I am not suggesting by any means that the gold standard was perfect, but if we judge it by its record, it achieved much better price stability than the disastrous inconvertible paper money standard that replaced it.
Unfortunately, in the twentieth century the gold standard came to be seen as a pointless constraint against the issue – or, rather, over-issue – of currency. Economists argued that the Bank of England should be free to issue whatever amount of currency it (or its political masters) wanted. The old idea that the gold standard imposed a useful discipline against the over-issue of currency was discarded as out of date. Keynes famously told us that the gold standard was a relic of a barbarous age, and reassured us that modern governments were much too sophisticated to debase the currency. Modern governments were not like impecunious Roman emperors or medieval kings.
The results were catastrophic, but Keynes was right about one thing. Modern governments were not like Roman emperors or medieval kings: they were much worse, and produced much greater inflation rates than their predecessors ever managed to achieve. There is a limit to how much inflation you can create by clipping the edges of your coins and putting them back into circulation, but the sky’s the limit when you can just speed up the printing press or add additional zeroes to your notes.
– a characteristically forthright moment from Kevin Dowd’s Chris Tame Memorial Lecture entitled Lessons from the Financial Crisis: A Libertarian Perspective, delivered on March 17th, already reported on here by Johnathan Pearce, now published by the Libertarian Alliance as Economic Notes No. 111, printable out as a .pdf but (more to the point for bloggers) copiable and pastable as an .html
Since Isaac Newton was the earliest promoter of metal-backed money, I propose that any new gold standard be called the Newgold (Ng for short). 1 gram of gold equals one Newgold. Silver coins could be called Sterls, or Sterloes, after Sterling silver.
If you want to tie the worlds economy to some type of element how about Astatine or Francium, then you would have a built in incentive to actually be productive…
That would not give life to the economy, but half-life! We can do better than that! And wouldn’t using radio-active elements create bigger boom-and-bust cycles!
Nuke,
Let’s keep the paper stuff in circulation, but with the symbols An (Andrex) in Britain and Ch (Charmin) in the U.S.
That Keynes Truly was an arrogant fuck wasn’t he? To think that the man based his assertion that modern government was far more even keeled then ancient governments on something so trite and simplistic as the idea that this is “modern times” and thus we’re better now….
Putting forth such an obviously idiotic theory truly shows his mendacious nature, and a complete lack of respect for the intelligence of those listening…. Or, if he was serious, it makes you wonder what the guy was smoking!
I assume that Keynes then also assumed somehow that all the raping, killing, and massive wars of modern times were somehow more rosy glowed and civilized then those of the Romans and others of their time?
wouldn’t using radio-active elements create bigger boom-and-bust cycles!
Yeah, but if the coinage contained these elements, and it was legal tender, then we would be required to accept it. but desperate to get rid of it.
Think of what effect this would have on the velocity of circulation.
radioactive coinage? Think of the damage to my dinner money!
Assertions about the ‘stability’ of gold-based currencies are fatuously unreliastic when we consider that there have actaully beeen very few such currencies for any extended period during the modern era of industrial extraction of gold – which is barely 150 years old.
Comparisons with ancient and medieval regimes, which all took place when gold really was fantastically rare and hard to extract, are simply invalid. I dare say that the Broken Boot can extract more gold in a day than was extracted in the entire Roman Empire in a day. The vast majority of refined gold currently held around the world was extracted within the last 2 centuries. So the gold-based currency game that is now being proposed will be played on a fundamentally-different playing field.
Those who suggest that metal-based currencies can only be devalued so far need to read a little more history – specifically, the history of European currencies in the C15-C17. There’s a reason that Gresham’s Law concerning the relative devaluation of currencies is named for a C16 English financier.
llater,
llamas
“So the gold-based currency game that is now being proposed will be played on a fundamentally-different playing field.”
“Fundamentally” different? A difference in the quantity of gold in a market is not a fundament. Nothing actually fundamental or principal in its function changes with quantity. If you think differently, then say why.
“Those who suggest that metal-based currencies can only be devalued so far need to read a little more history – specifically, the history of European currencies in the C15-C17. There’s a reason that Gresham’s Law concerning the relative devaluation of currencies is named for a C16 English financier.”
Yes: it’s because of the guy who named the principle.
I often see people citing Gresham’s Law without accounting for its essential element of government force. It is as much about politics as it is about economics.
I don’t insist on a metal-based currency (radioactive or otherwise). All that I ask is some measure of exogenous control on the government’s presently unfettered ability to debase it. Gold, a basket of commodities, meteorites, I don’t care what it is; just give me something more than than your Pollyanish reliance on a government, any goverment, restraining itself. That way lies only disappointment and, ultimately, economic destruction.
Or, as P.J. O’Rourke said, it’s like giving whiskey and car keys to teenage boys.
Laird wrote:
‘All that I ask is some measure of exogenous control on the government’s presently unfettered ability to debase it.’
Indeed.
Cato wrote:
‘A temple is not the less sacred because curs frequently lift up their leg against it, and affront the wall: It is the nature of dogs.’
It’s in their nature to debase the currency – for any politician or ruler, it’s all upside and no downside (mostly). You would, too, in their shoes.
If you can think of any way to fetter them from doing this, speak up – please! But one thing’s for sure – gold (or any other commodity) ain’t it. Maybe we need a lead-based solution . . . but we should also bear in mind that the ruler or politician who holds fast to the stability of the currency above all else places him/herself at the (temnporary) mercy of other rulers with fewer scruples. And sometimes, ‘temporary’ is all they need.
llater,
llamas
I know that I’m economically illiterate, but I thought it all boiled down to a fairly simple equation.
If you have more money than wealth, you get inflation, and if you have more wealth than money you get deflation.
Yes, I know we manged to get stagflation a few times, but I always put that down to a timing effect, (or perhaps a measurement error.)
That was my whole point, Llamas: every time the subject of gold-backed currency comes up you climb up on your high horse to sneer at the idea, trotting out historical illustrations of why it doesn’t work. Fine, it’s not perfect, but then what human invention is? Perfection isn’t an option. You are the poster child for the best being the enemy of the good. So I’m putting it on you: give us some other mechanism which would hamper the universal impetus of governments to cheat us by debasing and inflating their currencies. But please note that simply relying on their promises not to do so is an insufficient response. Some concrete proposal, please. I’m more than happy to listen.
Laird – I don’t have the answer either – I thought that much was clear.
By-the-bye, I never really need to climb up onto my high horse – I’m mostly in the saddle already.
My point – and I do have one – is that a gold- or silver-backed currency worked moderately-well in the days when extraction of gold or silver was a complex and difficult process, travel was fantastically-difficult and dangerous. In those times and places, these materials were very, very rare, and their supply was very, very inelastic. Under those circumstances, currencies made of actual gold and actual silver were quite good at resisting ‘the nature of dogs’, although even those were not immune.
But all that went by-the-board when treasure galleons from the New World began to run on a regular schedule. In a few decades, those convoys hauled more gold and silver back to Europe than had ever been extracted in all of human history worldwide to that point. And then we learned to hard-rock mine for gold, thousands of feet down, and then we learned to solution-mine for it, and hydraulically-mine for it, and now the only limit on gold supply is the price of extraction – which is not great. Goldstrike, NE alone produces in excess of 35,000 tons of ore a DAY, yielding about 2800 ounces of gold.
So those factors of scarcity and fantastic difficulty of extraction which, once-upon-a-time, made gold-based currencies somewhat-less-prone to the manipulations of rulers and politicians, simply don’t apply anymore. The supply of gold has now adjusted to match the price that folks are willing to pay for it, and as-much more can be had as anyone wants to get, at not-very-high cost. It’s getting to be like diamonds, where serious machinations are required to keep the supply in check.
So harking back to those bygone days may be comforting, but it’s not applicable – the conditions of the world, which made it work then, simply don’t apply anymore.
llater,
llamas
It isn’t only “not perfect,” Laird, it is outdated. That was Llamas’ point. When vast gold reserves were found in Russia and South Africa, the idea of those countries playing reindeer games with the world’s economies (by hoarding or dumping) is not a good thing. We might as well base our currency on salt. It makes about as much sense.
The larger point is that there is no perfect system. Period. Everything can be abused and manipulated.
It’s like Capitalism. It’s a terrible system, except it’s the best thing we have, compared to everything else.
There’s no magic bullet or currency equation that can’t be gamed by people intending to game the system. The only thing we can do is catch the rascals and put them before a firing squad.
Yes, it is possible to extract more gold.
But most of the gold ever extracted remains in circulation. One cannot easily impact to total amount of gold in human hands by an appreciable percentage.
Moreover, although extraction of gold is rather cheaper than it was, it is not free, and does not approach free. Thus, even if people redouble their efforts to obtain gold, as I predict they would were gold to be the monetary base, the value of gold could not go lower than the cost to obtain more, which would remain significant.
You can print a dollar bill for about 3 cents. You can print a 10 dollar bill for about 3 cents. You can print a 100 dollar bill for about 3 cents. In other words, if you’ve got 3 cents and a license to print money, you have no reason to produce a 1 rather than a 100.
This is not, and cannot be, the case with any commodity standard, because it will always cost more to extract a large quantity than a small one.
“Outdated” doesn’t necessarily mean “bad” or even “ineffective.” And I don’t understand your point about “[i]t’s a terrible system, except it’s the best thing we have, compared to everything else.” If you’re referring to a gold-based system you’re making my argument, and if you’re referring to the current fiat-money system that’s just plain wrong. It’s the worst we have, compared to everything else. A monetary system based on chickens and clamshells would be an improvement.
Rich Paul’s points about the non-zero cost of extracting more gold and the diminishing impact of new production on existing world inventories are quite valid. Llama’s arguments about fluctuations in supply are accurate, but only to a point, because even expanding inventories would serve as a constraint on government. Furthermore, we could use a basket of commodities as the monetary base, which would be significantly more difficult to manipulate. I’m giving you carte blanche to suggest some other system, and all you can do is defend the current demonstrably inferior one. Nearly anything would be better than what we’ve got.
We have caught the rascals, and we always catch the rascals. It doesn’t matter. No one has ever been put before a firing squad for debasing currency, and no one ever will. That’s as unhelpful a “solution” as is Llamas’ non-answer.
I just did some math, I could be off by an order of magnitude but I don’t think I am. If we consider all of the gold ever refined, 145,000 tons, there is less than one ounce per person on the planet. I am not worried about mining diluting this by too much. Gold moving around between separate economies, which is what happened during the time llamas is talking about, will always happen on the borders of newly merged economies regardless of the medium.
Even so, the only solution will be a free market in currencies. When you look at how rapidly the (still free for now parts of the) markets respond to various inputs, bubbles will be precorrected out almost before they get a chance to form. Just for example, the G20 rocket scientists are pressuring IMF to sell gold to ‘help the worlds poorest nations’. The price of gold responded by dropping to its lowest in quite some time.
Bubbles don’t hold much air in a genuinely free market.
Perhaps late to this party:
Consider the functions of money.
What is the role of currency in those functions?
Does not credit have the major role as the medium of exchange function of money?
What role would a metallic (or physical asset based) currency have on the role of credit as a function of money?
Who stores value in currency?
I am a minarchist.
I favour small, local governments over big, distant governments.
In my ideal world, local governments would be the strongest version of government that anyone encounters.
Ideally, governments would also be limited to public roads, parks, and town halls.
Thus, individuals could trade using whatever currency they wanted, between themselves. The local government could insist that you only pay for its’ services in some medium, perhaps silver or gold grams. This would become the local de facto standard, so long as it wasn’t de jure.
That would check government arbitrariness.
I would say that the answer to the whole mess is really pretty simple: free market currencies. As Midwesterner and Nukegrey point out, why not just let the actors of the world market place decide for themselves? Unstable currencies would quickly be flushed out of the system due to rapid reserve transfer by users in the face of unreliability, and stable currencies, in order to avoid the same fate would have to keep their reputation rock solid. The details of how such a free market in currencies could work, I leave up to the market itself, but I completely trust that it will quickly sort out a way do pull it due to sheer market pressure.
Also wanted to point out that if all the worlds gold really did amount to just over an ounce per person on earth, it would truly make it easier to deal with the metals weight. It would be valued so high that a couple grams would be sufficient for a week out on the town, and would not be actually carried on the person but in some sort of symbolic form which is directly convertible to gold at a bank or somesuch.
Stephan wrote:
‘ . . .Unstable currencies would quickly be flushed out of the system due to rapid reserve transfer by users in the face of unreliability, . . ‘
Unfortunately, our experience shows us the exact opposite. In a world . . .
(RIP, Don LaFontaine)
. . . where currencies of varying stability and reliability compete, what actually happens is that the more-stable and more-reliable currencies rapidly disappear from circulation – because people and institutions acquire and hoard them, even at a premium – and all that’s left in commerce are the weaker and less-desirable currencies. This way lie hyperinflation and a quick collapse.
This is Gresham’s Law. Bad money drives out the good.
In the old Soviet bloc, there were effective reserve currencies which had no intrinsic value at all (in effect) because they were never spent. For example, in the early 80’s, unopened cartons of American cigarettes assumed a currency status all their own in certain eastern-bloc nations. They were so valuable – as currency – that they were never actually opened and smoked. Their rarity and unquestionable provenance made them a talisman for actual value stronger than any actually-valuable item. The promise of the sheer wonderfulness of any American cigarette when compared with ‘victory tobacco’ was enough to imbue these talismans with a commercial value even though their intrinsic value was never accessed.
Now you can buy Kents on any street-corner in Estonia. The talismanic value of a carton of Kents has evaporated in the face of just a minor change in the way the world works. Gold is no different.
llater,
llamas
Rich Paul wrote:
‘ . . .Moreover, although extraction of gold is rather cheaper than it was, it is not free, and does not approach free. . . .’
. . . until some tin-pot dictator, blessed with a large deposit of gold-bearing ore, simply (effectively) enslaves his people into extracting it.
Something of the sort went on in the Soviet Union, and in other places.
Precisely because the amount of gold in circulation (note, in circulation, NOT what is held) is relatively small, it doesn’t actually take very much to drive the market like a rented mule. The extraction of gold has reached a point of availability where it has become a matter of policy and political will as much as it has a matter of mining technique. If you want to turn the world gold market on it’s head, you don’t have to make 100,000 men climb the Chilkoot Pass – all you have to do is put on a second shift and another row of Liebherr 282s at Goldstrike, NE, and in a month or two, you’ll have enough gold to overturn the economies of half the world’s nations.
Like YESTERDAY.
Am I the only one here who actually knows today’s gold price vs yesterday’s gold price, and so sees what a hopeless basis for a currency it has become? I really get the feeling that ‘gold as currency’ has now become an article of faith in certain circles, and the real world be damned. Are you really willing to allow the future of your nation’s economy to be placed in the hands of a Vladimir Putin? Or a Barack Obama, for that matter?
llater,
llamas
There probably is some truth in your assertion that gold has become an “article of faith” in certain circles. But I don’t understand the succeeding sentences. The nation’s economy (notably its currency) is in the hands of Barack Obama. My goal is to take away that power, or at least limit it, through the use of some objective standard. If you don’t like gold, how about a “basket” of commodities? Or suggest something else. All you do is harp on how bad a gold standard would be, but you offer nothing in the alternative. Without some constructive counterproposal your criticism is ultimately sterile and useless.
As I’ve said before, nearly anything would be an improvement over the current system.
The reference to Barack Obama was just my attempt at dark humour. I guess it fell flat.
The reason I keep badgering on about the gold standard is that other people keep badgering on about the gold standard. The lesson needs to be repeated, regularly and hard.
As to ‘objective value’ – what that?
No such a thing. What has ‘value’ today, is ‘valueless’ tomorrow.
150 years ago, aluminum was more-valuable than gold. Now we make beer cans out of it, and throw them on the side of the road when the beer is gone.
Diamonds used to be fantastically-rare and valuable. Now the diamond cartel buys them in vast bulk – to keep them off the market.
Lead has fluctuated in price by 400% and more in the last 6 months – both ways.
“Basket of commodities”? Heh. What do you suggest? (see ‘alumimum’, above)
I’m sorry if this all sounds relentlessly negative. And I wish I had a better answer for you. But neither of those things negate the points I am making.
llater,
llamas
Your refusal to answer is itself an answer. You seek perfection in a monetary system, but that is a chimera; perfection is impossible. So we are left to find the best system we can. Your arguments against gold and commodities are de facto arguments in favor of retaining the current system, which is most assuredly not the best we can do. With all its faults I’ll take a gold- or commodity-backed system, until you or someone else comes up with a better suggestion.
Cars that used to cost $2000, now cost $30,000. Real estate that used to cost $10,000 now costs $300,000. I could go through every product on the market, factor out the improved efficiencies of production, and find similar inflation. We went off of even the pretense of a gold standard in 1970. As they say, how’s that working for ya? While I suspect that after factoring in technology improvements, true inflation has probably far outstripped that amount, even using these records prices have multiplied by 7 since then.
There are 145,000 tons of gold refined in all of history. So, llamas, is your claim is that some tinpot dictator will manage to mine 145,000 x 6 = 870,000 tons of gold in less than forty years? That is too utterly preposterous to bother arguing about.
So to make your argument work, you arbitrarily declare gold not circulating to be not in use. Apparently you are basing that on the good money/bad money ‘law’ and concluding that gold (good money) is ‘out’.
This whole bad money drives out good money is flawed reasoning; it’s back asswards.
Money being money, it is ‘good’ by its worth, not by its quantity. In fact, it is good money that drives out bad by quickly absorbing its worth. The reason that bad money appears to take over the market is that nobody wants to hold it, because it is worth less.
It is a mistaken understanding of money to equate its velocity with success. Velocity is a sign of its failure. It becomes the most common medium of ‘trade’ because everybody wants to trade it away. Holding it amounts to giving some more of it to the issuer with every passing moment. Good money seems to disappear because it does what good money should, it sits quietly holding its value in the market.
And that what’s-his-name’s law, while popular, is falsified by Roosevelt having to use brute force and the threat of prison to force people to give up gold (good money) and use Fed notes (bad money).
And no, llamas. You are not the only one who knows the price of gold. I have on my computer 30 minute prices going back a couple of years and courser measures going back farther. I use them not to know the value of gold, but to know the value of the Fed note.
If you truly understood currency, you would recognize how, for just one example, gold and oil move in near unison. So I ask, which is the “hopeless basis for a currency” the one that tracks oil, neither inflating or deflating much relative to it, or the one that tracks neither. It is the Fed note that is fluctuating wildly, not the gold.
llamas, I just saw your comment on aluminum before posting this comment. That is what I am talking about when I refer to manufacturing improvements. Aluminum is the most abundant metal in the earth’s crust. We have merely gotten better at refining it. Gold is, er, not the most abundant metal. While it is likely that refinement will become more efficient in a more gold friendly marketplace, it will never be more readily available than paper and ink, say nothing of bits and bytes.
I use gold for comparisons simply because it is the easiest and best documented commodity and tampering is most visible. In a free market in currencies, I would more likely trade using dock receipts for commodities as money, ie bushels of wheat, gallons of diesel, tons of pig iron, pounds of copper, etc.
Laird wrote:
‘Your arguments against gold and commodities are de facto arguments in favor of retaining the current system, which is most assuredly not the best we can do.’
You misread me entirely. I am not making any ‘de facto’ argument in favour of retaining the current system. The current system sucks too. It’s just that any commodity-based system – and gold is worse than many – sucks worse.. I wish I had a better answer. I don’t like the current system any better than you do. But I don’t accept that I must have a better solution in order to point out the flaws in any other solution.
Midwesterner – where to start?
FDR’s outlawing of the private ownership of gold proves Gresham’s Law – “worse” money (Federal fiat paper) drives “better” money (gold coin) out of circulation, whence it can only be extracted by force.
As we have seen lately, homes that used to sell for $10,000, and then sold for $300,000, are now selling for $10,000 again – and some cannot be sold at any price. Come to Detroit & see for yourself. So what’s your point?
Cars that sell today for $30,000 could not be bought at any price 50 years ago. Performance, reliability, safety, durability – you could not sell a ’57 Chevrolet into a mass market today, even at its inflation-adjusted price (about $25,000) – nobody would buy it when you can buy an ’09 Honda Accord for the same money.
I didn’t say that gold that is not circulating is not in use – what I was trying to describe is how you don’t need to control all of the gold in order to manipulate its price – so much of it is tied up in non-circulating uses that you only need a relatively-small position to have a very large influence on the price. In fact, you don’t even need to actually possess the gold – you only need to make people believe that you do. Or can.
I certainly never said that some ‘tinpot dictator’ would have the capacity to extract 870,000 tons of gold – it’s a fatuous argument, which is why I didn’t make it. Why do you feel the need to fabricate what I said?
Governments hold perhaps 30% of the world’s stock of gold – the rest is in private hands, safes and teeth, and in a half-a-hundred industrial applications. The largest single government holder would appear to be the US with about 8,000 tons, although no major part of the US gold reserve has actually been seen for almost 50 years. It may be gum wrappers and Federal IOUs in Fort Knox for all we know.
So let’s say we go to a gold standard. How much gold would be required to seriously de-stabilize the US currency?
Not such an outlandish number now, is it?
Which country is now the world’s largest gold producer?
Gold tracks oil? What are you smoking?
Price of oil June 2008 = $155 a barrel
Price of oil December 2008 = $36 a barrel
Price of gold June 2008 = $875 an ounce
Price of gold December 2008 = $800 an ounce
So oil fell by 400% and gold fell by 10%.
Hell of a track, there.
llater,
llamas
Llamas, you claim that a gold- or commodity-backed currency system would be worse than the current system. You offer no alternative. Your “default” position, therefore, is necessarily to retain the current system, even if you merely see it as the best of bad alternatives, and is thus a de facto argument in favor of it.
QED.
llamas – Gresham’s law only operates when the exchange rate is rigged (by government force – you stress the word, and quite rightly).
Without such rigging good money would drive out bad.
As for commodity money – there is no reason whatever why the exchange rates of gold and silver coin were fixed (for example they were not in the Kingdom of Hannover till the middle of the 19th century – and there are many other examples).
Nor is there any reason why a person should not take gold or silver (or any other material) and say “make coins of this” (in return for a certain percentage – comptition comming into play).
For example in the western United States some private mints were frauds – but they were forced out of business by honest mints (people soon found out who was minting false coins – and the good version of Gresham’s law came into play “good money drives out bad – when the exchange rate is not fixed”).
It was not till the 1850’s that the government took over the private mints in the west of the United States – and there was no economic reason for it to do so (it was political ideology – minting coins being something the governement felt it ought to do, and the Constitution did give the government the power to do so if the Congress so wished).
As for “people will wear away the coins by usage” (to give one argument against commodity money) – writers worked out the solution to that long ago, encase the coin in clear plastic (the stamp of an honest mint will be seen clearly – and if the mint loses its reputation…..).
Really there is no argument against private commodity money decided by private contracts.
As for your suggestion that such a thing would be “worse” than the current credit bubble mess – such an idea astonishes me.
Of course there is no reason why gold or silver (or whatever the contract was in) could not be represented by a piece of paper (as long as the gold or whatever it was actually existed in the vault – otherwise it is fraud).
By the way hat tip to L. Neil Smith – it was him (many years ago) who told me of the clear plastic covering ideas as a response to the bogus “the gold or silver will be worn away by human hands line” (and it is bogus – as people who against voluntary money that is established by consentual contract are not really interested in preserving gold and silver from being worn away, it is just a cover for their real, and corrupt, motives).
I should also make the point that I am not writing in favour of the gold (or any other) “standard”.
I have no love of such deception.
Credit bubble central bankers like Ben Strong in the 1920’s were almost as bad as degenerates like Alan Greenspan (although not quite as bad – there need to keep up the illusion, the “standard”, limited their actions a bit).
“Standards” are no good even without a central bank – as many American boom-busts before 1913 showed (although the creating the Fed made them worse).
If the contract says payment is to be made in gold of a certain purity – then gold of certain purity is the money (not a “standard” for the money).
If the contract says payment is to be made in silver of a certain purity – then sliver of certain purity is the money for this contract (not a “standard” for the money).
And so on.
In history most people have chosen to trade in gold and silver – but if they agree to trade in something else, I have no problem with that.
And it is none of my business anyway – nor the business of anyone else bar the parties to the contract.
By the way Kevin Dowd (whatever other differences he may have with intolerant and dogmatic people like me) is quite correct about how governments (and their associates in the banks and nonbank corporations) have used first paper and now computer entries to build castles-in-the-air credit bubbles on a scale that Roman Emperors (no matter how power mad) could simply not have done.
The first country to use paper money on a large scale (China) had gone through hyper inflation and economic and social breakdown before paper money even reached Europe.
“So you are in favour of the ban on overseas trade by the Ming”.
No Tim Congdon – not being in favour of printing lots of credit money, does not mean I am in favour of banning overseas trade.
In the same way that me not being a dog does not mean I am a horse.
llamas, over sixty years, gold has bought on average 15.2 barrels of oil per ounce. There are investors that work this ratio. So you point out that on a short term scale, this ratio varied between 5.6 and 22.2 barrels per ounce. Incidentally, what is half way between 5.6 and 22.2? 13.9.
In other words, you chose (deliberately I presume) the biggest crash in living memory and discovered what? That gold averaged about the same ratio to oil that it has for 60 years. Today (April 7, ’09) it is around 16.6 barrels to the ounce.
What did a barrel of oil cost 60 years ago? $2.77. So over 60 years, gold runs 15 barrels per ounce give or take ~65% and dollars run pretty close to $2.77 per barrel giver or take 5400%. Well . . . ?
I see Paul addressed the obvious fact that it was FDR, not Fed notes, that drove gold out of the market.
I haven’t seen any of those 300,000 dollar houses selling for 10,000. At least not without the benefit of accelerated oxidative process (fire). Those 300,000 homes are in fact now 200,000 and so you would be appear to state that an inflation factor of 20 fold is preferable to however much you think gold reserves will inflate.
JFTR, I am not advocating a gold standard, backing or any other version of monopoly currency/banking system. I am advocating a free market in currency/banking systems. As long as the ingredients are clearly marked on the box, people should be allowed to chose what they want. If we add up all of the money every malinvesting idjit ever loses in a free system, it will still be less than even one phase of the bail-out/TARP/stimulus spree.
Midwesterner wrote:
‘ . . .over sixty years, gold has bought on average 15.2 barrels of oil per ounce. ‘
And in the long run, we’re all dead. Your average ratio is meaningless – it’s just an average. Congratulations, you can use a calculator. Claiming some immutable rate of exchange is operating each time that the ratio happens to pass through the average means – what does it mean? Nothing.
Yes, I chose a very large excursion, deliberately. In order to prove that averages mean – guess what? Nothing.
Paul Marks – well, yes, that’s how Gresham’s Law works. Thank you for pointing out the bleedin’ obvious.
Your points about tying currency to a certain amount of gold – or whatever – are all quite correct. But I notice that neither you, nor anyone else – seems to want to address my point about how any commodity-based currency leaves any nation at the mercy of another nation that may happen to have – by luck or design – a large amount of that particular commodity.
All this talk about trading in any commodity of the contracting parties’ choosing just makes me smile. This is the system of exchange of the 12th century. Such an idea astonishes me.
I’m about done here. I’ll leave the commodity-currency dreamers to their dreams.
llater,
llamas
Oh dear.
So China, by luck or design is the biggest gold producer currently. I understand they passed South Africa. It sure is a good thing that we use Fed notes. That saves us from the risk that China might, by luck or design, have a large amount of that particular commodity.
If there is one point where I disagree with you the strongest on this topic, it is that I would rather be at the mercy of those engineers and scientists working to make more of a commodity than fiat money politicians working to get more everything. Inflation of commodity stocks is restrained by the laws of physics. Inflation of fiat currency is restrained by politicians.
60 years of gold/oil trending flat and 60 years of $/oil looking like a Newtonian demonstration, I think my average ratios are very meaningful.
Like you, I’m about done here. I wish fiat money people would leave us commodity dreamers to our dreams. But fiat money dreamers keep insisting that we share their nightmares. And like it or not, we are. If fiat money is so good, why do you guys need guns to make people use it?
“In the long run we are all dead”.
Keynes.
And you quote the line with approval llamas?
Well Keynes has been dead since 1946 – this is the long run.
As for the price of oil going up and down over time – so what?
It went up and down over time in relation to fiat Dollars as well.
Either people are allowed to make contracts saying “I agree to pay you a certain amount of oil (of such and such a type) for a certain amount of gold (of such and such a type)” or they are not.
But if people are not allowed to make such contracts (or the contracts are voided by arbitrary and unconstitional fiat long after the fact) then one can forget about liberty or the long run health of civil society (which is the same thing).
llamas,
our opposition to the current system is that the governments of the world are telling us what to do. We want to trade on our terms, and not give the governments any excuse to nose into our businesses. Therefore, we do NOT want fiat money. Whatever the other consequences, nonfiat money gives us greater choices, so we prefer it.
Q.E.D. (Quickly Ends Debate.)
What Nuke said, and it really is that simple. There will never be a perfect system. So the point is not how good or bad a particular system is, but how much choice it gives, which leads to the conclusion that there should be no mandatory standard, commodity or otherwise. The only standards will be those agreed upon in private contracts. One of those may prove to be so useful as to win the market and become universal, or it may not. Time will tell.
Stripped to its essence, what we’re arguing for is the elimination of the “legal tender” laws. That would cure the problem, because people would be left to agree on payment methods by contract. The government could still issue its paper currency; we would be free to reject it, however. No worries!
Yep.