Returning to Real Money

I'm well convinced that the US would be a better place had it not adopted fiat currency and other terrible monetary decisions, but I've had a hard time thinking of a fair way of reversing that tide.

In the same vein as my "What dictates president's pay?" thread, I'd like to know if anyone from the broadly libertarian tradition has routed a smooth way back to the gold standard (or some version of sound money).

Can we do this without collapse?

Post 1

Thursday, February 18, 2010 - 7:11pm

It is an assumption that there is anything that can be done from this point that will avoid a collapse.

I think there are just different degrees of collapse and differing times spent at the bottom. Think about the conditions you want to exist after the collapse. Do you want a brand new fiat currency, or do you want a gold backed currency? Do you want to see run-away inflation followed by a collapse or go ahead and collapse before we endure the Hell of hyper-inflation?

What would you advise a person that got themselves into the amount of debt relative to their earning power our government has taken on?

Post 2

Thursday, February 18, 2010 - 7:20pm

If it were announced that we were returning to a hard currency, the value of the dollar would skyrocket in value in comparison to other currencies. Stabilization would not be an issue.

Post 3

Thursday, February 18, 2010 - 9:40pm

Steve,

Interesting response. Rather like the eery desire of a Christian to see the world end. =\ If that were the best argument, I think a properly selfish person would try his luck with Keynesian economics, hoping the collapse happened after his death.

Ted,

Good, please run with this with me.

First, we announce we are going to back our trillions with gold. The price of gold sours (or, since it was backing so much currency, would it plummet?). The dollar goes up substantially. Then time comes for the government to say x oz. of gold = y dollars. Sure you don't see any problems in the process?

Post 4

Thursday, February 18, 2010 - 10:05pm

I have no desire to see a collapse and I don't substitute emotions for facts. Those who choose to go with Keynesian economics because the answer is less scary are going to find out that their desires aren't going to shift reality.

As to making the collapse as small as possible and to make the collapse last as short a time as possible... Ted is right. People need to be able to trust the currency. How that transition is accomplished is a technical issue. I believe Ron Paul has book dedicated to just that.

It won't get things done without attacking the underlying economic/political causes. There is a need to make massive reductions in government spending, take all taxes off of businesses and reduce taxes on individuals, repeal the regulations that make it expensive to do business, and do this all in a way that is explicitly based upon principles of capitalism with private property rights specifically and individual rights in general. Then working to ensure that people see that this new policy is stable and consistent.

The good news is that you don't have to have instant perfection... just to be better than the alternatives as a place to invest and do business.

But even if that program were put into place... completely and with great skill and inspiring leadership, there is still so much contraction, reorganization, and adjustment to get all of the bad debt and mal-investment out of the system that there is going to be a major collapse.

Given that I'm in my 60's I could hope that it were put off for 20 years by milking any Keynesian cows still out there, after which it would fall all the harder on the younger generations. But I think that anyone who holds principles that shallowly doesn't have much of a self.

That old saying about there being no atheists in fox-holes just makes me feel a flash of disgust.

Post 5

Thursday, February 18, 2010 - 10:06pm

I see plenty of problems. We can't simply transition to gold without also paying for all our fiat debt as well. That's not a problem of gold, though, but rather an issue of debt. You seem to have a point, Doug, so why don't you make it?

Post 6

Thursday, February 18, 2010 - 11:15pm

Ted,

I was asking how to get back to real money smoothly. I wasn't saying snarking, "how's gold gonna fix this".

No hidden motive. I wasn't expecting an answer to appear on this forum, fitting wonderfully into a paragraph or two. Was hoping there existed forward minded economists digging into long term political/economic strategies of how to fix things step by step (and in best order) with a smooth landing in mind.

My minimum expectation was a reference.

Steve,

Thanks for the reference. Turns out Paul has written many more books than I thought (good news!). Still, I thought there might be some more academic literature out there.

Post 7

Thursday, February 18, 2010 - 11:30pm

The best I can tell you is that back in the late 80's (nineties?) when gold was at $325/oz there were people advocating formalizing the fed's policy of aiming to stabilize that by actually announcing a return to gold at a slightly lower rate than the current value at some set date. The benefits would far outway any disruptions.

No, I cannot provide any references, I have never been that interested in economics. You might want to repost this question in the economics forum.

Post 8

Friday, February 19, 2010 - 8:05am

I think it's a mistake to even talk about a gold backed currency. Gold should be the currency, either the physical stuff handed from hand to hand or the electronic transfer of it.

Here are some talking points:

The overall goal should be to replace the dollar with physical gold and the government to get out of the business of regulating the money supply and interest rates entirely. This is the function of free markets.

Paper money, or even paper notes with 100% guaranteed government backing of them is obsolete in todays electronic age. Nothing says "trust" like physical gold.

As a first step, the government should allow individuals to agree on using gold for certain, specified transactions, between each other, e.g. second hand items such as cars, home appliances. These would be voluntarily priced in grams, or kgms of gold. Any pertinent taxes would be paid in gold to the government. The government's holdings of gold would increase.

Gold should be regarded as the stable value and the dollar as the variable � the relationship of their purchasing power would certainly fluctuate � as it does now.

As gold enters the market place as a legitimate currency from hoarders who previously held it out of fear and mistrust, the total supply of "money" (greenbacks and gold) increases causing the purchasing power of each to decrease ( the equivalent of inflation) � but the government can, according to its mandate, reduce an appropriate amount of greenbacks to compensate.

The government can then start paying its employees in gold, using its newly accumulated stash.

Finally, the government, according to a previously announced schedule, will repay foreign debt in gold, evaluated at a certain date. This is not a repudiation of debt, it is merely a substitution that others may, in fact, find attractive.

Comments?

Sam

Post 9

Friday, February 19, 2010 - 8:59am

There are actually a lot of ideas out there on how to do this. George Reisman has some and I have seen other plans. They are workable, but unfortunately I see no way people will suddenly all come to the light.

Post 10

Friday, February 19, 2010 - 10:36am

Thanks Sam and Kurt, for your interest and lack of tangents. I didn't think I'd be the only one to wonder about this issue in detail.

Sam, good talking points, I'll be thinking about them today. I had wondered if governments role in currency is valid.

Post 11

Friday, February 19, 2010 - 5:58pm

Re this: "If it were announced that we were returning to a hard currency, the value of the dollar would skyrocket in value"

More likely, skeptical laughter would ensue, especially if that announcement were made by Obama.

If we actually did that -- what hard currency? There isn't enough gold and silver around to come close to reflecting more than a tiny fraction of the value of goods and services produced.

A currency tranferring shares in, say, an indexed mutual fund, might be a more workable alternative, though the stability question might cause problems.

Post 12

Friday, February 19, 2010 - 6:33pm

I remember hearing a few years back that all the gold in the world could be fit into a cube 60ft a side.

In any case, there is plenty of gold and silver for a partial reserve system. You can laugh all you want and keep your fiat paper if you like. Or a mutual fund in shares of AT&T and GM.

The decision as to which commodity to use to back a currency is a side issue, and frankly a distraction raised by those who are simply opposed to any hard currency.

Post 13

Friday, February 19, 2010 - 7:42pm

I think the future is something like:

Quick transactions take place with government gun backed money. Long term values will be stored in company issued ownership aka stocks.

As it becomes easier to establish prices, buy, and sell company stocks, and be able to flexibly change prices on goods, people may begin accepting stocks as a form of payment. Think of paying with "X amounts of (insert some popular standardized ETF portfolio)" instead of USD.

A reasonably small increase in the money supply is not a terrible thing for you if you do not own a significant amount of the money being inflated. I just think the main wonderful thing about "money" like USD is that its value doesn't change very rapidly, so people can have a good idea of how much things are worth in that denomination. They can price something in that denomination and not have to worry that soon after they will have to think of a new price.

I think that fiat money is the future. The world will just move to the most reliable easy to trade form of it. Fiat money is simply a bunch of things that can be easily traded, where the "bunch of things" are made rare by enforcement of disallowing others to create counterfeit.

Nothing I know of currently prevents you from using gold to trade with.

Maybe a bigger problem is that the IRS (and the majority population of the US) wants to take a large portion of the products of your labor?

Post 14

Friday, February 19, 2010 - 9:52pm

Jim:

There isn't enough gold and silver around to come close to reflecting more than a tiny fraction of the value of goods and services produced.

Why is it that I hear this objection over and over? If the purchasing power of gold were equivalent to about $5,000 an oz. there would be enough to service all the transactions in the world economy. People seem to be always stuck on the perception that the purchasing power of gold should, and could remain static. Does anyone in their right mind believe that the purchasing power of the $US has remained static?

http://inflationdata.com/inflation/Consumer_Price_Index/HistoricalCPI.aspx

By looking at the change in the Consumer Price Index we can see that what cost an average of 9.9 cents in 1913 would cost us about $1.82 in 2003 and $2.02 in 2007.

That means that in 2007 the $US is worth only 4.9% of what it was in 1913.

Dean:

Nothing I know of currently prevents you from using gold to trade with.

I believe that only US dollars are legal tender.

United States coins and currency (including Federal reserve notes and circulating notes of Federal reserve banks and national banks) are legal tender for all debts, public charges, taxes and dues. Foreign gold or silver coins are not legal tender for debts.

Thus, I don't think that gold bullion qualifies as legal tender.

Sam

(Edited by Sam Erica on 2/19, 10:02pm)

Post 15

Friday, February 19, 2010 - 10:55pm

Sam,

Do you think legal tender is a legitimate law? I could see an argument both ways.

It is a sort of government held monopoly on currency, but seems a fine means for standardizing justice For example I broke your tv, but don't have any form of money you'd care to take in reparation, so I must bend over backwards, swapping currencies, taking an extra hit, just to pander to your particular taste in trade. I'm just throwing this out there.

In trades where contractual agreements are far from explicit, it seems like a helpful standard.

Post 16

Saturday, February 20, 2010 - 8:50am

In the absence of a legal standard, and the government out of the way, a defacto standard would arise and the obvious one would be gold. Private currencies could try to compete but why would anyone trust them when an objective standard is available? Other commodities are inferior. A fiat currency with a gold standard requires an arbitrary valuation of gold that subverts the free market. If we were to go back on the gold standard what should the value be?

In a world that operated on gold as a currency economic activity would skyrocket without all the currency speculations and conversion complications. International corporations nowadays have to hedge their finances because of the uncertainty of what national currencies will be in the future. If I would want to buy a gadget I could compare the price (in grams of gold) in Japan, Korea or the USA ... assuming that the government also got out of the business of levying import duties based on "most favored nation" politics and subsidies for special industries.

Post 17

Saturday, February 20, 2010 - 7:44pm

Excellent.

However you're the first I've seen argue that gold money would "skyrocket" the economy. Normally I hear stability emphasized.

Post 18

Saturday, February 20, 2010 - 7:51pm

The word skyrocket was used in post two, Doug.

Post 19

Saturday, February 20, 2010 - 11:59pm