Why is linking the US dollar to the gold standard a good or bad idea?

It’s a bad idea. Or perhaps more accurately, a useless idea.

I wonder if you have ever thought about money and what it is? Is paper money? Are shells money? Is gold money? Gold creates confusion because it is, of itself, valuable. Other things are not, in themselves, valuable. Their only value is symbolic. Money, whether it is gold, paper, or electrons, stands for the value of all the goods and services that humans create. It’s a pretty abstract concept, isn’t it?

We use money as a symbol for a unit of value. All the stuff we do and make has a value. All the money in the world should equal all the value of things in the world. When we make more things, we need more money to stand for the value of those things. When we lose things, we need the money supply to decline, too.

Money is really measured in terms of a comparison with the previous day or hour or week or month or year, etc. Well, I could go on, but I’m straying from your question.

Since money is only a metaphor, it really doesn’t matter which symbol we use for money. We can equate gold to the value of stuff we do, or we can just use numbers without any physical symbol for the money. As more and more interactions are done using credit cards and computers, the need for a physical symbol for money grows less and less. Eventually it will disappear. All the “money” we have will be symbolized in a card we carry about with us, or a chip in our heads, or whatever—it will be backed by computers.

A lot of people don’t understand what money is, and they don’t understand it’s symbolic nature. They think it should be a real thing. So they choose gold. If we switched to gold, there are some problems. THere is a limited supply of gold in the world. We can’t make more gold the way we can just create more money in the banking system.

So, as gold supplies remain the same—all the gold there is must stand for all the value there is. As value increases, gold won’t increase. That means a unit of gold will constantly increase in value. I don’t know how it would start out, but I wouldn’t be surprised if an ounce of gold would be worth an entire company at the beginning. We’d be flaking off amounts of gold too small to see in order to be worth what a 100 dollar bill is worth now. What is the point? Maybe a few people will feel more secure, but that security will be a chimera.

The future is not in going back to a gold standard, but in going forward to an even more hard to understand abstraction. It doesn’t matter whether people understand it or not. What matters is whether people trust the system. Does the money as counted in computers accurately reflect the value of everything in the world. If it doesn’t, we don’t trust money, and the economy goes to hell.

That’s what happened in the mortgage loan crisis. It turns out that the value we thought was in the houses wasn’t there. It was a fake. Those houses were worth a lot less than we thought. This caused a disbelief and mistrust in various companies and in our own lives, and the economy has been stalled in a recession ever since, because people still don’t trust there is an accurate measurement of the value of stuff and services in the world.

When that confidence comes back, the economy will recover. People didn’t believe that Obama was bringing back confidence. They elected Republicans in hopes they could make people feel confident. We’ll see what happens. Once the confidence comes back, the economy will grow again.

Just to add a note to the great explanation @wundayatta gave, gold isn’t really any more valuable than we say it is either. If we decided to make all the world’s gold equal all the world’s goods and things of value, that would establish a value for it. But if you were marooned on a remote island and there was only one other person there, which would be more valuable for barter with the other resident of your island, an pound of gold, or an pound of tuna fish?

One thing paper money has over gold is we can print more of it. That poses a risk. If we print far too much, it gets devalued to the point it won’t buy much. But being able to add and subtract money form the money supply lets central banks (our Federal Reserve Bank functions as ours) react to changing market conditions to try to stabilize the monetary system. All those who claim that this past recession would not have happened on the gold standard need to go back and read recent history. We were on the gold standard when the Great Depression hit in 1929.

The point of the gold standard was to tie the value of the dollar to something real. Gold is or was intrinsically valuable, whereas a scrap of paper with famous people on it is not.

It has been speculated that, even at present gold/dollar rates, there are more dollars, both paper and electronic, in circulation than there has ever been gold. There is no going back.
Happily, this reflects a rather capitalistic outlook on things: we don’t have to cut the pie into smaller pieces, we just make more pie of our own.

@Nullo Everything in the Gross Domestic Product is real. Real Estate is real. Paper currency is definitely a fiat currency getting its vlaue from the GDP that backs it up.

Gold gets its value not from some magical, intrinsic worth, but from how much there is in the world and how much demand there is for it. It is just as much a fiat currency as paper money is. On a desert island, a mountain of food would be worth your very life. A mountain of gold would be of no value to you whatsoever. It wouldn’t keep you alive a single day.

Gold has no intrinsic value. None whatsoever. The only reasons it is considered valuable by humans are that it is shiny and rare. Like other “precious” metals and gems.
You can not even make a good blade with gold.

@ragingloli true, not to mention the fact that it doesn’t oxidize easy, is malleable rather than brittle and therefore a convenient form of currency, contrary to popular belief you can eat gold and it is good for your digestion, despite having no nutritional value. But in the event of a life or death crisis, somewhere in the wilderness, i’d rather have a leather-man knife than an ounce of gold.

Being able to grow/shrink the money supply is one of the main mechanisms the federal reserve has for trying to prevent major economic disasters. The idea is that they can slow down the economy a bit when things get too hot, and then speed it up when things get too slow. This creates a smoother gradual increase in US GDP instead of a more erratic trend which is very unpredictable and ultimately bad for business and capitalism. Just one example of how Government oversight can be a good thing.

Another point to consider is that even if we went to the gold standard, money is still created/destroyed by banks. This is called the money multiplier effect. That article is a bit tricky to understand, so here’s the basic skinny.

Let’s assume we have gold coins in our economy. So in our hypothetical economy @Nullo has 10,000 gold coins he’s stashed away in a chest, and he decides that he’s tired of guarding it day and night and wants to take it to the bank so he can earn some interest and keep it safe. So he deposits the gold. Now Bank 1 has 10,000 gold coins in it’s depository. It’s allowed to loan that out, but must keep a percent of that onhand (assume 10% for this example—the federal reserve sets this rate) in case @Nullo wants to make a withdrawal (remember that @Nullo has 10,000 coins in his account so he can withdraw those whenever he wants). So now @wundayatta wants to borrow 9,000 gold coins to buy a car from @ragingloli. The bank takes out 9,000 from it’s vault and gives them to @ragingloli in exchange for the car for @wundayatta who will pay Bank 1 back with interest over time.

@ragingloli now has 9,000 gold coins in his pocket, and @Nullo has 10,000 gold coins in his account, but now there’s actually 19,000 gold coins in existence on the books, but there are still only the original 10,000 coins actually circulating around.

Now @ragingloli is tired of carying around all of those coins so he decides to deposit those in bank 2. Bank 2 must keep 10% of it in the vault and can loan out the rest. So Bank 2’s vault has 900 gold coins in it and makes a loan to @ETpro for 8,100 coins so he can go to college. @ETpro gives the money to Gorillapaws University which deposits the money in Bank 3. Nullo’s balance is still 10,000, @ragingloli‘s balance is 9000, and Gorillapaws University’s balance is 8,100. The economy in hypotheticalville now has 27,100 coins in existence, but only has the original 10,000 coins actually exist physically. This process continues and will ultimately result in 10x the original amount of coins being created “out of thin air.”

The system actually works because there are millions of people with accounts and not everyone will withdraw their money at once, so the reserve is enough to cover any individual’s needs, unless there’s a run on the bank, in which case the whole thing goes to hell and you have a depression. This is also part of what “too big to fail” means.

The federal reserve can increase or decrease the percentage the bank must have onhand and will actually create/destroy money this way. It is another tool for speeding up or slowing down the economy to try to even out the bumps.

@gorillapaws

Thank you for your explanation on fractional reserve banking, but I must ask,Who is this system working for?
Seems like it ready works for tge rich .

You forgot one key item in your explanation,and that’s interest. If a back only needs ten percent of reserves on hand, where does the interest come from and if banks serve to function for the people and pull money out of their ass, why can they charge interest, especially if that money doesn’t exist in the first place?

Also, the federal reserve is as federal as federal express it is a private corporation, whose main goal is profit.

@chris6137 Banks will pay out interest to those who deposit money, and will lend at a higher rate to others. The difference in rates is how banks generate profit. They need this to cover the cost of people defaulting on the loans, to pay their employees, to cover their overhead costs, to make dividend payments to stockholders and of course to bonus out the executives.

Having banks that are able to make loans is actually a very good thing for the common person, because it allows them to buy houses, cars, start up businesses, go to college etc, without having to first save up the money. If everyone had to pay for college up front without loans, then only the rich elite could afford to send their kids to college, and therefore only the elite would have degrees and would serve to prevent people from rising above the class they were born into. Having a healthy banking system truly is in the best interests of the little guy.

The problem comes when banks abuse their power and try to skirt regulations that may not allow them to get quite as much profit, but are there to protect the safety of everyone’s money. A well-regulated healthy banking system is a big part of what has made America the world power it is.

I’ll add my voice to the pile of people saying it’s a bad idea. I’d also like to add: instead of being able to control our own money supply, we would, like Greece, be turning over the control of our money’s value to others – in this case, the people who set the price for gold. This would be mining companies, and countries that export gold. Or, the alternative would be to set a national value for gold internally, which would be (1) not nearly as libertarian as the people who favor a gold standard would generally prefer, and (2) pointless, why not just set the value of currency?

A system based on debt discourages and actually hurts those who do save.
Housing and college tuition prices are as high as they are, only because people have access to money via loans. This hurts the common people trying to save to buy a house because the prices are being inflated by the people who are getting loans making it nearly impossible for the common person to save for a house.
If mortgages werent available, people would still live in houses. but instead of banks owning majority of the houses like they do now, people would actually own houses. Since we are so dependent on mortgages and most people’s credit is being destroyed on a daily basis, the only people who will be buying houses are the rich people who dont need loans to do so and they will be getting super cheap prices.
Our system of debt is what I believe to be a major cause of many of our problems. All money is created out of debt, which allows us and our government to spend money on things it can not afford. Ever notice how the national debt never goes down? Its not supposed to. Just like all ponzi schemes, when they stop growing, they fail.

There are 3 major banks in the world: the federal reserve, the international monetary fund, and the world bank. In greece, france, and other European countries, the IMF has been imposing austerity measures. The IMF is only concerned about receiving the interest they are owed because that is the main function of a corporation, to make profit. Once the product is sold(money), they are no longer concerned with getting that back, since the product they are selling(money) is made up to begin with. We will soon experience austerity in the US, which will than be passed along to the IMF. At that point, call it a dollar, amero, euro, peso, whatever you want to call it, the world will have currency or currencies controlled by one group(IMF), which will mean that no matter what our money is called, it will all be controlled by a small group of people, the same really smart group of people, that go to the colleges that even with loans available, most people can not get into or could not get loans for, that make them smart enough to use the banking system against the huggge amount of people that have no idea how it works.

I am by no means an expert on economics and monetary policy, but in my opinion, money, something which affects everyone, should not be so complicated that you need to go harvard to understand. I believe that a lengthy and healthy public debate of economics and monetary policy is strongly needed amongst our representatives because the only person i hear bringing up the subject is Ron Paul and he has been predicting the exact scenario happening with our economy since the 70s and no one ever debates him on the arguments and questions he raises. I think we may be surprised at how little our representatives understand economics and monetary policy.

May i recommend cheking out an article that Alan Greenspan wrote in 1966 called Gold and Economic Freedom? He actually argues for gold backed money and even talks about causes of the depression, which sounds very similar to what the Fed has been doing to try and avoid it again.

@chris6137 It really doesn’t matter if there is one bank or fifty. It doesn’t matter if it is gold or ones and zeros. The only thing that matters is confidence: is this unit going to get me what I expect it to get me? If you believe the answer to that question is yes, you will go forth and work hard and try to build yourself your own nest egg—big or small. If the answer to that question is no, then factories will stop working, and people will get laid off, and people will cut way back on their buying and selling of things.

If mortgages were not available, people would not be living in houses. No one would be able to make money building houses. So people would be crammed into smaller spaces, and more people would be living on the streets, just as things have been in the Soviet Block and Cuba and other centrally planned economies. The only advantage of those economies is that while everyone would be poor, they would all be equally poor. Except for the elite, which is much smaller than it is in capitalist economies.

The recession is purely conceptual. There are the same amount of workers and same amount of factories and same amount of consumers before and after the recession started. The reason why ten percent of the workforce is out of work instead of five percent is confidence… or lack thereof. Now, it’s different. The lack of confidence has been going on for so long, that lots of these factories and houses and stores have been shuttered. The value of things in the world shrank to match the reduced value of goods and services being produced.

Now, in order to expand the value produced in the world, we have to rebuild confidence, so people will be willing to go back to work and take risks, believing they can succeed and earn a good return on their investment. That’s a slog. It’s much harder to build confidence than it is to destroy it. You have no confidence because you are afraid of too few banks. It really doesn’t matter what your reason is, nor whether it is a sensible reason or not. All that matters is that you, and millions, perhaps even billions of others lack confidence that the money supply is an accurate reflection of the value of goods and services being produced in the world.

I have confidence. I understand that people are willing to work and want to be productive and create new stuff. I have worked most of my life to take advantage of my confidence in the economy (which is very different from confidence in myself). I come from a family that values education very highly. That’s an investment that reeks of confidence. It says that knowledge will give you a payback—a much better payback than other investments. It hasn’t always been easy to see the payback, but one of the results is that I can write something like this. In my opinion, education is the way out of the recession, and the way to bring badly needed confidence in our economy back to people.

@wundayatta did you notice a lot of people living on the streets in Cuba? i didn’t.

Secondly don’t you think offering vast levels of credit to people of dubious financial responsibility or potential is inevitably going to create an illusory sense of prosperity and productivity, and a false economy, when the debt eventually gets called in the little stack of cards is bound to come fluttering down.

Thirdly is it really ethical to buy and sell money? i mean as an abstract concept, it seems like a bit of a cheat to me, it seems like Minimum work for Maximum profit. This is where the whole concept of money sinks to its lowest denominator.

Fourthly @chris6137 round of applause, well said.

@mammal I noticed the people of Cuba having no cars, and barely enough food to eat, and I noticed that they wouldn’t have survived without the support of other nations, like the USSR. They did accomplish one amazing thing: universal health coverage.

Ethical to buy and sell money? Why not? Have you misunderstood my argument about what money is? To repeat, it is just a metaphor for the value of things. We buy and sell things all the time. Buying and selling a metaphor is just a form of derivative trading, I suppose. Meta-money. It’s a way of sharing risk. If it is done properly, it helps reduce risk. If people lie, then it doesn’t work, and that’s when we get recessions. The only thing we can do about that is to strengthen our systems for preventing and catching liars.

Many thanks for all the replies, everyone! Reading through all your entries has been really educational.

@wundayatta they wouldn’t have survived without USSR because America tried/ is trying to close them down economically, because America prohibits it’s own people to trade with Cuba, how is that a free market economy, how is that democracy? America doesn’t even allow it’s own people to visit, yet every other country has that right. Yet America trades with Vietnam and China openly. Let’s be reasonable. Besides, USSR was finished a generation ago, Cubans are still fed, clothed, educated, housed and looked after in health terms, with the automatic right to employment. Some Cubans have cars, and they are obligated to give other Cubans who don’t have cars a lift when the needs arise. i quite liked that idea.

Oh OK we’re trading in metaphors now, that’s cool, if somewhat bizarre, derivatives sounds like the long slippery slope from the concrete to the abstract to me. i would rather not build or buy a house on the basis of an abstracted metaphor if it’s all the same with you :)

@mammal Fine with me how you want to build a house. You make some good points about the blockade of Cuba. I wasn’t thinking about that. We’ll never know how things might have been different with free trade.

Food for thought: what is the role of money in a centrally planned economy? From each according to their ability to each according to their need. Cuba may have gotten the “according to their need” part right, but it’s hard for me to see how they would have gotten the “according to their ability” part any better than the USSR did.

In either case, it seems to me that in such an economy, money is irrelevant. Instead, there’s a big, master tote sheet somewhere figuring out what people’s needs are, and then distributing stuff according to some egalitarian formula. I’m not quite sure why you’re using communism as a case for the gold standard.

@wundayatta well Cuba is a law unto itself, for better or for worse, but i really don’t get this continuous barrage of hate, terrorism and subversion from it’s Super power neighbour, really i don’t. Cuba seems such a benign entity to me, despite it’s imperfections, sending it’s doctors all over the developing world to help the disadvantage and so forth. it breaks my heart to be honest with you.

I agree with you @mammal. I think the war against Cuba is largely symbolic… or it was largely symbolic, and then the symbol went away, and now it’s just habit and Florida politics.

if i give you a lump of coal you give me a note for it’s value, if i give you a lump of gold you give me a note for it’s value, if i don’t have a lump of coal or gold, but i got a good idea where to get some will you give me some notes anyway? the latter is the printing process of the federal reserve, there is no natural resource backing the american dollar (other than the labor of the citizens), so the idea is to pay off the debt and issue notes for the value of the gold that america has in reserve (which is none). suffice it to say we are now personally beholden to china with no way out. if we needed a reason for world war, there it is.

@dealrrr: No way out? You describe things as though the mining of natural resources is the only way for the US to generate value. The manufacture of products, as well as the provision of services, are two major avenues through which this can be achieved as well.

@dealrrr – I beg to differ, on your assertion that we have no gold reserves. We do.