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The Once and Future Gold Standard
The Financial Times on whispers about reviving that golden oldie of international finance: the gold standard.
....musings about a gold standard are currently cropping up in all manner of unlikely places. One savvy European property developer (who aggressively sold most of his holdings in early 2007) recently told me that he is now moving a growing proportion of his assets from government bonds into gold, even at today’s elevated prices.
“The logical conclusion of where we will end up eventually is with some type of gold standard,” he explains, arguing that future inflation will almost inevitably cause a future collapse in government bonds.
Half a world away in the Middle East, some sovereign wealth funds now say that they are stocking up enthusiastically on food and gold, due to similar reasoning.
Meanwhile, in New York a (still) formidable American hedge fund recently circulated private research that echoes the reasoning of Mr Smith. Most notably, this hedge fund points out that since the world abandoned the gold standard on August 15, 1971 credit creation has spiralled completely out of control.
But this four-decade long experiment with fiat currency is not just something of a historical aberration, it argues – but potentially very fragile too. After all, the only thing that ever underpins a fiat currency is a belief that governments are credible. In the past 18 months that belief has been tested to its limits. In coming years it could be shattered, particularly if the current wave of extraordinary policy measures unleashes a wild bout of inflation....
It might seem almost unthinkable to propose a return to a gold standard, in other words. However, the key point is that the last 18 months have already produced a stream of once unimaginable events.
Back in August 2007, I interviewed Nathan Lewis about his possibly prescient book Gold: The Once and Future Money and the prospects for some variety of a new gold standard.
|4.13.09 @ 12:57PM|#
AAARRRRGHHH - NOOOOOOOO....
::Shakes fist at Brian Doherty::
not freaking likely.
|4.13.09 @ 12:58PM|#
Personally, I have about 25% of my assets in "paper" gold, which
right now is bumping along at the bottom of a technical trading
range (meaning it will either break the support level and drop some
material percentage before finding new support, or will start
moving up).
Gold has been trading in a fairly narrow range for awhile now,
which usually means that we are due for a serious price move one
way or the other.
My take is that the various central banks are moving heaven and
earth to keep the price of gold as low as they can with naked
shorting on the futures markets, as an upside breakout for gold
will mean serious devaluations of their currencies. I would say
that any investment in gold right now is, essentially, a bet
against the central banks, which is kind of like betting against
the house, in some ways. OTOH, their ability to suppress the gold
market will find a limit, someday.
Fist of Etiquette|4.13.09 @ 1:08PM|#
Gold has no intrinsic value. However, I agree we should go back to some standard, but the basis has to be something of worth. I suggest currency be backed by carbon credits.
|4.13.09 @ 1:17PM|#
Didn't dilithium crystals have great value in the future? Maybe get ahead of the game and base currency on them?
kinnath|4.13.09 @ 1:18PM|#
I gotta house with a yard big enought to plant enough veggies to
feed the wife and me. I gotta wine celler with a couple hundred
bottles of premium red wines and several times that in home-brewed
meads. I figure I can barter booze for meats. We ain't going hungry
or thirsty for a long time.
The fence is already going up. The watch towers and razor wire are
in the plans.
So were ready for the big inflation that's coming, I think ;-)
BakedPenguin|4.13.09 @ 1:19PM|#
They laughed at me at the academy when I first proposed the idea of pr0n backed money - but they'll see, they'll see. One day the Splatter will be the global unit of currency!
Buster Brown|4.13.09 @ 1:20PM|#
so ... how would investing in gold provide a hedge against future(hyper)inflation? Somebody explain this to me ...
|4.13.09 @ 1:21PM|#
the world abandoned the gold standard on August 15,
1971
The gold standard in the US was abandoned in 1930; the facade was
all that remained until Nixon finally proved that's all it was.
kinnath|4.13.09 @ 1:23PM|#
so ... how would investing in gold provide a hedge against
future(hyper)inflation? Somebody explain this to me ...
In the mid 70's, a couple of dimes would buy a gallon of gas. In
current times, the silver in a couple of old dimes would buy about
a gallon of gas.
Got it?
kinnath|4.13.09 @ 1:25PM|#
I have a silver certificate from my birth year tucked away as a souvenir. I imagine many if not most of the younger dudes on this comment board have never seen one.
Buster Brown|4.13.09 @ 1:26PM|#
Kinnath ... thank you. Got it ... so, being that we are not on the gold standard at the moment, how about investing in gold as a bet that we return to it? In other words, what are my gold investments worth if we return to a gold backed currency? I am thinking that it would ne very profitable ...
Craig|4.13.09 @ 1:27PM|#
Gold has no intrinsic value.
Except its intrinsic value in jewelry, in industrial processes and
products, and as the monetary medium of choice for most of human
history.
However, I agree we should go back to some standard, but the
basis has to be something of worth. I suggest currency be backed by
carbon credits.
The reason gold has value as a backup currency to the paper
currencies created by governments, is that it will continue to hold
value long after any particular currency, or any particular
government, has collapsed. A currency backed by "carbon credits"
would still depend on some government enforcement mechanism, which
runs the risk of collapsing along with the government that issues
them.
kinnath|4.13.09 @ 1:30PM|#
Gold has no intrinsic value.
Aside from looking pretty, the precious metals have great utility
value for making lots of stuff that people want and/or need.
Therefore, they all have significant intrinsic value.
jasno|4.13.09 @ 1:31PM|#
brotherben beat me to it, sort of.
How about we base our currency on exotic elements in the theorized
'island of stability'. Sure, none of them currently exist, but when
we finally figure out how to make them, I'm sure we'll have the
technological tools to withstand the currency devalutation.
bill|4.13.09 @ 1:35PM|#
I'd like to talk about the fact that paper money is completely
illegal in the US.
Article 1, section 8 of the Constitution grants Congress the
authority:
"To coin Money, regulate the Value thereof, and of foreign Coin,
and fix the Standard of Weights and Measures;"
COIN! It says nothing about print. It definitely doesn't say
anything about a private company like the Federal Reserve (which is
neither "federal" nor a "reserve") printing notes that can be used
as money.
Article 1, section 10 denies the States from making;
"any Thing but gold and silver Coin a Tender in Payment of
Debts"
gold and silver COIN! It's blatantly clear that the only gold and
silver and only COINS are legal US tender.
sfb|4.13.09 @ 1:37PM|#
It's blatantly clear that the only gold and silver and only
COINS are legal US tender.
Do you believe that the income tax ammendment failed to ratify as
well?
|4.13.09 @ 1:37PM|#
Except its intrinsic value in jewelry
Ornamental - I would consider this a weak form of value
economically
industrial processes and products,
Yup.
and as the monetary medium of choice for most of human
history.
That is true, but not an example of "intrinsic" value.
Gold is a shiny industrial/ornamental metal, which is increasingly
difficult to mine economically.
As far the three purposes of money: medium of exchange, a unit of
account, and a store of value - fiat currency bests gold at 2 of 3.
Luckily, for those who are inordinately concerned with the last of
the three, they can choose to convert their fiat money into gold at
any time.
squarooticus|4.13.09 @ 1:42PM|#
Do you believe that the income tax ammendment failed to ratify as well?
No, and this is a straw man argument: the gold and silver clause in
the constitution is (presumably) still authoritative since it
hasn't been abrogated by an amendment.
That said, we live in a society of men, not of laws: the notion
that the constitution protects any right or restricts the
government from exercising any particular power is foolish. Until
we return to a society comprising free men and women who understand
and cherish liberty and individual rights, using the constitution
to support an argument is quaint but pointless.
guy in the back row|4.13.09 @ 1:43PM|#
When is Harry Turtledove finshing his book about Ron Paul winning the election in 2008?
|4.13.09 @ 1:47PM|#
Article 1, section 8
Congress delegated this power to the Federal Reserve. Like it has
done with many other duties such as:
To borrow money on the credit of the United States; (treasury,
executive, with rubber stamp approval of congress)
To provide for the Punishment of counterfeiting the Securities and
current Coin of the United States; (Secret Service, treasury)
To establish Post Offices and Post Roads;
(another quasi-public institution)
To provide for organizing, arming, and disciplining the Militia
(congress now approves joint chiefs of staff, which is about all
they bother to do about this)
bill|4.13.09 @ 1:52PM|#
Please show me in the Constitution were it grants Congress the authority to delegate ANYTHING to the Federal Reserve.
Muttley|4.13.09 @ 1:58PM|#
One savvy European property developer...
This reminded me of this golden classic from
BBC
kinnath|4.13.09 @ 2:01PM|#
How is the Federal Reserve relevant? It's a bank.
The US continued to mint silver coins and print silver certificates
(paper money) for decades after the creation of the Fed.
It wasn't until recent times (i.e. the sixties), that the use
stopped producing silver coins.
Naga Sadow, Soon to be Lord Pr|4.13.09 @ 2:01PM|#
Kinnath, you fool!!! Bwahahahahahahahahaha!!! You've played right into my hands! Now if you would kindly post a google map link to your home my minions will know where to go a raiding.
|4.13.09 @ 2:02PM|#
Please show me in the Constitution
Standard Ron Paul red herring. The constitution doesn't
specifically grant congress the authority to delegate anything, but
it's irrelevant: are you arguing that congress people should be
striking coins in their free time? They have legislatively
provided for the execution of this function as they see
fit - as they do the other functions that I list. They exercise
wholly appropriate oversight over these various functions, as
constitutionally required.
I've always been struck by the dichotomy of libertarians distrust
of congress, worries about inflationary policies, and support for
free market solutions - while simultaneously hating on the Fed:
which was enacted to keep congresses money grubbing hands off the
printing presses, avoid collapses and inflation, while creating a
hybrid public/private banking system which has enabled our free
market system.
|4.13.09 @ 2:02PM|#
bill, I gotta agree with squarooticus on this one. The
Constitution began it slow decline into obscurity in the early
1900s and is now only loosely followed. You can point to just about
ANY government function these days and show how it's
unconstitutional, but that isn't going to make it go away.
Until people want to take back personal responsibility on just
about everything, we're going to have what we have now.
And squarooticus, well said. Sad, but well said.
squarooticus|4.13.09 @ 2:11PM|#
while creating a hybrid public/private banking system which has enabled our free market system.
You don't actually believe this, do you? That the Fed has enabled
our free market system?
(a) We don't have a free market system anymore: the government has
its hands in everything, and massively intervenes in any important
market, restricting competition and price signals that enable the
free market to produce good outcomes.
(b) The Fed somehow enabled the free market in the 1800's that
produced the railroads, steam engines, autoloading guns,
photography, radio, light bulbs, assembly line factories, and all
manner of technological and business process advances that
increased productivity by orders of magnitude?! You mean the Fed
that wasn't created until 1913?
You've said some wacky things in the past, but this one takes the
cake.
|4.13.09 @ 2:17PM|#
In the mid 70's, a couple of dimes would buy a gallon of gas. In current times, the silver in a couple of old dimes would buy about a gallon of gas.
You're off by about ten years but except for that you make a good
point.
They stopped putting silver in US coins (and printing and redeeming
silver certs) in 1964.
Gas was around 26 to 28 cents a gallon in the late 60s. By the mid
seventies it was double that.
|4.13.09 @ 2:22PM|#
By the way, the same thing shows up with gold.
All through the 19th centurly the generally accepted price of a
good quality man's suit was $20 or a Double Eagle (1 oz of
gold).
The price of one ounce of gold will still buy you a good suit.
|4.13.09 @ 2:23PM|#
You don't actually believe this, do you?
Actually, I do. And with good reason. The FR system has enabled a
much more stable and reliable banking system than was available
prior to its creation. Panics, and crashes used to be much more
common and severe. Obtaining capital was much more difficult then
compared to now, since the process of allocating capital was much
riskier and inefficient. By comparison, today it is extraordinarily
easy for an average person to obtain credit and start a business,
buy their own home, borrow to bridge short term gaps in
income.
a) if you are railing against the bailout, I agree. not sure what
this has to do with the Fed.
b) Yes, and there have been many other important innovations since.
I don't think this argument is very meaningful. I am not saying
innovation is impossible without the Fed - but rather that free
market access to capital helps bring good ideas to market, and that
the Fed has helped this process by providing for a stable banking
system.
|4.13.09 @ 2:28PM|#
Isaac, a friend of mine uses that argument all the time. Although he carries it back to a toga and a good pair of sandals.
High Every Body|4.13.09 @ 2:33PM|#
The price of one ounce of gold will still buy you a good
suit.
If that is what you call good.
Yes, I am a suit snob.
kinnath|4.13.09 @ 2:38PM|#
You're off by about ten years but except for that you make a
good point.
They stopped putting silver in US coins (and printing and redeeming
silver certs) in 1964.
Gas was around 26 to 28 cents a gallon in the late 60s. By the mid
seventies it was double that.
yup, I misremembered a few key points. That's what happens when
you're too lazy to google before posting.
So a bag of 4,000 silver Washington quarters ($1000 face value) is
going for about $11k (on one site today) ==> so a pre-1964
quarter is about $2.75 in silver now.
Wow, gasoline is such a bargain now ;-)
kinnath|4.13.09 @ 2:40PM|#
I remember when the Hunt brothers drove sliver coins to 20+
times face value in the early 80's.
Bubbles occur in all sorts of markets.
|4.13.09 @ 2:42PM|#
Mr. Bartram,
Considering the amount of labor required to produce and distribute
19th century suits (let alone togas!) compared to what it takes in
2009, that example doesn't carry much weight with me. Everything
should be cheaper now, all else being equal, don't you think?
kinnath|4.13.09 @ 2:44PM|#
So pay attention buster brown. If you decide to horde precious metals, be sure to get a mix of gold and silver. Cause it may be convenient to buy a suit with a gold coin, but you'll be better off topping off the tank using silver coins than trying to pay with fractions of gold coins.
|4.13.09 @ 2:45PM|#
I agree with crimethink. There is no a priori reason to suspect that the reletive value of anything should be stable over time. I think arguments of this type suffer from too many variables, not enough equations. People's preferences, living standards, needs, social classes, diets, lifespans, marital habits - everything, have evolved over time. Often radically. Anecdotal evidence that the relative value of two things were similar at two widely dissimlar points in time doesn't say much.
Lynn|4.13.09 @ 2:58PM|#
"I have a silver certificate from my birth year tucked away as a
souvenir. I imagine many if not most of the younger dudes on this
comment board have never seen one."
I have a ton of Nineteenth Century silver dollars that my
grandfather (born 1880) gave me. They are so cool!
kinnath|4.13.09 @ 2:58PM|#
There is no a priori reason to suspect that the reletive
value of anything should be stable over time.
When dealing with products that are widely available and which can
be massed produced, there certainly is a trend for them to maintain
a "stable" value relative to other mass-produced, widely available
widgets (including hard money).
Gasoline, food, durable goods (washing machines), houses even don't
change their value relative to each other that much unless there is
some remarkable breakthrough somewhere.
Consumer electronics are really good example of things that have
changed dramatically. When VHS VCRs first came out, they cost about
a month's take home pay for someone living just above the poverty
line (like me). But now you can buy a DVD player for under $30
bucks (four hours or so a minimum wage).
High Every Body|4.13.09 @ 3:01PM|#
But now you can buy a DVD player for under $30 bucks (four
hours or so a minimum wage).
I wonder if Stevie Nicks considers that a value?
|4.13.09 @ 3:03PM|#
Spoonman | April 13, 2009, 2:58pm | #
How about no standard, and letting people use what they want as
money?
Feel free to start a currency anytime you want. likewise, feel free
to start a business, and accept only alternative currency as
payment. both are legal.
High Every Body|4.13.09 @ 3:13PM|#
domo,
Feel free to start a currency anytime you want.
Someone already took my pr0n currency idea.
Fist of Etiquette|4.13.09 @ 3:19PM|#
Apologies to anyone who answered my previous
comment about carbon credits. I thought it sufficiently
ridiculous to not be taken seriously.
BakedPenguin mentioned
his plan of using pr0n instead, which was actually my first thought
when trying to come up with something people hold dear.
Spoonman|4.13.09 @ 3:22PM|#
Feel free to start a currency anytime you want. likewise, feel free to start a business, and accept only alternative currency as payment. both are legal.
Does legal tender not mean what I think it means?
|4.13.09 @ 3:35PM|#
"Legal tender" means you cannot refuse it as payment for a debt.
That's all. What's more, buying an item from a store is not a
situation that legally "incurrs a debt" so - you don't have to
accept cash (or checks or anything - you could demand bags of salt
if you wanted). What it means is that if someone owes you a debt,
and they try and pay you in dollars, you cannot sue them in court
for non-payment using the canard that you require payment in
Bob-Dollars.
Legal Tender does NOT mean:
1) other forms of payment are illegal
2) the government forces you to pay with, or accept dollars (except
that you must accept them in payment of a legal debt)
3) you can't mint coins or even paper currency and compete with
uncle sam (as long as they don't purport to be dollars)
Liberty dollars, and other gold schemes that have run afoul of
uncle sam were not indicted with legal tender laws, and that's not
why the feds had a problem. Rather, they refused to comply with
banking laws governing counter terrorism/narcotics laws (which is
another topic entirely). In actual fact, there are many local
currency schemes that have arisen (especially in tough economic
times) and these types of scrip have been widely used, and not
interfered with at all by the long arm of the law.
Haberdasher|4.13.09 @ 4:08PM|#
"If that is what you call good.
Yes, I am a suit snob."
An Armani suit at Neiman Marcus can be had on sale for about
$1,000, which is about where gold has been trading lately.
Nothing ever changes in Libert|4.13.09 @ 5:40PM|#
Reading this post reminds just how fucking far removed
Libertarians are from the real world.
Gold?
I mean, this discussion is akin to a D&D gathering, or maybe
poker night for socially awkward gentlemen.
Here's some advice: Build a bunker first. That way, the U.N.
helicopters won't be able to find you so easily, and then you can
worry about everything else.
Those Ron Paul Newsletters were just speaking to the fringe, right?
And to think that I came to this site expecting intelligent
discussion. What predictable claptrap.
|4.13.09 @ 6:19PM|#
I'm pretty skeptical about the utility of a return to the gold
standard, but I'm not exactly enthralled with the concept of fiat
currency either.
I don't think you have to be some sort of bunker-hiding conspiracy
nut to believe that the monetary system we've been using has
exacerbated some of the economic problems of the last 15 years.
Taktix®|4.13.09 @ 6:28PM|#
An Armani suit at Neiman Marcus can be had on sale for about
$1,000, which is about where gold has been trading
lately.
Who buys an Armani suit on sale?
*chomps cigar and adjusts top hat*
|4.13.09 @ 7:31PM|#
Nothing Ever Changes: you are very correct, although the ridiculous blathering got thick around the primaries and became unbearable by the general election, it is really surprising that the gold standard, federal reserve bashing, alien overlords crowd still seems to dominate what used to be a place for really intelligent discussion.
economist|4.13.09 @ 9:27PM|#
"Naga Sadow, Soon to be Lord Protector of the Fuedal Kingdoms of
the South"
I think we have a problem here. You see, I intend to be Lord
Protector of the Feudal Kingdoms of the South. This is my turf,
buddy.
Remember that.
economist|4.13.09 @ 9:30PM|#
I would lean towards supporting fiat currency, except that
leaving control of the money supply in the hands of any government
is almost certain to end in grief. I base this on the fact that no
government with a fiat currency has ever practiced a sound monetary
policy.
Go ahead. Try to prove me wrong.
economist|4.13.09 @ 9:31PM|#
Sorry, should have been: "has never practiced a sound monetary policy consistently. Probably the upward limit for sound monetary policies is ten years".
Kolohe|4.13.09 @ 9:47PM|#
Domo-
I mostly sympathetic to your POV on everything on this thread, but
I don't think you have the liberty dollar raid thing right. At
least, nothing I have read indicates they have been doing anything
other than the 'community script' stuff that has been making the
news lately..
Kolohe|4.13.09 @ 9:50PM|#
I base this on the fact that no government with a fiat
currency has ever practiced a sound monetary policy.
Maybe. But there are also around five major currencies and dozen or
so minor ones that keep each other honest by competing with each
other. So there are feedback mechanisms little different than a
gold (or splooge) standard.
a bit sceptical|4.14.09 @ 3:47AM|#
"But there are also around five major currencies and dozen or so
minor ones that keep each other honest by competing with each
other."
How naive can you get? Most world currencies are dollar-linked or
dollar-backed to some degree right now, the ones that are not have
been engaging in competitive devaluatiosn with the USD since
Nixon....
"keep each other honest"! really... what are you, 10?
not really|4.14.09 @ 3:57AM|#
"As far the three purposes of money: medium of exchange, a unit
of account, and a store of value - fiat currency bests gold at 2 of
3."
actually, an unit of account which changes over time is a bit
crappy... a gram of gold has been a gram of gold since the metric
system was invented... whereas your dad's dollar is definitely not
today's.
As a medium of exchange... the playing field is not exactly
level... but when we're talking electronic units of account it
really makes little difference if it's paper, gold or frequent
flier miles... convertibility is the key, not any physical
quality.
wijg|4.14.09 @ 4:05AM|#
...and of course Greenspan was right, it's amazing how intensely statists of all colours hate gold... there really is nothings special about gold, except that governments cannot control it... if the market had over centuries chosen peanuts instead of gold, these control freaks would be on a crusade against them...
|4.14.09 @ 7:58AM|#
actually, an unit of account which changes over time is a
bit crappy... a gram of gold has been a gram of gold since the
metric system was invented
Well yes, by definition. Completely true, and completely
uninformative.
A unit of account that changes rapidly and unpredictably is of no
use. units that change meaningfully smoothly and over decade time
scales are still pretty useful, and can be easily compensated for
using simple math. I still think this is an advantage for fiat
currency.
|4.14.09 @ 8:13AM|#
Kolohe,
The liberty dollar people were scam artists, and fraudsters. read
the FBI complaint.
confiscate it if you can!|4.14.09 @ 8:33AM|#
"The liberty dollar people were scam artists, and fraudsters.
read the FBI complaint."
..funny thing, it's a complaint, not a conviction... in fact,
weren't charges dropped?
...also funny that they were allowed to go on for years and
years... until they got into politics with those pesky copper
dollars... (sounds like freedom of speech to me)
measurement, schmezuerement|4.14.09 @ 8:38AM|#
"A unit of account that changes rapidly and unpredictably is of
no use. units that change meaningfully smoothly and over decade
time scales are still pretty useful, and can be easily compensated
for using simple math."
were you talking about physics, engineering, medicine... you would
be laughed out... having to compensate for slowly changing molars,
cms, mls, m... what a joke...
Oh well, "lies, damned lies and government statistics" ya
know...
accountant|4.14.09 @ 9:16AM|#
I concur. How can you DCF a 30 year bond if CPI SD cannot be
narrowed beyond 2sigma?
Investing for the long run becomes absurd when itertemporal
comparisons become so distorted after just a few years... and then
we wonder that nodoby saves! It's actually rational given the
institutional framework to consume like crazy and leave the next
generation to clean up the mess...
|4.14.09 @ 11:08AM|#
in a somewhat related matter, how are bartered transactions treated by the IRS?
High Every Body|4.14.09 @ 3:12PM|#
An Armani suit at Neiman Marcus can be had on sale for about
$1,000, which is about where gold has been trading
lately.
We are speaking of fine suits, not off-the-rack!
|4.14.09 @ 5:04PM|#
Gold has no intrinsic value.
Nothing has intrinsic value, so this really isn't a knock on
gold.
how would investing in gold provide a hedge against
future(hyper)inflation?
Well, traditionally, as the value of the dollar has declined, the
value of gold has gone up. Gold doesn't inflate, but currencies do
(very broadly speaking). In very rough, very broad, terms, if gold
is trading at $1000/oz, and we go through a period of inflation
that reduces the value of the dollar by half, then you can expect
gold to trade at $2,000/oz.
Really, though, gold isn't so much a hedge against currency
inflation as it is against government instability.
randy|4.15.09 @ 1:55AM|#
nothing has intrinsic value. All value is subjective.
...and relative in ordinal terms to available alternatives.
...you know oil? before the model T started rolling out it used to
be known as "black shit"
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