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Thanks in large part to the hype surrounding Ron Paul's candidacy within the Republican Party, the notion of a US return to the Gold Standard has enjoyed renewed popularity as of late. Mr Paul supports the dissolution of the United States Federal Reserve and a return to the Gold Standard. Others in his ideological camp would take the matter yet further, and some have gone so far as to suggest that the United States do away with paper currency altogether and return to the practice of using coins minted from actual precious metals as currency. Like many of the solutions seized upon by hobbiest libertarians, these monetary policies are concise, simplistic, and - unfortunately - completely wrong. A return to the Gold Standard is not only profoundly inadvisable for the United States, but also impractical, unnecessary, and unrepresentative of the problems and solutions put forth by the dicitfuls of Dr. Paul. In an effort to inject some sanity into the debate, this article will address the first of three myths and misunderstandings upon which the Gold Standard movement is based. Myth: Gold Ensures A Stable Currency Take a dollar bill out of your wallet or purse and look just to the right of George Washington's head. Printed in small black letters should be the phrase "This note is legal tender for all debts public and private." These words, and the guarantee of the United States Government, are the only things that give the US Dollar weight as a currency, either domestically or on the international currency markets. Some 30 years ago, in 1972, this was not the case. Under a system called Bretton Woods, the US Dollar was, for some time, pegged at $35/ounce of gold, meaning that one dollar was worth, by decree of the United States Federal Government, 1/35 of an ounce of gold. The Bretton Woods system was brought to an end in 1972 as the unequal market pressures forced a rapid movement of dollars (and thus liabilities for the sale of gold at $35/ounce) out of the United States. Since that time the United States has operated on a fiat currency, meaning that the dollar is no longer pegged to the price of gold nor guaranteed by it. Rather, dollars have value because the government of the United States says that they have value. Such a notion is troubling to many as the notion of a government controlling anything, much less money, through an exercise in self restraint seems a joke at best and a recipe for financial disaster at worst. Critics of the fiat system question what motive such a government has that would compel it not to simply print money as it sees fit, thus inadvertently destroying overnight the value of its own currency. Gold or silver, by comparison, can not be simply produced, and thus acts as a natural check upon this assumed tendency to expand the money supply without consideration for the hyper-inflationary pressures such a move would have. The problem with this argument is not one of its accuracy, but rather a matter of degree. A fiat system is more prone to governmental expansion of the money supply, but such expansion is neither unique to it nor a probable course of action for its economic governors. A gold based system is less prone to hyper-inflationary tendencies, but by no means immune from them and, as demonstrated under Bretton Woods, is less able to respond to rapid changes in the market. As such, the opposition between Gold Standard and Fiat is neither a binary one nor nearly so clear cut in its costs and benefits as laid out by critics of the existing system. Gold's value comes primarily from its high demand and low supply. There are many uses and applications for gold in the modern world and a limited supply of it. Currencies pegged to or backed by gold will remain stable provided these two economic realities remain true. Such monetary systems are, however, at the mercy of the global gold market. History teaches that, should demand for gold drop significantly or if world-wide gold production suddenly increased, gold backed currencies would immediately and irrevocably collapse. This is exactly the fate suffered by the Spanish (and by extension European) economy during the early era of New World Colonialism. As Spanish galleons hauled tons of silver and gold across the Atlantic, the European precious metals markets went into hyper-inflation. Dutch traders, then profoundly concerned for the long term stability of the European continent, bought and buried gold and silver en masse in a desperate attempt to keep the entire European continent from slipping into a depression, but their economic sacrifice was neither large nor timely enough to save Spain herself, which suffered the brunt of the economic consequences of her wealth. Even Spain's gold standard could not save her economy from the massive influx of gold and silver brought about by her exploitation of the Americas. Indeed, Spain still suffers some of the consequences of that economic collapse today. The risk of a Spanish style collapse can be mitigated by allowing a government to re-adjust the rate at which gold is pegged to a currency. A US gold standard would, by Constitutional mandate, incorporate such a safeguard as Article I, Section 8 clearly states:[Congress shall have the power] To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures. (Emphasis added) This safeguard and power, however, nullifies the initial advantages listed for a gold-standard system: namely the difficulty of devaluation and political stability. In short, the constraints and limitations placed upon monetary governance by a gold standard system serve as little more than speed bumps should government seek to actively set about the devaluation of currency. In actuality, a gold standard offers only ineffectual protection for the money supply against incompetence and malice while profoundly limiting the ability of well informed and well meaning governments to enact substantive and beneficial monetary policy. Far from ensuring a stable currency, a gold standard is a primitive relic serving only to hamper modern monetary regulation.

http://www.nowpublic.com/debunking_..._myth_stability

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Friedman and Schwartz's insight was that, if monetary contraction was in fact the source of economic depression, then countries tightly constrained by the gold standard to follow the United States into deflation should have suffered relatively more severe economic downturns. Although not conducting a formal statistical analysis, Friedman and Schwartz gave a number of salient examples to show that the more tightly constrained a country was by the gold standard (and, by default, the more closely bound to follow U.S. monetary policies), the more severe were both its monetary contraction and its declines in prices and output.

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Subsequent research (for example, Choudhri and Kochin, 1980) has identified other countries that, like China, did not adhere to the gold standard and hence escaped the worst of the Depression. Two examples are Spain, where the internal instability that ultimately led to the Spanish Civil War prevented the country from re-adopting the gold standard in the 1920s, and Japan, which was forced from the gold standard after being on it for only a matter of months. The Depression in Spain was quite mild, and Japan experienced a powerful recovery almost immediately after abandoning its short-lived experiment with gold.

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The second category consisted of countries that had restored the gold standard in the 1920s but abandoned it early in the Depression, typically in the fall of 1931. As Friedman and Schwartz observed (p. 362), the first major country to leave the gold standard was Great Britain, which was forced off gold in September 1931. Several trading partners, among them the Scandinavian countries, followed Britain's lead almost immediately. The effect of leaving gold was to free domestic monetary policy and to stop the monetary contraction. What was the consequence of this relaxed pressure on the money stock? Friedman and Schwartz noted (p. 362) that "[t]he trough of the depression in Britain and the other countries that accompanied Britain in leaving gold was reached in the third quarter of 1932. [In contrast, i]n the countries that remained on the gold standard or, like Canada, that went only part way with Britain, the Depression dragged on."

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Third were countries that remained on gold but had ample reserves or were attracting gold inflows. The key example was France (see p. 362), the leader of the Gold Bloc. After its stabilization in 1928, France attracted gold reserves well out of proportion to the size of its economy. France's gold inflows allowed it to maintain its money supply and avoid a serious downturn until 1932. However, at that point, France's liquidation of non-gold foreign exchange reserves and its banking problems began to offset the continuing gold inflows, reducing the French money stock. A serious deflation and declines in output began in France, which, as Friedman and Schwartz pointed out, did not reach its trough until April 1935, much later than Great Britain and other countries that left gold early.

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They found that the countries that remained on gold suffered much more severe contractions in output and prices than the countries leaving gold. In a highly influential paper, Eichengreen and Sachs (1985) examined a number of key macro variables for ten major countries over 1929-35, finding that countries that left gold earlier also recovered earlier. Bernanke and James (1991) confirmed the findings of Eichengreen and Sachs for a broader sample of twenty-four (mostly industrialized) countries (see also Bernanke and Carey, 1996), and Campa (1990) did the same for a sample of Latin American countries. Bernanke (1995) showed that not only did adherence to the gold standard predict deeper and more extended depression, as had been noted by earlier authors, but also that the behavior of various key macro variables, such as real wages and real interest rates, differed across gold-standard and non-gold-standard countries in just the way one would expect if the driving shocks were monetary in nature. The most detailed narrative discussion of how the gold standard propagated the Depression around the world is, of course, the influential book by Eichengreen (1992). Eichengreen (2002) reviews the conclusions of his book and concludes largely that they are quite compatible with the Friedman and Schwartz approach.

money, gold and the great depression

http://www.federalreserve.gov/board...022/default.htm

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Originally posted by zDmn You know, for every link you post, there is another link that lays out the exact opposite. I guarantee you didnt even read them. Ive been challenging you for input and all you've been able to do is attack my character. And suddenly youre such a knowledgeable guy because you googled up 20 articles. Thats not how it works, noob. I've read convincing articles that describe all kinds of different opinions. I dont go along with the conspiratorial aspect of the Fed because there is a lot of phony information coming from all kinds of different opinions. All I have to do is look back at history and see how obvious it is that the Fed has too much power.

zdmn just became my favorite tranceaddict member.

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Originally posted by pkcRAISTLIN 10 characteristics of conspiracy theorists A useful guide by Donna Ferentes 6. Inability to tell good evidence from bad. Conspiracy theorists have no place for peer-review, for scientific knowledge, for the respectability of sources. The fact that a claim has been made by anybody, anywhere, is enough for them to reproduce it and demand that the questions it raises be answered, as if intellectual enquiry were a matter of responding to every rumour. While they do this, of course, they will claim to have "open minds" and abuse the sceptics for apparently lacking same. you dont know how the fed works or what it does. yes, i HAVE read numerous pieces of garbage that you're alluding to here. many of us in the PDD have been unfortunate to be presented with these arguments repeatedly over the last few years. every so often another idiot conspiracy theorist like yourself comes along to "open our eyes". ultimately all they do is illustrate their sincere lack of knowledge and understanding of a fairly straightforward and transparent institution. i pity you.

lol, he just used his famous cut and paste list on you zdmn.

Oh look, if it isn�t TA�s dumbest of the dumb!

How�s the second investigation into 911 coming along mate? I bet you�ve made some massive strides since last we spoke!

Care to educate us with your wealth of economics knowledge? We�d love to hear from you.

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Originally posted by zDmn I made the mistake of trying to reason with fools. The laws of nature, common sense, and the physics of money are totally irrelevant to a Marxist. They artificially change the rules and proclaim themselves intellectuals and its lead to the same end time and time again - a system of counterfeit money that cannot be sustained. The average man's 401K is drowning in debt while investment banks and government continue to grow despite the fact that they are the ones who overreached and caused this mess in the first place. Before Bretton Woods, the USA (despite the FED) was the worlds largest lender. Now we are the worlds largest debtor. Yet these Marxists still refuse to acknowledge the fact that wealth has been redistributed. Your solutions to the economic downturn are simply more of the same - counterfeit, confiscate, and redistribute. I shouldnt expect anything more from a guy named "Comrade Stalin" though.

Marxist!? LOL! Is that what it is? Sorry, read up on Marxism before you misuse the term. None of us are arguing for the state to control the means of production. And instead of providing any counter argument to my rebuttals of all your points, you simply revert back to restating for the nth time all the talking points which we just addressed for you. Talk about in one ear, out the other.

Are we supposed to just accept your propositions outright? Hell no. This isn't a church you're preaching to the choir to, it's a political discussion/debate. You got to put (evidence) or shut up.

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My solutions? - Return monetary powers to the Congress per the Constitution. Democracy is key when dealing with honest money.

Congress has money powers. They have just delegated it to the Federal Reserve. And this just goes to show you have no problem letting our interest lobby infested Congress run monetary policy. For all intents and purposes, you're proposing the economic suicide of America.

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- The currency must be backed by a commodity. A common man should be able to exchange his paper money for its worth in gold/silver/etc. at any bank of his choosing. This type of system would make the effects of counterfeiting much more apparent to the common man, in turn, encouraging government saving rather than debt. Interest rates will be influenced by commodity reserves and free markets instead of artificial means, and thus be more stable over a longer period of time.

You can already buy all the gold and silver you want without commodity money. Occrider has already made clear that many of the attributes of fiat money apply to commodity money as well. Interests rates are not set "artificially", the Fed moves them up or down according what the market is doing. Free ranging interests rate are utterly detrimental to the economy. No they won't be stable, they will become enormously more volatile.

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- End "fractional reserve lending". When the average bank isnt able to loan money that doesnt exist, people are far more likely to buy with savings than debt. Prices of houses, cars, college, etc. will accommodate.

Prices of houses, cars, etc. will accomodate alright, into a deflationary spiral by the very radical change of our entire economic framework that you advocate. Credit is the reason businesses expand, hire new workers, entreprenuers open up shop. Our spectacular growth would not have been possible without the current system we have in place.

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These key solutions, among others, would end an era of constant boom and bust cycles and massive market fluctuations, and replace it with a market that is not only more predictable and sustainable, but even more prosperous in the long run.

Your key solutions would only massively disrupt the economy. The business cycle is a natural effect of capital markets. To say these "principles" are going to end it all is ludicris. I don't know what planet you're on, but a unregulated highly volatile market, is far from predictible or properous.

Funny how they come and go so quickly.

I'm am sick to the bone of these lunchbox economists...

I studied economics for 4 years at uni, got my Honours degree, and have subsequently been successful in the field for 5 years. I STILL feel that I'm not qualified enough to have a decent opinion on fixing the worlds financial ills.

And here come along some halfwit wannabe intellects that've watched some papermach� youtube videos, and have read some bullshit hyperbolic internet article claiming comparisons of the US economy with Zimbabwe. Not only do these pricks think they have the understanding of the topics at hand, they think that their regurgitated opinions actually hold weight.

If you feel so passionately about the ill state of the economy, get out there and make a fukn difference yourself. Educate yourself and get a job where you can create change. If that's too hard, or you like your shitty menial job, then shut the fuk up. Stop posting bullshit on the internet that makes absolutely NO difference.

Intelligent people like Occrider no longer post in these forums simply because of these fukwits that hijack threads into discussions of homeschool grade economics. There's little wonder why the PDD is dead

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Originally posted by Dupz And here come along some halfwit wannabe intellects that've watched some papermach� youtube videos, and have read some bullshit hyperbolic internet article claiming comparisons of the US economy with Zimbabwe.

The comparisons are not entirely invalid.

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Originally posted by Capitalizt The comparisons are not entirely invalid.

So where�s the graph that shows that such increases have caused hyperinflation in the US?

Patience young grasshopper..It will take a few years to see the results. We haven't felt the effects of all the money printing yet due to the economy being utter crap. Banks are hoarding cash to make their balance sheets look good and keep stockholders confident. Things will turn around eventually though. Unemployment will drop..lending will pick up, and the bubbles will begin to reinflate.. Once the economy gets moving and that money starts circulating and multiplying (via the fractional reserve process), look out below.

So, care to take a guess at the hyper inflation level? 1000% 10,000? What do you reckon?

I've never said hyperinflation. Even the spike in the graph isn't enough to cause that. It would need to be 10X as high. I've said we are going to have "uber-inflation" though. My guess is around 10-15% annual inflation for a decade or so..unless we get another Paul Volcker in office who is determined to choke it off to protect the dollar, which I seriously doubt. There is simply no way to fund our current welfare/warfare state with a strong dollar, so the gubmint is going to take the easy way out and use the indirect tax of inflation.

oh, ok. so when you said this

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Originally posted by Capitalizt The comparisons are not entirely invalid.

you didnt really mean it?

"entirely" was a qualifier buddy.. Clearly there are similarities between the vast increase in the supply of money in Zimbabwe and the huge spike we've seen here. Both countries are engaged in the same practice. It's just a matter of degree.

Of course it�s a matter of degree, that�s the whole point. EVERY country is doing what Zimbabwe was doing (printing money). Let�s all make ludicrous comparisons the world over, yeehar!

Few countries have a fed quite as insane as the US fed. I don't think Austrailia/Britain/Germany, etc have printed nearly as much. We can get away with it though cuz a bunch of dumbass countries around the world (like China) have their currency tied to the dollar..which means their value will drop in tandem. Because of the currency pegs, we are basically exporting our inflation to these other countries and won't be paying more for their imports as a result. As long as people see the US Dollar as the "world reserve" currency, the game can continue indefinitely.

That �insane� fed just stopped your country from imploding.

Not rly. They (along with the federal gubmint) slapped some bandaids on a crumbling foundation. All they've really done is pass the buck to future generations and guarantee we will need to deal with a much bigger debt/currency crisis in the coming years.

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Originally posted by Capitalizt Not rly. They (along with the federal gubmint) slapped some bandaids on a crumbling foundation. All they've really done is pass the buck to future generations and guarantee we will need to deal with a much bigger debt/currency crisis in the coming years.

Capitalizt, you do realize the Federal Reserve is going to raise interest rates, reduce their balance sheet, etc., right? The real problem is the government's deficit spending and the lack of regulation in the financial markets, specifically derivatives. This crisis should make clear to you cap what a completely unregulated market is capable of. The derivatives market quite clearly almost brought us all down.

Derivatives have only become the disaster they are because these major institutions have an implicit guarantee from the government that they will never be allowed to go under. I think a few catastrophes with no corresponding bailout will do a world of good for the markets in the long run. This attitude that things must be kept on an upward trajectory at any cost is where the real damage is done krypt. All of these stimulus plans, home buyer tax credits, cash for clunkers, etc are distorting the market prolonging the current malaise. This belief that the state must fight market corrections and keep this bubble economy inflated at all costs is the SOURCE of the debt you are so worried about.

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Originally posted by Capitalizt Derivatives have only become the disaster they are because these major institutions have an implicit guarantee from the government that they will never be allowed to go under.

oh, so you're saying the bailouts came before the collapses? interesting.

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Originally posted by pkcRAISTLIN oh, so you're saying the bailouts came before the collapses? interesting.

Well pk the first bailouts of financial institutions didn't happen in 2008. We had precedent for that back in the 80's.. Secondly, the biggest derivative players like JPMorgan & others have a virtually unlimited line of credit from the fed (since they are part of the fed). They can safely assume they will be bailed out if they f*ck up sufficiently badly..unlike the man on the street who would lose his house if he made irresponsible bets. Of course nobody sets out to lose money with these derivative games..but when you are politically connected the incentive to be cautious is greatly reduced.

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Originally posted by Capitalizt Derivatives have only become the disaster they are because these major institutions have an implicit guarantee from the government that they will never be allowed to go under. I think a few catastrophes with no corresponding bailout will do a world of good for the markets in the long run. This attitude that things must be kept on an upward trajectory at any cost is where the real damage is done krypt. All of these stimulus plans, home buyer tax credits, cash for clunkers, etc are distorting the market prolonging the current malaise. This belief that the state must fight market corrections and keep this bubble economy inflated at all costs is the SOURCE of the debt you are so worried about.

The derivatives market is the wild west of the financial world. The size of this market is in the 100's of TRILLIONS of dollars. You're saying that a market with the potential to totally destroy our economy single-handedly, and almost did in 2008, should be left alone. No oversight, no capital restrictions, no separation of commercial and investment banking, etc. And when it does inevitably threaten to bring down the entire system, the government should do nothing and watch as society verges on a meltdown. I don't buy it for one second.

"In my view, derivatives are financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal." -Warran Buffet

Warren Buffet on Derivatives

I'm not going to pretend to understand the intricacies of the derivatives market. In general I am against any sort of regulation against voluntary exchange between a willing buyer and seller. All derivatives ultimately boil down to voluntary contracts between private parties..however I have no problem with certain types of regulations. If it can be shown that a firm takes the same asset and packages and repackages it multiple times..leveraging up with all sorts of fancy tricks to inflate the perceived value, then sells it to multiple buyers, this would be a clear case of fraud and shouldn't be allowed. When I was researching the silver market, I found the total number of outstanding paper claims to silver VASTLY exceed the physical supply that could be pulled out of the earth in 10 years..and all of these claims could be used to demand delivery at any time..so something is clearly amiss there. I think we need transparency more than anything. If regulation can accomplish this, go for it.

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