Gold Standard

It has been proposed that, if we had been on the Gold standard since 1972, our inflation rate would have been virtually zero and the value of the dollar today would be worth much more than it currently is. I believe the value of the dollar today is something like...

1972: $1.00
2008: $0.14
 
The reason that the gold standard was abandoned is that it limits government spending: they can't spend more money than exists. Naturally they didn't like that after around 1960 or so.
 
I was raised in a military family. I helped my father build a bomb shelter in Colorado Springs . He did his 20 years. I did 11 and some. It seems we lost . Who would have known? No Foil hat required on this one. Next time your at Wall-Mart buy a tropical fish. Walk it through the door guards, and it will be dead in a few hours. Hold it upbove the guards or walk around it and all will be fine. Don't ask me how I know!


We seem to be owned by China now! Beware of the Enemy from within!
 
First let me say that by not being on the Gold Standard the United States is free (within limits) to print as much money as the overall economy will permit. The supply of which is controlled by the Federal Reserve and hinges on the interaction between four entities:

1. The Fed itself.
2. The commercial banking system.
3. The public
4. Thrift institutions

The United States officially went on the Gold Standard in 1900 with the passage of the Gold Standard Act. At the time the dollar equalled 23.22 grains of gold. In 1968 we went off the Gold standard in response to the U.S. Congress repeatedly lowering the percetage of gold reserves backing paper money. We have never been on it since.

People who argue for the Gold Standard say the flexability or ease with which "credit money" is obtained is precisely the problem. Without which inflation runs at much higher rates. The Gold Standard (outside of being a gaurantee of liquidity - ensuring low transaction costs & higher price risk) is sort of an oddity in American finance in that we have always been deficit spenders.

Only two times in the history of the United States have we had a balanced federal budget (My favorite Andrew Jackson "Old Hickory" and God help us all: Bill Clinton). Other than those two periods we have always practiced deficit spending. This was a direct result of our first advocate of centralized banking Alexander Hamilton. Hamilton argued (against the better argument at the time of Jefferson who wanted decentralized banking and an agrarian society) that debt was needed to industrialize the country, foster commerce, and in the long run debt was not just needed but debt was good. We have lived with Hamilton's legacy (or the lack of it) since that time.

The Gold Standard (or specie as it is often called) is the best way to keep inflation in check thus maintaining the value of our currency. The bottom line is that, as of today, we simply do not have enough gold to exchange for their equal denominations in bank notes. That is the primary reason we are no longer on it. If a bank "run" occured as it did in the Great Depression banks could not satisfy demand.

If we went back to the Gold Standard we would have to drastically reduce the amount of currency in circulation to meet the demand of specie reserves.

The federal government is simply not prepared to do that.

JP
 
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If we went back to the Gold Standard we would have to drastically reduce the amount of currency in circulation to meet the demand of specie reserves.
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Why? We don't need to specify that $1 = 23.22 grains of gold. We start over.

Of course, if our gold reserves aren't what they used to be (and why don't we have congressional oversight on that?!) then there will be a bigger problem.
 
As I said, you do not need to have gold to cover every dollar in circulation. Gold is used as a gatekeeper to signal how to steer monetary policy.
 
The Federal Reserve holds about 261 million ounces of gold for the US government. The US Bullion Depository at Fort Knox holds about 147 million ounces of gold.

The US has about $792 billion of currency outstanding (not held by the Treasury or Federal Reserve Banks).

In rough terms, you could convert US currency outstanding to a gold standard at an exchange rate of a little less than $2,000 per ounce of current gold holdings.

BTW:

The US Mint makes coins and the Treasury Department's Bureau of Printing and Engraving prints paper money.

There are 12 Federal Reserve Banks, that are corporations, the stock of which is owned by member banks across the country. The Federal Reserve Banks are mainly service companies, providing check clearing and other services to member banks.

The Board of Governors of the Federal Reserve System has 7 members appointed by the President and confirmed by the Senate. The 7 members of the Board of Governors, along with 5 of the Federal Reserve Banks' Presidents, make up the Federal Open Market Committee which makes monetary policy.
 
SecDef:

The Gold Standard would force the United States government to adhere to a set exchange standard. There is no "wiping the slate clean" and starting over. That sounds like the game Monopoly. There are too many economic and social variables. If we went back to the Gold Standard we would have to reduce the amount of currency in circulation because by virtue of being on the standard, we would be required to honor all bank note redemption "at will".

In 1900 the 23.22 grain designation was simply the gold exchange rate set at the time. Nothing more. A year later it could have been 26.25 or 25.88. The actual exchange rate during that historic period is not really important (other than for historical reference).

What is essential to understand is that by returning to the Gold Standard we would have to drastically reduce the amount of currency in circulation to meet the demand of specie reserves in the event of mass demand (what is commonly called a run). This speaks to basic credit risk. If we did not do that, and we were on the Gold Standard, there would be holders of bank notes that could not receive the promised exchange amount of gold for notes. That is the primary problem with decentralized banking and why we have adopted a centralized system.

As it is in the United States, our system operates on credit which is backed by more credit, and futher supported by even more credit (ala A. Hamilton).

Reducing the amount of currency (on a Gold Standard) to reflect the amount of specie held would not only reduce inflation, reduce the overall money supply (thus increasing it's value against other currencies), but it would create a more stable and respected economic system and credit rating.

JP
 
HKuser:

In fact, in an economic system that truly operates on the Gold Standard a government would need to have the appropriate amount of specie "on hand" for "at will" exchange.

That is why decentralized banking failed in the 1820-30 period. In addition, decentralized or "state" bank notes distributed by state or local banks became almost worthless (or were sold for pennies on the dollar) during that same period for exactly that reason. They simply produced more bank notes in higher denominations which far exceeded specie holdings.

If a government is serious about being on a gold standard they will ensure that every note can be exchanged for specie reserves. AS PREVIOUSLY STATED, THIS CONTROLS INFLATION AND STABALIZES THE VALUE OF YOUR CURRENCY. Otherwise you are simply deficit spending regardless of what you call it.

JP
 
The Gold Standard would force the United States government to adhere to a set exchange standard. There is no "wiping the slate clean" and starting over. That sounds like the game Monopoly. There are too many economic and social variables. If we went back to the Gold Standard we would have to reduce the amount of currency in circulation because by virtue of being on the standard, we would be required to honor all bank note redemption "at will".

In 1900 the 23.22 grain designation was simply the gold exchange rate set at the time. Nothing more. A year later it could have been 26.25 or 25.88. The actual exchange rate during that historic period is not really important (other than for historical reference).

What is essential to understand is that by returning to the Gold Standard we would have to drastically reduce the amount of currency in circulation to meet the demand of specie reserves in the event of mass demand (what is commonly called a run). This speaks to basic credit risk.
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In order to meet the demand for redemption of currency into specie, we merely need to ensure that the redemption ration is sufficient.

If we did not do that, and we were on the Gold Standard, there would be holders of bank notes that could not receive the promised exchange amount of gold for notes. That is the primary problem with decentralized banking and why we have adopted a centralized system.
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What do the current bank notes provide for in terms of redemption? Zero, right? You can't petition the government for specie, you need to go to an alternate market. Setting the redemption rate such that the outstanding currency IS covered by available gold in storage simply sets and immediate and fixed price of gold in dollars.

If the ratio is as gc70 says:
In rough terms, you could convert US currency outstanding to a gold standard at an exchange rate of a little less than $2,000 per ounce of current gold holdings.
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Requiring a devaluation of 2000/884 [spot price of gold in$/oz] to one or a 2.2:1 drop (or reverse split)...then we are truly screwed. We've been printing money hand over fist for too long.

Of course, any attempt to go back to the gold standard would pretty quickly shoot the price of gold up to $2000/oz thus making wall street the bad guys... what a tangled web hath been woven...

Interesting post regarding the fed reserves.

Edit to add: And a link to a blog entry on this topic with interesting respones.
 
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You do not have to monetarize gold to have a gold standard. Gold convertability would regulate your monetary policy at equilibrium. If you tried to print your way out of debt there would be a rush on the gold window. By the way, I'm not advocating a gold standard, there are myriad problems with it, but not enough gold isn't one of them.
 
Sec Def: you said:

"In order to meet the demand for redemption of currency into specie, we merely need to ensure that the redemption ration is sufficient."

My answer:

That is the primary issue. Had the U.S. Congress not continued with their 1968 fiscal policy with regard to reduction of gold per dollar we may still be on it. They no longer wanted to do it precisly because it limited the ability of the Fed to introduce additional currency into the system. They refuse to meet it and think non-specie backed money is better.

Sec Def: you said:

What do the current bank notes provide for in terms of redemption? Zero, right? You can't petition the government for specie, you need to go to an alternate market. Setting the redemption rate such that the outstanding currency IS covered by available gold in storage simply sets and immediate and fixed price of gold in dollars.
My answer:

See the first answer above. The reason you cannot redem bank notes for specie is because we are no longer on the Gold Standard. If lets say, in 1961you had a ten dollar gold certificate, you could actually go and redem it for gold. Being on a Gold Standard does more than set pricing in terms of dollars versus gold reserves. A Gold Standard creates credit worthiness. That it its genius. As it sits right now all you have backing the U.S. dollar is "the full faith and credit" of the U.S. government. This explains in large part why the dollar ihas been devalued so heavily against other currencies.



HKuser: you said:

You do not have to monetarize gold to have a gold standard. Gold convertability would regulate your monetary policy at equilibrium.

My answer:

To have a Gold Standard you MUST have gold to back each dollar in circulation or by definition it is not a Gold Standard it is an entirely different animal: "the full faith and credit" of the U.S. government.
 
Holding gold to cover outstanding currency conversion is not enough. The US also has $9.4 trillion of outstanding debt securities, $5.2 trillion of which is privately held. So, when US government securities held by the Chinese government mature and are paid in dollars, the Chinese could simply demand conversion of their dollars to gold.
 
Here is a good read for everyone.

Toilet Paper Money: The Downfall of Fiat Currency

Some relivant snipits:
The history of fiat money, to put it kindly, has been one of failure. In fact, EVERY fiat currency since the Romans first began the practice in the first century has ended in devaluation and eventual collapse, of not only the currency, but of the economy that housed the fiat currency as well.

Why would it be different here in the U.S.? Well, in actuality, it hasn’t been. In fact, in our short history, we’ve already had several failed attempts at using paper currency, and it is my opinion that today’s dollars are no different than the continentals issued during the Revolutionary War......

.....The U.S. of A. has all the characteristics set in place that have led to the collapse of every other fiat currency money in history.

We are currently at war, and the financing of this war is extremely inflationary. In fact, if you look back at our history, since 1914, the U.S has engaged in 16 military conflicts. We have been involved in some form of violent international accord in 44 of the past 93 years. The overwhelming majority of military conflicts result in monetary inflation.

The U.S. has a debt similar to that of Weimar Germany. All though the reasons for the debt are completely different, it appears that this Mount Everest of IOUs is going to be impossible to pay back. I guess the U.S. could just print 10 trillion dollar bills and hand them out, but the implications of such actions are obvious.

We are currently increasing the supply of dollars at a rate of 13% per annum. This over-issuance of a currency has been the leading indicator of a currency on the brink.

So what’s in the future for the dollar?

Some, myself included, might say that the dollar has already failed. It has lost over 92% of its value since its initial issuance in 1913. After the revaluation in 1934, the dollar dropped another 41%. In my opinion, it already is toilet paper money, but for the above-mentioned characteristics, which are alarmingly similar to the circumstances that led up to the eventual collapse of the dollar’s toilet paper predecessors, I believe that we have seen only the tip of the iceberg of the dollar’s inevitable path toward becoming toilet paper money.
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get rid of that worthless paper

I'll be happy to remove the burden from those of you who have those worthless US Federal reserve note. Send them to a charity so they can dispose of them for you.

:D
 
I'll be happy to remove the burden from those of you who have those worthless US Federal reserve note. Send them to a charity so they can dispose of them for you.
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Sorry, I'm converting mine into lead ingots, reloading supplies, and firearms. Stuff that actually holds its value. :D
 
This is simply incorrect. A standard is just that, a metric, not necessarily a pure specie system. All the currency does not have to be convertible at once. You're supposing a system of gold barter, which is not necessary for using gold as a standard.

HKuser: you said:

You do not have to monetarize gold to have a gold standard. Gold convertability would regulate your monetary policy at equilibrium.

My answer:

To have a Gold Standard you MUST have gold to back each dollar in circulation or by definition it is not a Gold Standard it is an entirely different animal: "the full faith and credit" of the U.S. government.
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To have a Gold Standard you MUST have gold to back each dollar in circulation or by definition it is not a Gold Standard it is an entirely different animal: "the full faith and credit" of the U.S. government.
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True, but you don't need $1 worth of gold (I know that doesn't make sense) for the currency to work, you fix the price of the underlying hard asset artificially low. So each dollar is backed by maybe 80¢ worth of gold and/or silver.

Alan Greenspan emulated a gold dollar for a while (until he abandoned it and the wheels fell off.) He raised and lowered interest rates to track the price of gold. This worked remarkably well. The dollar is in such a mess right now because Bernanke keeps lowering interest rates when he should be raising them.

Bob
 
HKuser:

A "true" Gold Standard does mean full covertibility. Otherwise, all it reflects is credit (or partial credit) masking itself as something else. A barter system has entirely different dynamics with much more simple independent, dependent, and extraneous variables.

zxcvbob you said:

"True, but you don't need $1 worth of gold (I know that doesn't make sense) for the currency to work, you fix the price of the underlying hard asset artificially low. So each dollar is backed by maybe 80¢ worth of gold and/or silver."

My answer:

That is what the U.S. Congress attempted to do in 1968 with their fiscal "slippery slope". Policy makers at the time correctly viewed the situation and decided that it could no longer be maintained. Add to that the notion of cheap and little regulated production of non-specie backed currency (credit versus tangible exchange or credit worthiness). The price of gold if set, would be in one dollar units (as a baseline).

Any other "pricing" is a byproduct of the currency exchange markets (futures) which is a different topic altogether and doesn't really apply to what we are talking about.

JP
 
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