented with fiat currency at the same time it segwayed from a Republic to an outright Empire. As condemnable as that surely is, half of Europe would have remained a barbarian wasteland otherwise.

The Switz Franc is backed up with gold and with Switz reputation for honoring contracts. But as solid as the Franc may be, it is not as popular the Dollar.

Once the Dollar was backed by gold, silver, and it was not so popular outside the States.

Now the US Dollar is backed by top notch armed forces that protect international trade and keep appropriate or at least tolerable governments in states Worldwide (the intolerable then Communists, now just a handful of 'Rogues')

It didn't happen overnight. Two World Wars and half a century separates the opening of the Federal Reserve from Nixon and the funeral for the gold standard.

The American Republic didn't turn itself into an empire overnight either. And I might add, a bit risque even if plain obvious, that this expansion has, at least for now, stimulated a lot of growth.

 

[Matt84]

Interesting article but it still doesn't explain the intrinsic value of gold or gold backed assets other than the common (cultural?) agreement to accept it as such.

It is not intrinsic, but there lies the value.
If you can get enough people to commonly agree to accept E-Points or Lew Miles as valuable without the use of force then you would have achieved alchemy.
If you do use force and win, then the money you issue is called fiat and its value is retained as long as your power is retained. If the society evolves to a certain point, then the law and shared physical control (like in Switzerland where every citizen doubles as a soldier) backs the currency.

Therefore, the people in charge of the Euro are either lying through their teeth or achieving alchemy.