I'm not an expert on this subject, but based on what I know, in my opinion the instability of the present-day economy (partly) is due to the fact that we have stopped backing currency with anything of real value (like gold and silver). With the gold standard, currency existed at stable values and, since it was backed, this prevented the printing of money out of thin air (much like the federal government does today) Paper money backed by gold and silver is one thing; however, fiat currency can lead only to further inflation and devaluation. With inflation, you are losing money; and you aren't going to be making any more. This makes it worse for everyone, especially the poor. Gold and silver not only exist at stable values, they are scarce in supply, which means you won't have unlimited currency. The federal government can print as much money as it wants, but it isn't backed by anything and it does nothing to actually improve the wealth of individuals. Stable prices and valuable currency is what we get from the gold standard; why don't we get back on it?
Because we can't now, it would be a very difficult thing to do for many countries do not have any gold and there are only a few that control it.
Norsefire, I will try to respond to some of your statements. Much of what you write originated with the "gold bug" sites, mostly from speculators that play the gold market. Gold is anything but 'stable', it has wider swings than the US dollar, for instance. Gold speculators buy gold on the down side, then fill the internet with 'fiat money' inflation fears. That drives many investors to buy commodities, much of it gold. That causes a demand for gold and commodities, increasing the market price. More investors will pile into the gold market while it is on the upswing, raising the price even more. The smart speculators then sell their gold for a profit, bringing on an oversupply and a price fall. When the price has fallen enough, they buy again, starting the cycle over. Gold is presently falling from its high of around $1000 per ounce, at about $875 per ounce now. Look on the internet today and you will see predictions that gold will fall to about $800 soon. That is an attempt to influence niave investors to sell their gold, driving down the price even more. Two points to make in response to this statement: (1) most developed economies are experiencing a period of mild deflation, not inflation. The 'fiat currency' is backed by the total wealth of a nation and its GDP, not by a single metal like gold. (2) Why do believe gold has 'real value'? It is just a metal, with limited 'real' uses. Gold only has value based on the value of the goods that someone else will exchange for the gold. A dollar is the same, it only has value based on the value of the goods someone else will exchange for the dollar. The medium (gold, silver, currency, or a pig) only serves as a convenient exchange mechanism. What, exactly, is that 'one thing'? Explain, exactly, why 'fiat currency' can only lead to inflation and devaluation. Do you realize that 'fiat currency' literally translates to 'paper currency', instead of metal-based currency? A gold-backed paper currency is still a fiat currency. The country printing the gold-backed paper currency can still print as much of the paper currency as it deems necessary. The mechanism would do nothing to stop inflation. Printing an excess of gold-backed paper currency would increase the relative value of the gold a country held, while simultaneously de-valuing the paper currency. Much like the fractional banking system operates, a government could hold only a fraction of the gold in storage relative to the number of dollars in circulation. For instance, when someone is a millionaire, it is very unlikely they have a million dollars in cash stuffed in the mattress. They have 'assets' that total a million dollars. Those assets could be their home, the stocks they own, plus a statement from a bank acknowledging a deposit in a savings account. What would happen if everyone decided to convert their assets into gold, assuming a gold-backed currency, at the same time? There would be a complete collapse of the economy, no different than with the present 'fiat currency' system we now have. The banks only keep a small percentage of customers savings in the vault, the majority of the deposits are loaned out or invested. The banks would collapse. If everyone wanted to cash in their stocks, the companies that sold those shares no longer would have the cash to refund everyone's money. There would be no buyers with the cash to buy your house, and the run on the banks would leave them with no money to loan out. Asset values would tumble, the actual dollars that people held would increase in value, buying much more than before. It would make no difference if the currency were gold-backed, unbacked, or in the form of gold coins. Perhaps you are beginning to see that the real problem would be within the fractional banking system, not with the method of backing the currency. The actual number of dollars in circulation amount to only a small percentage of the 'money supply' even today. The vast majority of the 'money supply' is electronic I.O.U's, based on asset values. When those assets fall in value, the money supply shrinks. For instance, my home is fully paid for. When the value of my house decreases by 20%, where does the 'money' go? It evaporates from the total money supply in the US. What happens when a stock loses value? The lost value evaporates from the total money supply in the US. 'Printing money from thin air' attemps to replace the money supply that has evaporated. It is a method of re-inflating the deflated asset values. If the 'printed money' stays below the amount that evaporated from the economy, the inflation is limited and temporary, serving to partially replace the evaporation in home values, the evaporation in stock values, etc. Run-away inflation occurs when more money is added to an already inflating economy. No, you are not 'losing money' with inflation. If you have a store of cash money or money in a savings account, your money will lose buying power. 'Poor' people, by definition, do not have large stores of cash or large savings accounts. Most wages are directly or indirectly linked to the inflation rate. For instance, most entitlements and jobs have cost-of-living adjustments, your personal money supply will increase with inflation. Even those with jobs not linked to inflation will see an increase in their income to keep pace with C-O-L adjusted jobs. The biggest problem is the lag time. The increase in income lags inflation by 6 months to a year. A lot of people that are considered 'poor' still own homes and property, normally making payments on those assets. Smart people took out fixed-rate loans on those homes and cars. Your income will eventially increase due to inflation, but your payments on your home and car will remain the same. Your mortgage payment and car payment will constitute a smaller percentage of your income, making it easier to pay bills. The value of your home will increase due to the inflation, giving you equity in your home. New cars will increase in costs due to the inflation, but that same increase in the new car will also make your used car worth more on the resale market, again increasing your equity in your asset. I assume you must be a student, with no real material assets. In that case, your university education will increase in cost more due to inflation, meaning you will have to borrow more to complete your education. The upside for you? Loans for your education should be available, whereas they may disappear in a deflationary economy. Remember, in a deflationary economy, the wealthy will hold their wealth in savings accounts, treasuries, or other very safe investments. Their cash will gain in value even if 'stuffed in a mattress'. Student loans are riskier in a deflationary economy because jobs are very hard to aquire after graduation, increasing the lender's risk of a default.
This is a bit of a tangent, but how does gold or silver have any more "real" value than printed money? Both gold/silver and printed money are backed by people's faith in them. It's not like the gold or silver has any intrinsic utilitarian value. (Ok, so they do have some engineering uses, but their "value" is far out of proportion to any real usefulness).
We don't get back on it because, you can't spend money you don't have by printing more of it if you are on the gold standard.
I second the point that gold's "real" value is overstated relative to its engineering uses. Woprse, gold that is being used to back up the value of dollars *isn't* being used for engineering purposes. It is being stored in vaults that have to be guarded. What economic value is it "really" generating sitting there gathering dust? But it gets worse: (1) It does take "real" resources to obtain gold. It has to be mined, refined, formed into bullion, transported and, as noted, guarded. If, as I have suggested, it adds no real value when being used to back up the value of a currency, its worse than that...uit costs you real value to get it in the first place. (2) The trouble with fiat money is that the government can simply decide to print more of it at any time. That in turn allows the government to spend more. Guess what? The same thing was a problem with gold and silver. Governments were not averse too changing how much gold each unit of currency was worth, almost always downwards, so the value of the currency still deflated so the government could print more of it. The reason we don't go to a precious metal standard is that there's no compelling evidence it improves anything.
In doing that they undermined the utility of the gold standard. The reason for a gold standard is to have currency which holds real value, unlike the toilet paper we currently all agree to pretend has real value.
The only real value gold has is for dentistry and electronics, plus a few elegant applications like the plating in my coffee filter basket.
The fact that it trades for around $1,000 an ounce makes your argument asinine. Around the world people with lots of money agree that gold has intrinsic value. Hence, they use it as such. If you want to stock up on coffee filters and dental porcelain with your 401k investment go for it. See if you can trade it in for its worth in gold when you retire.
Your claim that fiat dollars measure the real value of gold one paragraph after your claim that fiat dollars have no real value summarizes your argument neatly.
And in printing more money, a government undermines the value of fiat money. The point is that a responsible government *won't* print more money recklessly, just as a responsible government won't undermine the gold standard recklessly, but if you think that using a gold standard in any way limits the ability of the government to engage in reckless monetary policy, then you have been sold a bill of goods. If you believe that you can trust a currency more if it is backed by wastefully produced and stored precious metals, then you, in effect, must "trust" the government not to undermine that standard. If you trust that relevant government to do that, though, then why not trust them to issue fiat money backed ultimately by their own promise not to undermine the value of that currency? What you do not understand is that fiat money does have real value underlying it (the allocable value of the entire economy denominated in that currency), the only difference is that you can not "turn it in" and have the government fork over specific assets to you in exchange for it. (I point out though, that you can "turn it in" and get your allocable share of goods right now, at any privately run store in a normal commercial transaction...it is only that the government does not have an active obligation to exchange iot for a aspecific good. So, if you fear for the value of fiat money, then the solution is to spend it on things you do want as quickly as you can, even on gold or silver, if you value that.) But what is the "real value" of $20 worth of gold or silver? Are you going to eat it? Wipe your ass with it? Build a house out of it? You can make jewelry or spoons, to be sure, but the uses of silver or gold in the hands of the average person is pretty limited. The average person would be better off if we backed up our currency in useful goods like gasoline...except that would be a nightmare. Imagine that every dollar were backed by a certain amount of gasoline. Imagine that the U.S. government had vast storehouses of gasoline sitting around, the gas never being used. Imagine the price of gas as the government tries to stockpile it and to maintain the steadily growing reserve of it that it needs. It would go through the roof and it would hurt people who actually need gas to live. The reason the gold standard did not involve much pain is that not many people "need" gold in their day-to-day lives, so the fact that governments serves as a competing source of demand didn't affect the average person directly (in the pre-electronics age that existed then) because he only bought the stuff as a luxury. The laugh is that if the United States were to tumble and anarchy take hold, no one would accept gold and silver as payment for anything, unless they were morons. In a post-apocalypse world, gold and silver would be worthless save as a luxury, and even then most people would want it in jewelry form, not bullion. Gold and silver would be heavy and hard to transport, and the uses of it very limited compared to the costs involved with that. Gasoline, canned goods, potable water and alcohol are what you are likely to want in that world.
Just so you know, most of the time, the government doesn't even bother to print the money. It's just a value in a computer somewhere, which we agree to assume has real value. It's the same with gold, something we agree to assume has value, because you can't eat it, make shelter from it, or wear it (easily).
Aluminum was once a precious metal. As late as the early 1880’s, it was considered to be a semiprecious metal and was sold in troy-ounce quantities; the retail price of aluminum metal was reported to be higher than that of silver. A commercially viable large-scale production method had yet to be developed. Domestic production levels during this period were in the 1,000- to 3,000-troy-ounce range, and many uses were considered to be experimental (Mining Engineering, 1987). In 1886, formal patent applications were filed for the electrolytic reduction process for aluminum. This process, which came to be known as the Hall-Heroult process, led to the mass commercial production of aluminum metal. As the process was developed and refined, production levels increased rapidly. By 1895, domestic production levels had reached 1 million pounds. As production levels continued to increase, domestic producers kept the price of aluminum low to encourage its use by consumers. In the early 1900’s, they held aluminum metal prices at a low steady level to compete against copper in the electrical industry (U.S. Department of Commerce, 1956, p. II.1-II.4). http://minerals.usgs.gov/minerals/pubs/commodity/aluminum/050798.pdf
Base edge of the aluminum pyramid tip of the Washington Monument is 5.6 inches and it is 8.9 inches tall. It was placed there at late December 1884 as a suitable precious metal top: Please Register or Log in to view the hidden image! Formal dedication was less than two months later on Washington's birthday, 22 February 1885. Ironically a year and a day after the dedication: "Hall produced the first samples of metal on February 23, 1886, after several years of intensive work..." Quote from: http://en.wikipedia.org/wiki/Charles_Martin_Hall And aluminum became cheap to make, but AFAIK, that precious metal pyramid is still on top of the Washington Monument. ----------------------------- To make an on thread part of this post I will note a very serious problem of the gold standard, not often noticed. Not even mentioned at Wiki: http://en.wikipedia.org/wiki/Gold_standard#Disadvantages Consider the current conditions with the US importing more than it exports and lets focus on trade with China. To balance the trade account, the US would need to annually ship to China a great deal of gold. In a few years the US would have no money for domestic commerce. I.e. China currently has the power to collapse the dollar, but it is not yet in China's interest to do so. (Quadraphonic argues that it never will be, but I disagree as I think China will like the lower prices of raw material it must pay for to mainly Southern Hemisphere countries is has signed long term contracts with for them if US and EU are in depression and this export payments plus rapidly growing domestic market demands keeps the Chinese with full emplyment.) If world were on a gold standard China would already have most of the gold and US would be collapsing now. - Something for gold standard advocates to think about.
The US has the largest cache of gold in the world, but if you broke it down and gave it to the 300 million Americans, everyone would end up with less than one ounce. And yeah- gold is volatile and can be manipulated- that's because there's no one controlling the market. Considering the world mines 700 million oz. per year and more than half of that goes to jewelry and electronics, there's a market of 200-300 million oz. for sale per year as a precious metal. It is impossible to return to a gold standard because we would need trillions of ounces of silver to replace our fiat money with- and that much gold simply does not exist. And even if we had enough to go gold, we only mine 200-300 million new ounces per year for coin... it would end up stifling the economy's growth. The only way it would be possible is if we use gold, silver and a high quality steel as the base of a hard-backed currency, and only if we build up a stockpile for 10-20 years at an up-front cost of trillions of dollars.
Is there any law against say Western Union, and a bunch of international banks and Insurance company getting together to form an enterprise that stores gold and sells paper notes backed by that gold while making money for themselves by taking a small commission any time their gold backed paper is converted back to government fiat currency? There certainly is pent up demand for non fiat currency. The Gold based private currency consortium could also issue interest bearing bank accounts denominated in their gold backed paper notes. I am not so enamored with Gold as a measure of real value because the value of gold is almost as nonsensical as the collectible value of rare baseball cards. If Gold stopped being the arbitrary store of of wealth the value of Gold would crash. What I personally want as an inflation hedge and safer way to save some money is an interest bearing bank account in a currency pegged to 35% international median hourly labor rate, 15% to the median US hourly labor rate 25% to various sources of energy, 15% to industrial and construction raw materials and 10% to food commodities. Some neutral agency would have to covert annual salaries and benefits into hourly wages. I only want the extra weight on US labor markets because I live in the USA. If I lived somewhere else I would want the currency to replace it's peg to US labor with a peg to my national labor market. I don't like the US government's "TIPS" securities because I have no faith in the US government to accurately measure US inflation and I also am a bit of a global citizen. Clinton cooked the US inflation books and Bush and Obama have continued cooking the books. Also the US regions, economic classes, and different age groups, and tastes in spending cause each American to really be experiencing a unique rates of inflation. Even if the US government was not cooking it's books on inflation I think I don't want to use a inflation rate that counts housing and new cars as heavily as the US inflation rate does. My concern when saving for retirement is about paying for health care, food,and energy, and taxes more than it is about paying for housing and new cars.
I wonder if the Gold market was manipulated last September to help the dollar going to to the crash in October. This probably did not happen because the world's governments are not competent to have known to do such a thing. I just don't have a good explanation for the selling of gold prior to the wave of hedge fund redemptions that came later. It is not as important whether naked short selling of gold did happen as whether government sanctioned naked short selling of gold could happen. A lot of large institutions that could naked short sell gold should feel like they owe the US government for keeping them alive and would therefore be could expected to dump gold if asked to do so. In reality the institutions that owe their lives to the US government probably felt that the US government owed them for the years of campaign contributions and therefore would only naked short sell gold if they thought they could make a profit doing that. People who may or may not be conspiracy theorists have at various times accused firms of selling paper gold for which they could not deliver real gold if called upon to do so. There are thousands of web pages making that accusation but most of them don't feel very scholarly.
