Let it Shine

Money versus Gold

Doubts about a gold standard

gold standard vs consistent supply of money

First of all, this is an excellent article.

You didn't, however, convince me that gold is an adequate standard. Maybe it has been relatively stable but when it comes down to it, gold is just another commodity albeit one that has a very long shelf-life. Gold's price is affected by supply, for example in the 16th century when conquests in America brought an abundance of gold back to European resulting in massive inflation. It is also affected by demand - the intangible aesthetic value attached to it as well as (presumably more and more as our would becomes more electronic) the fact that it's one of the best conductors of electricity know, even better than silver.

Your point about Thailand and currency pegging is a bit of a straw man. Since Argentina I think you'd have a hard time finding anyone who thinks currency pegging is a good idea.

It has long been believed that modest inflation is good for an economy since people are more likely to take out longterm loans for things they expect to bring some return - real estate or entrepreneurship - if they thing their loans will become cheaper relative to their income over the long term.

You do a great job of pointing out the world needs a more stable money supply. I think it's a bit misguided to think that a return to the gold standard would provide this better than, say, the progessive adjustments and improvements in monetary policy that have going on since before history.

I would suggest that you place a few links in. Some for those k5er's who haven't taken Econ 101, and maybe a few on the Thailand investment pullout and Greenspan's actions leading up to it.


Can anyone think of anything else which may be more stable than gold to peg the dollar to? I can't think of any, but there may be something out there. After all, gold isn't perfect.

Also you could address other current issues with the floating dollar. For instance, the artificially high price of the dollar due to Chinese, Japanese, and Korean holdings which keep their currencies devalued against the dollar. This in turn enables them to keep exporting huge quantities of their goods. This tends to have an adverse effect on the already bloated US trade deficit.

The dollar has been slowly devaluing - it's currently at a new low against the euro. I my opinion, the best thing for the world economy would be slow %30 to %40 devaluation of the dollar over the next few years. Currently, the Bush administration seems to be attempting to curb the trade deficit with trade restiction policies which aid US export markets (most notably on textiles). At the same time, the US thirst for imports seems unquenchable. A sharp increase in expense of imports may turn Americans away from imports.

I stress that the devaluation of the dollar needs ot be gradual or catastrophe may be lurking. Unfortunately, it currently looks like it may be a rough ride. There are currently fears that

China might threaten to retaliate by selling some of its massive Treasury holdings - a move that would hurt the US bond market and which could weaken the dollar further. The report showed the fall in net inflows came from declines across numerous types of US financial assets. Foreign purchases of Treasuries have fallen to their lowest, on a monthly basis, since February, according to Lehman Brothers. The Treasury report said foreigners bought a net $5.6bn of Treasuries in September, down from $25.1bn in August.

It seems that the main benefit claimed for the gold standard is: the supply of gold can't be affected by governments. But how will we force governments to retain gold as the standard currency? Perhaps we'll require some constitutional amendment (or other legislative restraint) saying "Gold shall not be abandoned as the sole currency..." But couldn't we just as easily have a Constitutional amendment prohibiting the excessive printing of paper money? The Constitution has been more stable than the price of gold, after all.

And I question the claim that gold prices have historically been stable and non-inflationary. During the 16th century, enormous new stores of gold were found in the New World, and this led to significant inflation. Thus, any stability of gold prices could come to an end, when new gold reserves are discovered. I'm told that there are several million tons of gold for each resident of Earth, floating around in the asteroid belt beyond Mars. Is it so inconceivable that this could be mined some time during the 21st century? Especially since, if Gold were the currency, this asteroid mining would bring limitless wealth to whoever did it first? And what would be the longer-term affect of the sole world currency suddenly becoming worthless?

Finally, the gold currency may not be under government control, but it is marginally under societal control insofar as we can invest in expenditures to extract it. Since currency is inherently worthless, and since Gold is only expensive because it's treated as a currency by some, the cost associated with extracting something inherently worthless is wasted money. Consider. In the 16th and 17th centuries, the government of Spain spent collosal sums on military expeditions to the Americas, in order to wipe out the Indians, mine the gold from their earth, transport it on sailing ships back to Spain, and put it back in the ground in vaults. This costed huge sums and caused inflation. What was the ultimate point? Aliens visiting Earth would consider it highly peculiar that we pick a currency because it is difficult to increase the supply, and then we spend enormous sums trying to increase the supply.