Ron Paul and the Gold Standard
I was just looking at Wikipedia's description of Ron Paul's political positions. I agree with Dr. Paul on most things on the list.
One thing that has captivated many Ron Paul supporters is his opposition to the Federal Reserve and preference for the gold standard. While I agree with him that the Federal Reserve may not be the best way of managing the dollar, I don't agree that the gold standard is better.
For those who don't know, in the good old days, the dollar was based on gold. In theory, anyone could bring dollars to the federal government, and the government would then hand you the appropriate amount of gold. Of course the government didn't really do this, but that was the general idea.
Under this idea, the dollar has value because it is based on gold. For critics of the current system, this is the problem. In their view, the dollar has no real value because it is no longer based on something that has value.
This is where I disagree. Gold standard supporters believe that gold has some kind of intrinsic value. This is nonsense. Gold has value for precisely the same reason that the dollar has value -- they have value because people think they're worth something. The current system relies on the idea that people believe dollars are worth something. The gold standard system creates a facade, since gold is only worth something for exactly the same reason the dollar is worth something.
In fact, the market price of gold has fluctuated substantially over the years. In the 1970s, as we shifted to the current monetary system, gold went from $36/ounce to $307/ounce in 1979. In 1980 it skyrocketed to $612/ounce. Since then it has varied from the mid-400s to as low as $272/ounce in 2001. Now it's over $800/ounce. While some might explain these fluctuations by problems with the dollar, one sees similar fluctuations in other currencies (Gold Price History for 30 years).
So a shift to a gold standard adds a false sense of stability. Tying the dollar to gold adds value to the dollar only if gold retains its value. Gold has value only because people value it. It's not that there's any significant intrinsic or useful value in gold. Silver, by contrast, is useful in film processing. With the decline of film in the face of digital photography, even that useful value has certainly diminished.
Despite my criticism of the gold standard, I am not saying that the current Federal Reserve system for the dollar is best. I know Milton Friedman at some point advocated a simpler and more predictable approach to managing our currency. If what I'm reading these days is correct, Ben Bernanke is pushing to make the Fed's decision making process more open to the public, so people have a better sense of what they're doing and why. This fits in with a notion I like in economics, that we should assume that people have "rational expectations." When government makes its decisions in open processes, that makes things more predictable and the private sector is better able to anticipate changes and adjust to them.
One thing that has captivated many Ron Paul supporters is his opposition to the Federal Reserve and preference for the gold standard. While I agree with him that the Federal Reserve may not be the best way of managing the dollar, I don't agree that the gold standard is better.
For those who don't know, in the good old days, the dollar was based on gold. In theory, anyone could bring dollars to the federal government, and the government would then hand you the appropriate amount of gold. Of course the government didn't really do this, but that was the general idea.
Under this idea, the dollar has value because it is based on gold. For critics of the current system, this is the problem. In their view, the dollar has no real value because it is no longer based on something that has value.
This is where I disagree. Gold standard supporters believe that gold has some kind of intrinsic value. This is nonsense. Gold has value for precisely the same reason that the dollar has value -- they have value because people think they're worth something. The current system relies on the idea that people believe dollars are worth something. The gold standard system creates a facade, since gold is only worth something for exactly the same reason the dollar is worth something.
In fact, the market price of gold has fluctuated substantially over the years. In the 1970s, as we shifted to the current monetary system, gold went from $36/ounce to $307/ounce in 1979. In 1980 it skyrocketed to $612/ounce. Since then it has varied from the mid-400s to as low as $272/ounce in 2001. Now it's over $800/ounce. While some might explain these fluctuations by problems with the dollar, one sees similar fluctuations in other currencies (Gold Price History for 30 years).
So a shift to a gold standard adds a false sense of stability. Tying the dollar to gold adds value to the dollar only if gold retains its value. Gold has value only because people value it. It's not that there's any significant intrinsic or useful value in gold. Silver, by contrast, is useful in film processing. With the decline of film in the face of digital photography, even that useful value has certainly diminished.
Despite my criticism of the gold standard, I am not saying that the current Federal Reserve system for the dollar is best. I know Milton Friedman at some point advocated a simpler and more predictable approach to managing our currency. If what I'm reading these days is correct, Ben Bernanke is pushing to make the Fed's decision making process more open to the public, so people have a better sense of what they're doing and why. This fits in with a notion I like in economics, that we should assume that people have "rational expectations." When government makes its decisions in open processes, that makes things more predictable and the private sector is better able to anticipate changes and adjust to them.
Labels: federal reserve, gold standard, ron paul
posted by Albany Lawyer at 9:57 AM
12 Comments:
Gold has some value -- in semiconductors and other electrical uses -- it's an excellent conductor.
So gold has some industrial uses besides the fact it's pretty. But much like silver, the real value is in what people believe in it (industrial uses are a tiny use of it).
I don't agree Warren, gold and silver have been the preferred store of wealth for thousands of years, they make the perfect money, for the people that is. Governments, the banking elite and assorted other inflationists would rather have paper money based on debt. Does debt and paper have timeless intrinsic value to anyone? Fiat money only has value as long as the government has the ability expropriate wealth from the taxpayers to cover the interest owed to its debtors. As long as they can do that, they will continue to inflate the currency and hoist endless wars and poverty on us.
Fiat money is the perfect money for big government because they can create it and waste it so easily without alarming most of the people who are oblivious to how they are being taxed by the inflation scam. Unfortunately for us, the more they create with the printing press and the computer, the less it is worth in buying power.
Precious metals however have never lost their buying power in thousands of years.
Thank God Ron Paul has renewed an interest in many people on monetary policy. If we do not take control of the monetary system away from the central bankers and the spend thrift politicians and revert back to honest money based on gold and silver like the Constitution specified, we will never defeat big government and their money wasting ways, at least until it collapses under its own weight, but by then it will take us all down with it too.
Obviously I disagree with Ray, and will pick apart a couple of his arguments.
First, he asserts that gold and silver have "timeless intrinsic value." I simply disagree with that and the argument would last hours and get us nowhere.
Ray also blames the current currency system for "endless wars." I'm afraid that human society saw many, many wars during periods where money was based on commodities like gold. If anything wars have become less common - though I don't claim the end of the gold standard reduced wars. Similarly, governments in the past wasted money quite easily while on the gold standard.
To be clear, it's not that I inherently trust the government in controlling the currency. Rather, I think fans of the gold standard look at the past with, well, gold-colored glasses. --Warren
Warren, how can you deny that precious metals have been considered things of universal value through the ages across all civilizations?
When all is said and done, when people realize that their governments have inflated paper money to the point that it isn't worth the paper its printed on, they alway flee to convert paper into hard commodities.
Gold in particular has been the favorite for storing wealth, it is fungible and virtually indestructible.
On war and paper money:
The early 20th Century to this day has been the bloodiest of times. It started that way when governments started to go off the gold standard and began to inflate the currency.
It allowed government to fund wars without direct heavy taxation and risking domestic revolution.
The 19th Century was relatively peaceful in comparison. The most glaring exception for the U.S.was the Civil War, where Lincoln financed the war against the Confederacy with Greenbacks (fiat paper currency backed by nothing)
The Confederacy did the same.
The founders of this country knew the dangers of fiat currency. They went through the devastating effects themselves during the aftermath of the Revolutionary War with the Continental Dollar that wasn't backed by gold or silver.
That's why they specified in the Constitution that government shall not "make any Thing but gold and silver Coin a Tender in Payment of Debts". They knew that given the power to create money out of debt, politicians would create massive deficits to engage in unnecessary wars and other wasteful spending, the central banks and the government would rob the people of their wealth through inflation.
Responding to Ray:
Defining why something has value is at the heart of economic theory. Your reliance on this notion of a universal value across time is no stronger than longstanding beliefs that the world is flat or that the sun orbits the earth.
Similarly, your notion that the current monetary system has made governments more warlike is simple fantasy. Our current wars in Iraq and Afghanistan are not being financed by printing money. They are line items in the budget paid for with tax dollars and the usual borrowing. There were plenty of wars in previous centuries. Any differences are far more connected to technological change than to monetary systems.
Again, this does not mean I favor the current Federal Reserve system. There may well be better alternatives, such as ending the federal monopoly on currency and letting the private sector issue its own currencies. I do not believe a return to the gold standard will accomplish much of anything - though at the same time I don't see it causing much harm.
Warren, there are many books on the subject, a good place to start as any is Ron Paul's book, GOLD, PEACE AND PROSPERITY.
http://www.mises.org/books/goldpeace.pdf
We could go on forever arguing about this, mainly because we are not on the same page, as far as the history or the economics.
You have a misconception that what has happened in modern times is different than what happened in other centuries. Sure, technology has changed the way governments and central banks work, but it has not changed the results other than a more accelerated growth of government and public debt than was previously possible.
If our taxes covered the expenditures of the welfare-warfare stste, then the government would not have a growing deficit. Federal taxes do not even cover the domestic expenditures of the federal government. They surely don't cover the expenditures for foreign adventures.
Federal borrowing is just another term for inflating the money supply. They have to sell new bonds (debt in the form of new Federal Reserve Notes) to continually pay for its wars and welfare.
This is where Ray and I agree and disagree at the same time:
"Federal borrowing is just another term for inflating the money supply."
We agree that the binge of federal borrowing is a bad thing. We also agree that the main underlying problem is excessive spending on what Ray very nicely calls the welfare-warfare state.
But I can't agree that this is the same as "inflating the money supply." It may have an effect on the money supply, but it is not necessarily the same thing.
Ray - you have to acknowledge that excessive government spending is a separate issue from the gold standard. Otherwise you are confusing two issues. It may be that "fiat money" allows for greater spending and borrowing. Maybe it even encourages it. But it does not cause excessive spending. Our elected officials do that by voting for it. Placing blame on the monetary system lets them off the hook.
Governments in past centuries were certainly capable of excessive spending without fiat money. I've been to Versailles.
Excessive spending comes from excessive power. An answer to this that we both support is reducing the size and scope of the federal government - for starters. :-)
Warren, the dollar is a debt note. The only way for the federal government to borrow is to create more debt to sell through the FED, hence more money flows into the system. The influx of more money into the system waters down the buying power of the dollar (inflation).
The system has allowed the federal government to spend way beyond its ability to tax the people directly.
That's how we got a federal government that has buried us in a 9 Trillion Dollar debt and growing.
That wouldn't have happened under a hard money standard, as it would have been political suicide to be so fiscally irresponsible.
"Governments in past centuries were certainly capable of excessive spending without fiat money. I've been to Versailles."
What makes you think that governments in the past didn't engage in debasing their currency to enable excessive spending?
Yes, governments in the past have debased their currency to enable excessive spending. I agree completely with that. I also think it happened to countries that had a gold standard.
My point all along has been that it's not the gold standard or lack of it - it's the spending. Talking about the gold standard is a distraction. A currency can be managed without a gold standard without being debased. And an asset-backed currency can be debased.
Our disagreement is where Ray says: "That wouldn't have happened under a hard money standard." It obviously has happened. There is no such thing as hard money - it's an illusion. Some love the gold standard so much they can't accept that it is not a panacea.
A) It's written in the Constitution (e.g. Gold and Silver can only be used) - But... I know, I know, that's just a "GOD-damn piece of Paper" (quote by George Bush 2007)
b) After the dollar collapses (pretty soon) I could feed my family for a week on a gold coin because people have more faith in the value of a mineral that has been exchanged since the birth of civilization, than they do in a government or a bank's promise -- because history shows they always collapse under their own weight, like the U.S. and the Central Bank are now). (e.g. since 1971: trade deficit over 1100%, 2.1 Trillion in foreign loans, 57 Trillion in entitlements, etc.)
c)I do like your chocolate standard idea - then I could just exchange it and eat it when the monetary system fails.
d)At todays rates the "melt value" of a modern dime is <$.02, while a modern nickel is $.06. So in my book two nickels are worth $.12 and two dimes are worth less than a nickel. Hmmm.
e)Finally - no intrinsic value for gold and silver? Well ... think about this one... the price of gas at the pump is now about 3.20-3.60/gal (even with all the CIA overthrows, OPEC spikes, "terrorist" attacks, illegal U.S. police actions, etc.)
In 1950's I think a gallon of gas was about $.25 - $.35/gal. I can take 3 dimes (90% silver) from that same time period and sell them for $1.10/each (melt price) which is about the current cost of a gallon of gas. Go figure! The price of gas still hasn't changed! It's just the Fed printing "GOD-damn piece(s) of paper" 24/7.
Maybe the Constitution and the founders had something there. Too bad we got apathetic and let our government sell us out.
I love the last comment's discussion of melt value. If correct, it probably costs the government more than 5 cents to make a nickel. This goes to what Ron Paul fans should really be saying -- get government out of the currency business. The private sector will probably do it better and cheaper.
The Constitution prevents States from printing fiat money. Not the Federal government.
And please source that Bush quote. I have seen it a number of times but it doesn't seem credible.
If gold is the answer why are so many goldbugs trying to trade their gold for worthless paper dollars?
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