A Philosopher's Blog


Posted in Business, Philosophy by Michael LaBossiere on January 7, 2011
American Gold Eagle
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Seeing Rand Paul pushing for a return to the gold standard got me thinking about gold. I’m not expert on gold, but I know that we went off the gold standard under Nixon and that hard currency like gold is often portrayed as very useful in various post-apocalyptic scenarios (although zombies only accept brains as currency).

While Paul is often portrayed as being a bit crazy (moonbattastic even), the idea of restoring the gold standard does seem to have some appeal-at least to certain folks. Of course, it also seems like it would simply bring about a return to the problems that leaving the standard was intended to address.

Rand and other gold proponents tend to focus on gold being a tangible asset and that it has consistently held or increased its value. Rand often contrasts gold with paper money, with paper money coming up the loser in his eyes.

In some ways, Rand does have some good points. While gold is valuable because we value it, there are some important differences between the way the value of gold works and the way the value of paper money works. In the case of gold, most people seem to value the gold itself. In contrast, paper money is valued to the degree that people have faith in what lies behind the printing on the paper. Crudely put, gold seems to back itself, while paper requires backing. So, for example, if I have some gold coins, I could take them almost anywhere and expect that people would value (and probably try to steal) them, regardless of what king, president or country’s mark is upon the metal. In contrast, how people regard my paper money would depend a great deal on the marks upon the money and what was supposed to be backing it up.

Though gold is a special sort of currency, its value is still extrinsic-that is, it is valuable only to the degree that people value it. True, from a practical standpoint, most people do value it. But this is quite different from gold actually being somehow intrinsically valuable. This would mean that gold would somehow have value even if no one valued it or had any use for it. It is, I suspect, important to keep this in mind.

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  1. T. J. Babson said, on January 7, 2011 at 12:43 pm

  2. WTP said, on January 7, 2011 at 1:51 pm

    Gold has value beyond paper money because gold has held its appeal across civilizations across centuries and thus has a track record that transcends politics or any other human-conceived entity. Gold is also a nearly finite resource and thus its tradition as a hedge against inflation, but could conceivably be influenced if someone were to hit the Mother of All Mother Loads (see more below). Thus the desire for a gold standard is inversely proportional to the faith and trust we put in our governments, and ultimately reflects our trust in our fellow man.

    “its value is still extrinsic-that is, it is valuable only to the degree that people value it.” Well, yeah that’s the meaning of value. However, you are overlooking gold’s practical uses as it is an excellent conductor of electricity, it is very malleable as metals go, it does not corrode easily, it is a good reflector of radiation, yadda-yadda (see Wiki). As it becomes increasingly valuable technologically and in manufacturing, its value will begin to increase disproportionately to its traditional use as just a pretty ornament. This could hold significant implications for its traditional use as the last refuge for storing wealth. Also perhaps digging too deeply into science fiction, as technology advances we could reach a point where we can turn lead (or something else that is not gold) into gold. While the implications of that breakthrough could far exceed the impact on using gold as a wealth storage, it certainly would upset the apple cart of its traditional usage.

    Personally, I feel that investing in gold is just short of investing in bullets so I would prefer to stay ahead of the curve. The implications for such a perception by governments is scary.

  3. WTP said, on January 7, 2011 at 2:02 pm

    Also “it has consistently held or increased its value”. Not really. Looks that way today because we are in a recession. Stocks have done better against gold over the longer term. Gold doesn’t produce anything. It just sits there. Worse, it costs money to keep it safe. Businesses produce the wealth that is temporarily stored in gold. If not for economic productivity, gold’s value would hit a ceiling.

  4. Greg Camp said, on January 7, 2011 at 2:51 pm

    1. There isn’t enough gold in the world on which to base a modern economy. A certain measure of inflation is necessary for growth, but pegging the dollar to a specified quantity of gold would either freeze the number of dollars or require a revaluation of dollar to gold periodically–something that would end up being a clunkier way of doing just what happens now without a gold standard.

    2. Gold has little intrinsic value. It has uses in electronics, but the amount of gold in our gadgets is small. Humans want gold, but they don’t have many needs for it. Its scarcity did lend it a kind of value (see Douglas Adams’s Golgafrinchans’ use of leaves as money), but that was only because humans agreed to accept that value, and we do the same thing with dollars today.

    • WTP said, on January 7, 2011 at 3:41 pm

      Greg, on what are you basing these statements?

      1. “There isn’t enough gold…on which to base…”? Says who and why? You can measure gold to whatever infinitesimally small standard you want, ounce, gram, milligram, whatever. What difference does it make how much gold there is? The point is that there is perceived to be a finite amount. Freezing the number of dollars has only a psychological impact. If the economy grows, the dollar stays fixed, the dollar grows in value. Now maybe you would need to bring back the half-penny, etc. at some point due to deflation, but that is also a psychological perception and would not have the same sort of consequences as it did during the depression because the economy was shrinking then, whereas in this hypothetical it would be growing. “A certain amount of inflation is necessary”? No, we’ve just come to accept it as a fact of life when really, it’s just the government (or whoever controls the money supply) quietly taxing us. The ideal amount of money supply in the economy is merely that amount that will produce the least amount of panic for the greatest volume of change the supplier can get away with.

      2. True gold has minimal practical use today, but that does not mean it won’t have much higher practical use in the future. Crude oil had very little value throughout human history and often could be found bubbling to the surface in places (even outside of Arkysaws), but once modern society found a use for it, its value increased dramatically.

      Ultimately, money doesn’t matter. Nor does gold. They are just middlemen, so to speak. What ultimately matters is the productivity of a society. The ability of a society to manage its wants and needs against its abilities is what is important. In order to move goods between these producers and consumers (remembering that producers and consumers are the same entities), some form of temporary wealth storage is required. Moving all the way back to a barter system would be a disaster only because it would destroy the ease at which this is currently done today.

      I asked this question once before and only kernos cared to reply…If I take a $20 bill out of my wallet and burn it, what is the economic impact? Similarly, but not entirely the same, I could ask, if I take the $10 gold piece I have in my safety deposit box and drop it into the Mariana Trench, what would be the economic impact?

      Also, for the gold standard fans, assuming we did peg the dollar to the price of gold…Hypothetically what would happen to the value of that dollar if everyone in the US stopped producing goods? Maybe the US government would convert those dollars to gold because they had promised to do so, but we’d be back to relying on the faith and credit of the US government. The government could use that gold to buy goods from other countries and sell them to citizens in return for dollars, but then the number of dollars in relation to the gold reserves (anyone remember Fort Knox? See TJ’s video link) would essentially be inflated unless the government then destroyed those dollars. Would you trust them to do so?

  5. FRE said, on January 7, 2011 at 3:32 pm

    What many people do not seem to understand is that most of our money supply is in the form of bank deposits rather than in coins or paper money. Basing money on gold would not limit the money supply to the amount of gold available.

    When we deposit money into a bank account, the bank lends out most of that money and the money lent out is also deposited. That process results in a multiplication of the money supply. So, even if we based money on gold, the money supply could still expand to several times the amount of the value of the gold on which it is presumably based.

    Gold is best understood as an important industrial metal.

    • Asur said, on January 7, 2011 at 3:51 pm

      What you’re saying is true, but recall why banks have those little “FDIC Insured” placards by the teller windows; if enough people try to withdraw enough of their money, the bank will collapse. After the Great Depression taught us that lesson, the FDIC was created to restore faith in the banking system and act as a buffer against the same thing happening again.

      The trick is that there is no one to insure the government. The US dollar is traded worldwide; if we guarantee it with a gold standard, then foreign interests can purchase our currency and then sell it back to us for gold — this is exactly what happened to cause Nixon to take us off of the gold standard in the first place.

      Giving foreign interests that kind of leverage over our economy is a terrible idea.

      • FRE said, on January 7, 2011 at 5:18 pm

        It wasn’t only during the Great Depression that banks failed; there were a number of financial panics before the Great Depression which also caused bank failures. After the Great Depression, postal savings accounts were created so people who did not trust banks could deposit their money at post offices.

        • Asur said, on January 7, 2011 at 6:22 pm

          Interesting, I hadn’t heard of postal savings accounts before you mentioned them. I’ve always disliked banking fees so much that for a long time I kept all my spare cash hidden away in a cookie tin…not that I had that much spare cash >.>;;

          • FRE said, on January 7, 2011 at 8:00 pm

            It’s only by accident I heard about postal savings accounts. When they were discontinued there was an article in the newspaper. I don’t remember how many decades ago that was.

  6. Asur said, on January 7, 2011 at 3:40 pm

    Greg is right that there is no where near enough gold to cover even our economy — if the US owned all of the gold mined to date on the planet, it would not cover our present paper currency in circulation.

    Switching to a gold standard would require a massive increase in the price of gold in order to be feasible. It would also force a reinvention of our financial system (no more deficit spending, ever…) and put our economy at risk of foreign control through such absurdities as having to purchase gold in order to pay debts beyond our current gold reserves.

    • FRE said, on January 7, 2011 at 8:01 pm

      Perhaps we could use something more valuable than gold by weight. How about xenon?

  7. WTP said, on January 7, 2011 at 6:28 pm

    God help us, it could possibly even lead to dogs and cats sleeping together! Again, I am not a gold standard advocate but there is a lot of misrepresentation going on about what the gold standard would be. Dare I say, straw men? There are various ways to implement a gold standard, the weakest of which get argued against. However, in an attempt to find where much of yall’s discussion is based, I ran across this. Not sure how far off Rand Paul is from Ron Paul, but here’s Daddy Paul, from his own web site (http://www.ronpaul.com/2009-11-14/end-the-fed-consider-outlawing-fractional-reserve-banking/):

    News Anchor: And just one more thing which is that when you talk about the right course, if I am not mistaken, you want to go back to the gold standard? Is that the right way to run monetary policy, in your opinion?

    Ron Paul: No, but I’d like to go forward to a commodity standard. There were a lot of always (wtp read as “flaws”?)in the old gold standard because there was bimetallism and fixed price between gold and silver. It’s still on the books that gold and silver is legal tender and we ignore it. If you use gold and silver as legal tender today, you go to jail. There is nothing in the law that says a Federal Reserve note equals a dollar. We can’t even define a dollar. No, we should have a definition of a dollar. How can you have a measuring rod which you can’t define? It’s totally foolish.

    I really like the idea of allowing the market to determine what backs the currency, make sure there are no-fraud laws, and really look into the matter whether or not we should have fractional reserve banking. Yes, you have the Fed creating money out of this air, but then this is magnified by fractional reserve banking which is really fraudulent. And all it does is build financial bubbles guaranteeing the business cycle and the collapses, and as long as you patch it together, the longer you do that, the bigger the bubble. And now we’re in the midst of a big correction.

    WTP again: I do NOT agree with much of the gold standard position nor do I agree with some of what RP says here, but it’s apparently not as simple minded as what has been argued here.

    • Asur said, on January 7, 2011 at 7:41 pm

      “…but it’s apparently not as simple minded as what has been argued here.”

      This is certainly true, but I don’t agree that it’s a strong criticism in this case:

      Economics at the scale of a nation is such a strange, complex beast that I don’t think it’s humanly possible to adequately predict what the results of many policies and decisions will be.

      But, there is still a pressing need to set those policies and make those decisions. If our most accurate portrayal of a subject makes it too complex to effectively use, then increasing generality must be introduced until we reach a point where we can adequately manipulate it.

      That’s why I think there is value to discussing these things in broad strokes. For example, I think it’s a compelling argument to say that any commodity standard tied to our currency will necessarily permit foreign tinkering with our economy through it — I just don’t see a way around this, regardless of how detailed the system is.

      • FRE said, on January 7, 2011 at 8:40 pm

        One of the problems with economics is that there are too many variables to pin down. Human psychology also enters into it. However, we have to do the best we can because government monetary and fiscal policy do impact the economy; we ignore that only at our peril.

        • WTP said, on January 7, 2011 at 8:52 pm

          “One of the problems with economics is that there are too many variables to pin down.” – Exactly. And the larger in size the government and monetary fiscal policy is, the more it will impact the economy. The ambition of those pursuing a gold standard and others who seek fiscal restraint in more orthodox (for lack of a better word) ways is to minimize that impact.

          • FRE said, on January 7, 2011 at 9:03 pm

            But consider that even before 1900, when government was much smaller, there was still a problem with economic instability. Of course governments can become too powerful and oppressive, but on the other hand, they can provide important services that otherwise would not be provided. Financing these services by necessity requires fiscal policies which potentially can impact the economy.

            There will never be total agreement on everything, and that’s OK as long as we are able to discuss important matters rationally and base our opinions on rational thinking.

            • WTP said, on January 7, 2011 at 9:40 pm

              I definitely agree. One of the most important purposes of a government, after national defense, is the establishment of certain standards and measures. I am not well versed enough in 19th century monetary systems or policies to get into the details, but IIRC the issue stemmed from a hodge-podge of competing and/or conflicting gold and silver standards. I would need to do some re-reading about the free-silver and other issues of the day. Also keep in mind that there was a good bit more bartering going on back then on the day-to-day consumer level which ultimately didn’t clash well with the faster economic turnover that the industrial age was bringing on.

      • WTP said, on January 7, 2011 at 8:45 pm

        “If our most accurate portrayal of a subject makes it too complex to effectively use, then increasing generality must be introduced until we reach a point where we can adequately manipulate it.” – Yes, I agree completely. But in context of much of the discussion here, I’m not reading it that way. Partly in regard to the fear of foreign tinkering and such. While I would not deny that there is an ability to commit some degree of skulduggery (ha, love that word), I certainly do not fear a foreign government, or any foreign entity for that matter, doing serious harm to our economy. Unless, of course, they can “invent” gold in some manner (see my other post above re science fiction).

        Let’s take the simplified examples described above. If foreign entities want to redeem dollars for gold (and under most gold standard plans, this ability is limited to certain entities), they would have had to acquire those dollars some how. They, or some other foreign entity from whom they got those dollars, at some point in the past would had to have sold goods and/or services to us, i.e. we got the “stuff” they got the paper (or more likely, electronic blips). We can redeem with gold from our own reserves or purchase them elsewhere, but we would only be paying a debt that we already had “written the checks” for, and assuming no funny accounting, we already had it off of our books so its economic impact would have already been accounted for. In fact, it could be seen as an interest free loan. Which is not much different than today, except we redeem today in goods and services. Now of course I’m speaking outside the context of someone cornering the gold market.

        All that said, I feel I must continuously state that I am not an advocate of the gold standard for many other reasons. I just disagree with many of the fears here. There was a gold standard in the past (post Bretton-Woods) and the modern economic world of the day was able to function.

        Also much of the discussion here speaks as if THE gold standard was a 100%-redeemable-for-gold concept, which is highly unlikely and highly unusable. A gold standard could be established at whatever the current rate of exchange is. Gold can also fall in value, as I also point out above. Again, the only thing that really matters for an economy is the exchange of goods and services via some stable value-holding medium. If whatever that medium is, be it dollars, gold, or pairs of Paris Hilton’s underpants, so long as the value can be expected to remain somewhat stable through the umm…period of the transaction, all is well economically.

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