Reformation of the Monetary System - and the Gold Standard

[Invictus XII]

It has been know for many years now (but not to the general public so much) that our money has no backing of any physical value. A history teacher once told me that inflation was natural and occurred at a natural rate, when I thought, why? Turns out to be total rubbish. Inflation can't be natural, otherwise there would be a point in time when things cost less than nothing. Now there has been small and steady inflation among the western world as it expanded and demands and supplies changed, but why has rapid inflation occurred in the last 50 years or so. I do not claim to be an expert in this field at all, but the question has always struck me;
Why would one leave the gold-standard? It doesn't allow government manipulation of an economy, keeps markets and inflation relatively steady, give a deep routed human value to money (since gold has been of common value amongst most people since the dawn of civilisation) and doesn't allow for the devaluation of currencies, as long as the human trust and value of gold doesn't die (which it never has). I mean there are negatives, like the inflexibility of a market to expand rapidly and progress rapidly and the restriction of money flow - but good things take time. The biggest problem with this day and age is the need to rush ahead, and I think this extremely flexible and expandable financial system has contributed to that. People need to learn (mainly governments) that money should be hard for an economy to develop, not printable at a whim. Plus, it would put an end to that most "evil" and dreaded fractional-reserve banking which is a big factor of inflation. It just seemed logical when I first researched our financial systems over the last one-hundred years that the gold-standard worked, but for some reason rejected. One question does arise in this. The last time before 1971 (US leaves the Gold Standard) when a nation decided to print money without a gold backing, a state of hyper-inflation occurred to the point where bread cost 2 billion marks and wages where taken home in wheelbarrows - (Germany after the Treaty of Versailles), so why hasn't that happened today. The US prints money regularly, why haven't they fallen into ultra hyper-inflation? Is there some kind of manipulation going on of the "free" market?

Please tell me your thoughts and opinions, I would love to hear the pros and contras, and the opposition.

[Thorn777]

Germany's inflation was due to massive productivity extraction forced from abroad.

Gold standard sucks mainly because credit becomes inaforadable. Minor gradual inflation is only good because its a self cleansing of the system so wealth doesnt concentrate as much. That is as long as we see minor and gradual wage increases, and none of that maximized returns bonanza at the upper scala.

[Invictus XII]

Germany's inflation was due to massive productivity extraction forced from abroad.

Correct, but it's state of hyper inflation was caused due to the republic's decision to print mass amounts of money because Germany's production had been halted by the Weimar Republic.

Gold standard sucks mainly because credit becomes inaforadable. Minor gradual inflation is only good because its a self cleansing of the system so wealth doesnt concentrate as much. That is as long as we see minor and gradual wage increases, and none of that maximized returns bonanza at the upper scala.

But the wage increase are far inferior to the inflation rates, that is indisputable, even following the "mainstream media figures" it's still unsustainable. But one must remember, what we've seen isn't minor gradual inflation, its been extremely rapid from post-war to now, compared to any other period in history, our inflation has been very rapid. Minor inflation, what you speak of is what we saw during the 19th century, stability with a very slow gradual inflation, in tune with wages.

[Thorn777]

[QUOTE]

Correct, but it's state of hyper inflation was caused due to the republic's decision to print mass amounts of money because Germany's production had been halted by the Weimar Republic.

Again, it was due to making massive payments abroad, hence productivity exports abroad.

When that demand can no longer be mirrored by the economic output, which also needs to sustain itself and its people, then the shortfalls will be made up by inflation. And since the demands where nothing but draconian the hyperinflation was only a logical consequense.

But the wage increase are far inferior to the inflation rates, that is indisputable, even following the "mainstream media figures" it's still unsustainable. But one must remember, what we've seen isn't minor gradual inflation, its been extremely rapid from post-war to now, compared to any other period in history, our inflation has been very rapid. Minor inflation, what you speak of is what we saw during the 19th century, stability with a very slow gradual inflation, in tune with wages.

Source?

I think you and I define minor and gradual differently. And in any case, a balanced economic policy in accord with inflation-levels is much more important than 2% or 10% inflation. At least for the mass of people, where even in the west 70%+ own no assets exceeding their debts.

[Vizvii]

The Gold Standard couldn't prevent the Great Depression.

[Denny Crane!]

The Gold Standard couldn't prevent the Great Depression.

You think there was a true gold standard before the depression? That amuses me.

[VALIS]

The gold standard would be no help. Infact it would make things worse.
You guys need to stop the gold-standard fetishism. It's not coming back and there's no reason to believe Fiat money is the cause of this crisis anymore than the depressions and recessions in the 19th century in the UK and US was because of the gold standard.

You think there was a true gold standard before the depression? That amuses me.

And why was it not a true gold standard? Was money pegged to gold or wasn't it?

[Denny Crane!]

The gold standard would be no help. Infact it would make things worse.
You guys need to stop the gold-standard fetishism. It's not coming back and there's no reason to believe Fiat money is the cause of this crisis anymore than the depressions and recessions in the 19th century in the UK and US was because of the gold standard.



And why was it not a true gold standard? Was money pegged to gold or wasn't it?

Throughout history gold standards only exist whilst convenient and in the appropriate engineered way:

While I have no doubt that the jerry-rigged gold exchange standard that was cobbled together by government bureaucrats and central bankers at the Genoa conference of 1922 was better than Richard Nixon's fiat money monstrosity that has plagued the world for 39 years and 11 months, it was a pseudo-gold standard from the beginning. It was not a full gold-coin standard under which anyone could exchange a nation's currency at a fixed rate for gold coins of a fixed weight and fineness.


The full gold-coin standard that prevailed in the second half of the nineteenth century was itself a doomed experiment. It turned into the fiat money standard (1914), which became the gold exchange standard (1922), which became the Bretton Woods standard (1944), which became today's fiat money standard (1971). Why? Because the full gold-coin standard relied on government promises. "Yes, we guarantee that we will exchange our currency for gold. You can trust us." It was not a 100% gold standard. It was a 100% trust your national government standard.

In August 1914, European governments that entered the war broke their monetary promises, confiscated the gold that was on deposit in commercial banks, turned this gold over to their respective central banks, which then inflated to fund World War I. It was the biggest bank heist in history. There was no resistance by the public.

The gold exchange standard of 1922 was Europe's attempt to maintain the trappings of the pre-war gold coin standard, but without full redeemability. It was a central bankers' gold standard among themselves. It was never intended to be a gold standard for the masses.

[Invictus XII]

Throughout history gold standards only exist whilst convenient and in the appropriate engineered way:

While I have no doubt that the jerry-rigged gold exchange standard that was cobbled together by government bureaucrats and central bankers at the Genoa conference of 1922 was better than Richard Nixon's fiat money monstrosity that has plagued the world for 39 years and 11 months, it was a pseudo-gold standard from the beginning. It was not a full gold-coin standard under which anyone could exchange a nation's currency at a fixed rate for gold coins of a fixed weight and fineness.


The full gold-coin standard that prevailed in the second half of the nineteenth century was itself a doomed experiment. It turned into the fiat money standard (1914), which became the gold exchange standard (1922), which became the Bretton Woods standard (1944), which became today's fiat money standard (1971). Why? Because the full gold-coin standard relied on government promises. "Yes, we guarantee that we will exchange our currency for gold. You can trust us." It was not a 100% gold standard. It was a 100% trust your national government standard.

In August 1914, European governments that entered the war broke their monetary promises, confiscated the gold that was on deposit in commercial banks, turned this gold over to their respective central banks, which then inflated to fund World War I. It was the biggest bank heist in history. There was no resistance by the public.

The gold exchange standard of 1922 was Europe's attempt to maintain the trappings of the pre-war gold coin standard, but without full redeemability. It was a central bankers' gold standard among themselves. It was never intended to be a gold standard for the masses.

Absolutely correct. Over the last century, governments have been intervening in our economies, not to mention the partially backed economies.

Source?

Well, according to mainstream media and the government, Australia is at 1.8% inflation. But if you look at what that rate includes, they leave out the rises of real estate, energies such as gas and electricity and general products such as foods, etc... Probably the three major points of our economy, left out of consideration for our inflation rate. See here if you need proof of their fallacy. Not to mention the huge outliers in our inflation rate ,for example with fruit dropping a massive 30%, which in reality would be full of a couple of fruits with massive price drops due to environmental factors bringing the average down, making this inflation rate far from the rate of practice. http://www.tradingeconomics.com/australia/inflation-cpi

[VALIS]

Throughout history gold standards only exist whilst convenient and in the appropriate engineered way:

While I have no doubt that the jerry-rigged gold exchange standard that was cobbled together by government bureaucrats and central bankers at the Genoa conference of 1922 was better than Richard Nixon's fiat money monstrosity that has plagued the world for 39 years and 11 months, it was a pseudo-gold standard from the beginning. It was not a full gold-coin standard under which anyone could exchange a nation's currency at a fixed rate for gold coins of a fixed weight and fineness.


The full gold-coin standard that prevailed in the second half of the nineteenth century was itself a doomed experiment. It turned into the fiat money standard (1914), which became the gold exchange standard (1922), which became the Bretton Woods standard (1944), which became today's fiat money standard (1971). Why? Because the full gold-coin standard relied on government promises. "Yes, we guarantee that we will exchange our currency for gold. You can trust us." It was not a 100% gold standard. It was a 100% trust your national government standard.

In August 1914, European governments that entered the war broke their monetary promises, confiscated the gold that was on deposit in commercial banks, turned this gold over to their respective central banks, which then inflated to fund World War I. It was the biggest bank heist in history. There was no resistance by the public.

The gold exchange standard of 1922 was Europe's attempt to maintain the trappings of the pre-war gold coin standard, but without full redeemability. It was a central bankers' gold standard among themselves. It was never intended to be a gold standard for the masses.

Okay, well, "meh", losing the gold standard was no great loss either way.
And bringing it back won't do much positive things either.

[Denny Crane!]

Okay, well, "meh", losing the gold standard was no great loss either way.
And bringing it back won't do much positive things either.

By that same standard "oh well meh, fiat money does nothing for us and losing it won't make much difference in favour of the gold standard"

I mean ambivalence is a wonderful if useless position.

[Jedi1]

The gold standard will not solve our current problems though. It will artificially restrict (or expand) the money supply in line with gold production as opposed to in line with the total wealth of the nation using the currency and currency will still be subject to manipulation not only by government but also buy those who control those (not really any worse than domination buy private bankers on the "financial markets" as we have now but not really any better).

We need to tie the money supply and value to the total value of the wealth available to the nation, that is the only way to have it reflect reality, bring about realistic economic activity and to enable us to live within our means or rather simply determine what our means are in the first place as we have no real measure right now due to money being created based on money as a debt and we would not have a real measure with a gold standard either.

[Denny Crane!]

Only if the gold standard is the government standard. Left up to competition it could live or die as a trusted unit.

FYI you are simply talking about hard money as opposed to soft fiat money which is all a gold standard is, hard money. You are simply talking about using different sources anything which can't be inflated artificially is hard money usually commodity based though with exceptions like BITCOIN.

Well I say that...to a certain extent fractional reserve began under the gold standard which inflated the money supply. It just wasn't supposed to go down that way.

[Jedi1]

But even if you could theoretically stop the government influencing it it would still be subject to manipulation by those who control the supply of gold not to mention would artificially control economic growth, confining or artificially growing it due to changes in the supply of a single metal which could and likely would be completely unrepresentative of the rest of the economy when it should be based on the total wealth available in the economy. People are constantly talking of living within our means but how can we determine what our means are if our measure of our means, the wealth available in the economy, is completely out of wack.

A gold standard would not be a solution to our current problems as it would not topple the ridiculously bloated financial markets, which would likely just take advantage of it and would not place our money system on an honest basis.

[Denny Crane!]

But even if you could theoretically stop the government influencing it it would still be subject to manipulation by those who control the supply of gold not to mention would artificially control economic growth, confining or artificially growing it due to changes in the supply of a single metal which could and likely would be completely unrepresentative of the rest of the economy when it should be based on the total wealth available in the economy. People are constantly talking of living within our means but how can we determine what our means are if our measure of our means, the wealth available in the economy, is completely out of wack.

A gold standard would not be a solution to our current problems as it would not topple the ridiculously bloated financial markets, which would likely just take advantage of it and would not place our money system on an honest basis.

It could in theory be competing with other currencies and if people didn't like what was happening to it then they could use another. It wouldn't be in a position of being in a monopoly to exert so much influence. Or tie it to something else that isn't so finite.

The thing people forget with a gold standard is it doesn't have to be gold. It could be anything. And I'm not even that set on defending it to be honest because I honestly think it is a centuries old idea that isn't really relevant to the modern age.

My main point in this thread was the idea that the gold standard caused all the problems particularly the great depression is a bit of a laugh considering governments have never really held themselves to a gold standard and just a decade or so before had willfully printed money to the chagrin of JMKeynes to fund the war efforts.

[Jedi1]

It could in theory be competing with other currencies and if people didn't like what was happening to it then they could use another. It wouldn't be in a position of being in a monopoly to exert so much influence. Or tie it to something else that isn't so finite.

The thing people forget with a gold standard is it doesn't have to be gold. It could be anything. And I'm not even that set on defending it to be honest because I honestly think it is a centuries old idea that isn't really relevant to the modern age.

My main point in this thread was the idea that the gold standard caused all the problems particularly the great depression is a bit of a laugh considering governments have never really held themselves to a gold standard and just a decade or so before had willfully printed money to the chagrin of JMKeynes to fund the war efforts.

Well if its not tied to gold then its not technically speaking a gold standard but I get what your saying. What I'm saying is that to tie it to any single commodity be it gold, silver or bottle caps would artificially restrict or expand growth and the value and quantity of the money supply. We can not have money that truly reflects the reality of the economy, that serves its purpose has acting as an easy means to exchange and measure wealth unless we tie the value of our money to all the wealth we wish to exchange and measure. We need to throw the current debt based ponzy scheme system of money creation out and start valuing and creating money valued on wealth, any wealth whether it be gold, potatoes, a tree or the value of the skills of a highly qualified engineer.

If this was done then we could start living within our means as we would finally know what our means are and we would have the money to access our means and nothing ells. And it would free the economy from its current servitude to the large banks and their casino money markets which should simple be shut down as it would finally be evident that they do not produce any wealth, they merely play with other peoples wealth to leech of the economy and often ruin it in the process.

[Sphere]

If you want an idea of what a gold standard would be like in an economic crisis, look at the PIIGS in Europe.

They are stuck with a very strong currency, much stronger than they would prefer given the lack of competitiveness in their economies. If they could, they would mimic iceland and devalue their currency ~50% ...

By mid-2012 Iceland is regarded as one of Europe's recovery success stories. It has had two years of economic growth. Unemployment is down to 6.3% and Iceland is attracting immigrants to fill jobs. Currency devaluation has effectively reduced wages by 50% making exports more competitive and imports more expensive. Ten year government bonds are issued below 6% far lower than PIIGS nations in the EU. Tryggvi Thor Herbertsson, a member of parliament, notes that adjustments via currency devaluations are less painful than government labor policies and negotiations. Nevertheless, while EU fervor has cooled the government continues to pursue membership.[19

But the problem is that their national banks have no control over the money supply, only the ECB does and the ECB is not allowed to do anything but keep inflation down (unlike the BoE or the US Fed). A Gold standard would act in much the same way, taking away the vital tools which offer control of the money supply.

In short, fiat currency isn't a flawless system but we know more or less how to handle it. Central bankers might not make the 100% right decisions but they understand the general moves to make given an economic situation. Gold, however, is completely unresponsive to economic situations. Iceland would be stuck in much the same spiral as the PIIGS if it had been on the Gold standard and unable to devalue.

[VALIS]

If you want an idea of what a gold standard would be like in an economic crisis, look at the PIIGS in Europe.

They are stuck with a very strong currency, much stronger than they would prefer given the lack of competitiveness in their economies. If they could, they would mimic iceland and devalue their currency ~50% ...



But the problem is that their national banks have no control over the money supply, only the ECB does and the ECB is not allowed to do anything but keep inflation down (unlike the BoE or the US Fed). A Gold standard would act in much the same way, taking away the vital tools which offer control of the money supply.

In short, fiat currency isn't a flawless system but we know more or less how to handle it. Central bankers might not make the 100% right decisions but they understand the general moves to make given an economic situation. Gold, however, is completely unresponsive to economic situations. Iceland would be stuck in much the same spiral as the PIIGS if it had been on the Gold standard and unable to devalue.

Very good analysis Sphere, what we are seeing in Europe with countries like Spain, Portugal and Greece being tied to the eurozone is that they are being restricted in their economic choices and how they respond to this crisis. It is similiar to what we would see if all countries were pegged to gold. A great deal of inflexibility would come about in dealing with recessions (and even restrict the amount of growth that would occur in good times.)

[Invictus XII]

If you want an idea of what a gold standard would be like in an economic crisis, look at the PIIGS in Europe.

They are stuck with a very strong currency, much stronger than they would prefer given the lack of competitiveness in their economies. If they could, they would mimic iceland and devalue their currency ~50% ...



But the problem is that their national banks have no control over the money supply, only the ECB does and the ECB is not allowed to do anything but keep inflation down (unlike the BoE or the US Fed). A Gold standard would act in much the same way, taking away the vital tools which offer control of the money supply.

In short, fiat currency isn't a flawless system but we know more or less how to handle it. Central bankers might not make the 100% right decisions but they understand the general moves to make given an economic situation. Gold, however, is completely unresponsive to economic situations. Iceland would be stuck in much the same spiral as the PIIGS if it had been on the Gold standard and unable to devalue.

I'm not saying replace our money system now straight up with gold, I'm saying what if the world never dropped the gold-standard. Would there be an economic crisis to begin with or a degree of the crisis? Huge question, I know. Lets discuss.

[Lord Thesaurian]

I'm not saying replace our money system now straight up with gold, I'm saying what if the world never dropped the gold-standard. Would there be an economic crisis to begin with or a degree of the crisis? Huge question, I know. Lets discuss.

I think Denny Crane had a point in saying that their never really was a true gold standard as we would understand it, because, as he said, the gold standard relied a great deal on an "honor system" that was rarely kept. I do not know nearly enough about precious metals or the relative mathematics that currently determine currency and commodity values, so unfortunately I will keep tabs on this thread to wait for someone who does.

I think the main contributor to the inflation, debt and economic crises of today and the last century has been Keynesian economics; ie, the government behaving as a giant corporation or venture capital firm with unlimited money. If you look at the history and makeup of institutions like the Federal Reserve, I think that might go a long way in answering your questions. It really was the foundation of the Keynesian, quasi-fascist New Order. What I mean is that it gave governments a precedent by which they could justify and finance an ever-increasing power structure (how much has the US government grown in the last century?)

In the case of the US government, you see the Progressive movement begin to build such a model. The official rejection of the gold standard and creation of the Federal Reserve gave US Government, Inc., its own private bank from which it could play with currency values and interest rates, autocratically shape policy and ultimately history by moving massive amounts of currency around in the private sector, and conduct fascist social and economic engineering by pumping rivers of artificially valued currency in and out of its corporate cronies. Thus you have the huge social programs and military-industrial complex that creates trillions in debt while achieving little benefit and perpetually inflating the economy. Most of this was paid for not with true growth, but with smoke and mirror currency. Meanwhile markets boom and bust with greater and greater force as the whole power orgy spins out of control. The Creature From Jekyll Island by Edward Griffin, a non-professional look at the economic structure created by ideas like the Federal Reserve, offers some pretty interesting perspectives on the subject.

If you want an idea of what a gold standard would be like in an economic crisis, look at the PIIGS in Europe.

They are stuck with a very strong currency, much stronger than they would prefer given the lack of competitiveness in their economies. If they could, they would mimic iceland and devalue their currency ~50% ...


But the problem is that their national banks have no control over the money supply, only the ECB does and the ECB is not allowed to do anything but keep inflation down (unlike the BoE or the US Fed). A Gold standard would act in much the same way, taking away the vital tools which offer control of the money supply.

In short, fiat currency isn't a flawless system but we know more or less how to handle it. Central bankers might not make the 100% right decisions but they understand the general moves to make given an economic situation. Gold, however, is completely unresponsive to economic situations. Iceland would be stuck in much the same spiral as the PIIGS if it had been on the Gold standard and unable to devalue.

The question is, is the flexibility of the fiat model worth sacrificing the stability of a much more objective standard of value? I would argue in the negative, in light of the inflation and public debt growth coupled with the massive boom-busts of the last century. The issue to prove or disprove would be whether the stability of gold or some other standard could largely prevent these disasters, or that it is better to be able to readjust and recover afterwards using the fiat model, rather than risking the failure of an objective standard and then lacking the flexibility to quickly adjust to the new economic climate. I also do not like the fiat model because the premise upon which it is built, mentioned above.