I know that many people are thinking: "Oh great, another loony Ron Paul talking point." Well, deal with it. If this presidential race has opened my eyes to anything, it is the issue of monetary policy and its importance in the various issues that plague the US from the debt, to health care, to standard of living. Now many people believe that returning to a commodity based currency would be a disaster for economic growth in this country. Other argue that a currency backed by gold and silver would prevent government overspending and protect the dollar from inflationary pressure. I think that there are decent points on both sides and want to explore is further.

Questions for Debate:

1) What are the benefits of making gold (and/or silver) legal tender and returning to a commodity backed currency?

2) What are the negatives?

3) Has enough attention been paid to monetary policy by the current crop of Presidential candidates?

1) What are the benefits of making gold (and/or silver) legal tender and returning to a commodity backed currency?


Correct me if I'm wrong... the logic behind taking us off the gold standard was that it made our goods more affordable in foreign, especially European markets, the down side being you couldn't do Frommer's Europe on 5 Dollars a Day.

So the logic of putting us back on the gold standard would be:
1.) the dollar would inch back towards 1:1 parity with the Pound and the Euro
2.) We could afford more imports
3.) Fewer people could afford our exports.

Americas buying power right now isn't by any means lousy... Government policies since Reagan have been to increase our buying power, often at the expense of jobs... and it's worked, at least according to a book I'm currently reading, "Supercapitalism" by Robert Reich.

As far as the strength of our export markets, I don't know enough about the situation to say how strong we are overseas. Something tells me we couldn't afford to be a country that only produces unaffordable luxuries for Western European markets, which if my dilettante's background in this matter is correct, is what would happen. Someone can enlight me if I'm missing something.

This is especially a concern with rising markets in India and China and South America... speaking on Africa, since the US's goal is to raise nations like Kenya and Benin into middle economies, it would defeat our own self-interest to make unaffordable products at the very moment African markets are finally reaching the middle economic status we've spent billions of dollars in aid helping them get to... that would be kind of a schizophrenic policy.

My personal thought is this: there have to be less destructive ways to prevent government overspending than putting us back on the gold standard. Maybe we need a federal amendment stating that our national debt can only be x percent of our annual budget. Or something similar. This should be a bi-partisan issue.

But I see the merit of any action that raises the value of the dollar in a non-destructive, smooth process.

3) Has enough attention been paid to monetary policy by the current crop of Presidential candidates?

Absolutely not, and it's not their fault... the media is set up to stress the same 2-3 or issues over and over again, and even then, do a poor job deconstructing the issues. This year it's Iraq, 'change,' and maybe driver's licenses. Let's all roll our eyes in collective protest on three, 1,2...

What we need are PBS-style debates -- seriously. These Wolf Blitzer duds are infuriating, all they are interested in doing is creating 'gotcha' moments, presumably so they can sell more stock footage with a little CNN logo in the corner. We need debates that take place outside of the arena of the mainstream horse race, so that serious voters can press these issues.

1) What are the benefits of making gold (and/or silver) legal tender and returning to a commodity backed currency?

There is currently about $800 billion in US dollars circulating. Where is the US going to get 40,000 tons of gold that it would need to implement a full gold standard? Fort Knox currently has about 5,000 tons of gold in the US Bullion Depository.

The gold standard actually caused some pretty huge problems on the international stage. There are merits to a gold standard, but also pitfalls.

2) What are the negatives?

The price of gold would rise significantly. I wonder if Ron Paul owns gold?

Right now, the value of the dollar and the value of gold counterbalance each other. One rises, the other falls. Tying the US dollar to the value of gold would tie the hands of the Federal Reserve, giving us LESS monetary control of the economy.

3) Has enough attention been paid to monetary policy by the current crop of Presidential candidates?

It isn't something that most people are interested in. Even ADers aren't all that interested in such a subject.

A commodity backed currency would keep a relative control on inflation. Of course, gold can be mined and sold, which would dilute the value of gold everywhere. However, this would almost certainly occur at a rate far lower than the rate at which federal reserve creates money now.

So the main advantage is preservation of wealth.

Furthermore, easy money policies can help create financial euphorias. Not that this is necessarily the case, but easy money and speculation tend to go hand in hand.

I think the big negative is loss of monetary control over the US economy, as AMlord suggested.

However, it can be argued that this isn't as big of a disadvantage as it might seem considering the institutions historical blunders, which include greatly exasperating the Great Depression (Though their hands were tied with the gold standard at the time) and creating the stagflation phenomenon in the 1970's. There is talk now of stagflation: every time interest rates are cut, oil will rally.

In a tightly controlled environment, money tends to get "stuck" which creates an environment were legitimate parties are unable to receive capital.

Lastly, the US controls the dollar, but it doesn't control gold.

No, anyone that watches the stock market knows the federal reserve has way too much power distributing wealth. Considering Alan Greenspan blundered his way during the final years of his position, and the slide the dollar has taken relative to other currencies, you would think more people would pay attention.

I don't think gold is the answer. Even Milton Friedman advocated a system were the total quantity of money increased every year.

What are the benefits of making gold (and/or silver) legal tender and returning to a commodity backed currency?

I can't think of any myself. Perhaps I'd revise my thinking if someone could tell me what actually determines the value of gold? It seems to me rather pointless stuff. It can be made into jewelry and coins. Okay, so? How would this offer 'wealth preservation'? Furthermore, I'm not sure it's an inflation hedge...gold reserves didn't stop the Confederate dollar from inflating, the dollars just began to represent less gold per bill. If we have to print to keep the economy floating, we will print....gold reserves or no.

And the value of gold changes over time as well. I remember when Carter was president, it went up to 1000 dollars an ounce (we've never seen that since). In today's dollars that would be about 3,155 dollars per ounce. The value of gold has decreased a heck of a lot since 1978...right along with our dollar. I just don't get it.....

An inflation "hedge" is an interesting word to use. Under the quantity theory of money, the value of the dollar can be maintained simply by not creating more of it. As long as the amount of currency and the amount of all assets remained constant, there should be no inflation. In that case, the government really isn't hedging its bets at all, it can stop inflation whenever it wants.

The rationale is that, given that the amount of money is fixed, price increases in one area must be offset by price decreases in another area. If there were a static amount of dollars in circulation, and the price of oil, in dollars, increased, then that increase must be offset by a price decrease somewhere else. All assets everywhere could not increase in price, because that require more money to purchase those goods.

Ideally, the government would create a fixed exchange between currency and gold so that every dollar would be worth X ounces of gold. If they issue more currency, or create more money, in excess of their gold reserves, then they are, in a way, cheating on their obligation to guarantee every dollar in circulation with a fixed amount of gold. They could fix it either by increasing the amount of dollars necessary to claim a certain amount of gold, or by rapidly pulling back in the amount of dollars in circulation. I think advocates of the gold standard would argue in favor of strict legislation preventing the government from issuing more dollars than they had gold.

As you mentioned, the supply and demand (and thus the price) for gold can change. The recent fluctuation (last 100 years) of gold prices can be deceiving because they are derived not just by the supply and demand for gold, but also the strength of the dollar. If it is expected that the value of the dollar will fall dramatically, gold prices would sky rocket. However, if that expectation never pans out, then gold would fall backwards. Dollar expectations can result in dramatic price swings.

I'm not an economist, but some of your logic doesn't make sense to me. Perhaps you could explain further?

Where is demand in your equation? If consumers, say, are on fixed wages (because in your notional nil inflation economy, there is no reason for annual pay increases), and the prices of oil-based commodities (i.e. not just fuels, or petrochemicals, but every good or service that uses fuels in their distribution) shoots up, maybe those consumers might decide not to buy quite so many goods and services at all. That's how most consumers choose to cut their expenditure - most individual consumers do not have the negotiating power to demand lower costs on commodity X because commodity Y has gone up in price.

That doesn't mean the goods get sold at zero price, it means they don't get sold at all. Which means that the government revenues form all of those sales taxes doesn't come in. So government also has to choose not to spend so much money (

Also, where is the profit motive and the concomitant underying driver of modern capitalism (i.e. that you don't just have to make a profit, you have to make more profit that last year/quarter/month/etc.)? Cost efficiencies will go some of the way, but the potential for those in most industries is not infinitely extensible.

Is the commercial economy to go to hell in a handcart to protect the currency, whose function is solely to serve as a means of exchange to allow a functional economy in the first place?

2) What are the negatives?

Well, there is the matter of inflation and/or deflation, depending on just how fast or slow the gold is mined and also the concurrent level of economic productivity at the time.

As I mentioned above, I'm not really in favor of a gold standard for all the reasons I mentioned there. I simply wanted to illustrate how the Federal Reserve creates inflation through expansive monetary policy.

Lets take a simple economy with three goods, A, B, and C that are all valued equally. Lets say that this economy also has three dollars and everything is in Equilibrium. We start out then, with:

A= $1
B= $1
C= $1

Assume that producer of product A wants to increase the income he makes to $2 instead of $1. If all the goods are valued equally, then he would not be able to achieve this because a total of two dollars has already been spent on B and C. In order to sell A, he must reduce his price back to $1. We assume that he would rather have the money than product A.

However, lets suppose that Item B becomes more valuable than either A or C, and demand has increased the price of B to $2. Then we would have:

A= $0.50
B= $2
C= $0.50

Because there is a static amount of money in circulation, $3, price increases of one item must be offset by price decreases of another. In the scenario above, there is no way inflation (an increase in all prices) can be produced because there is simply not enough money to do so. If products A, B, and C and the $3 in circulation remain unchanged, you cannot have inflation.

The only way for prices to increase would be to somehow increase the amount of money relative to the amount of goods:

Orange example

As Milton Friedman put it, "Inflation is always and everywhere a monetary phenomenon, ..."

Think about it realistically: a dollars worth of goods in 1960 is worth $7.1 today. If there was the same amount of money today as there was back in 1960, would this really be possible? Check the graph!

The question really isn't whether or not a gold standard would limit inflation, but whether or not zero inflation is what we really want.

The above makes little sense to me. Let's give your variables some names.

A=fruit
B=manufactured items
C=petroleum

In your above supposition, if the cost of petroleum goes up, the cost of manufactured items and/or fruit goes down. But both fruit and manufacturing requires the use of petroleum. If the cost of petroleum goes up, so must the cost of fruit and manufacturing (and distributing) or else those items cannot be manufactured in the first place and the plants close and the agricultural industry tanks as well.

It seems to me, on that note, that the apple has kept its value much better than gold. Maybe we should have the 'apple standard'. Makes about as much sense to me as the gold standard.

Edited to add:
Long ago, Aluminum was an expensive and relatively rare metal. Mining techniques changed that. Today, titanium is considered useful and somewhat rare but they are working on techniques that will likely decrease the cost of titanium substantially. I see this happening with gold too (especially if we chose it to back our currency). Gold is now worth essentially a third of what it was less than thirty years ago.

The main principle I wanted to demonstrate was that you cannot sell $4 worth of goods in a $3 economy. A producer cannot charge $4, say for product, A. He must reduce his price down to $3 in order to sell product A. If $1 is committed already to both A and C, the maximum the producer can charge is $1.

Whats nice about my completely unrealistic instantaneous model is that the amount of dollars in circulation relative to the amount of goods stays constant. As long as this balance is maintained, there will be no inflation.

I understand. I said as much in my first post:

I just want to point out that the creation of money is not exempt from this principle either. If you increase the amount of dollars, just as if you increase the amount of gold, it will lose its value relative to other goods.

If gold were to become as cheap and plentiful as you say, the amount of gold it would take to purchase the same good would increase.

Likewise, if money were to become plentiful (And cheap! Low interest rates) through monetary operations, the amount of money it would take purchase the same good would increase. (inflation)

I think your right. There are some obviously serious limitations to my model, but I think we can recreate whats happening here well enough. Lets say the price of C increases $1, which in turn, causes a price increase to both A and B of $0.50. You would have:

A= $1.50
B= $1.50
C= $2.00

Lets say C has already been purchased to produce both A and B. In that case, there is $1 remaining, so neither can profit at a $1.50 price. They must lower it to some combination that equals $1.

Of course, we could really take this to an extreme an wonder what the person whom received the $2 did with that money. If both A and B retain their static quantities of C (unlike petro, its not expensed), and the amount of money never changes, I think you can safely swap around all the goods without inflation. You cannot sell $5 to $3, no matter what! This might cause either the producer of A or B to drop out.

Maybe a more intellectually satisfying way is to say that a rise in Petro increases the cost of production for all goods, which reduces the supply. As supply decreases, the amount of dollars relative to goods increases (in what has been known as stagflation, a reduction of output and inflation). In order to decrease the inflation, we would expect monetary policy to reign in the money supply (lowering the amount of money to the amount of goods) by increasing interest rates, as Volcker did in the late 1970's.

Well, what determines the value of anything we use as money? The answer is that it represents a form of wealth bookkeeping. I do something for you, or give something to you, and in return you give me a token of indebtedness representing the value of what I provided for you. This token can later be exchanged for something from you. I could also give it to some third party in exchange for something of value, who could then exchange for something from you. Or there could be fourth and fifth parties, and so on, among whom this token could circulate. When tokens of this nature circulate all around, they're called money. As long the supply of these tokens remains constant, you can be reasonably certain that no one is helping himself to credit that he did not earn.

Granted, the supply of gold does not remain constant, but as has been already pointed out, it's effectively constant compared to the extent to which fiat dollars are created out of thin air.


I don't have detailed knowledge of Confederate financial history, but from what you're describing, it sounds like they didn't have a gold standard. It sounds like they had an arbitrarily defined dollar. Having gold standard means that your currency unit respresents a fixed quantity of gold, as fixed as the number of ounces in a pound. Otherwise it's not much of a "standard".


What are the benefits of making gold (and/or silver) legal tender and returning to a commodity backed currency?

The biggest advantage that I can see is that it would rein in deficit spending. Once that happens, all government spending would necessarily come under much greater scrutiny. It would be consequently harder for politicians to buy the votes of their constituents with pork-barrel spending. That means they'd have to actually earn their votes. Congressional elections would likely then become more competitive, with actual national policy being debated. By debating it at a more local level, it would become more accessible to more people than the "debates" that go on in presidential election campaigns.

Also, less federal spending would mean less ability for the federal government to use subsidies as marionette strings for controlling state and local governments, as well as various other institutions. That would mean more robust independence among all these institutions, and better ability for people to run their affairs at a more local level the way they see fit, not the way some bureaucrat in Washington sees fit.

Initially they did. Later not. Just like every other state that had to start diluting its currency at one time or another (basically all of them). The bottom line is, even a "gold standard dollar" (impossible as you describe it because there isn't enough mined gold in the entire world to cover our trillions in currency) is only as good as the government's credibility (ability really) to stick with the standard. If a government can go on a gold standard it can also abandon it. And the government's credibility (rooted in the strength of its economy) is exactly what gives fiat currency its value in the first place. So the gold* itself seems like an irrelevancy to me (an economically costly irrelevancy).


*Not to mention the value of gold itself, according to what you said above, is based on the same determinants as any other form of currency. It is variable, just like everything else.