the gold standard

This is going to ramble a bit, and I’m not 100% sure my opinions are even remotely reasonable, but I had a great conversation on the Gold Standard recently, and thought sharing that would be fun. The quoted sections are relevant parts of the conversation from my friend*, and the unquoted segments are my responses.

I’ve seen pundits, or as I call them, “blowhards”, on both sides of the aisle claim that even suggesting we return to the gold standard is madness. Maybe it’s just because I’m not an economist, but I don’t understand that – we had like 3-4 thousand years of experience with the gold standard; we have less than a century with floating currencies. Why is it so crazy to say “we keep getting into trouble this way, maybe we should fall back until we’ve got this figured out better”?

The only issue I can see with returning to the gold standard (or the silver or any other), is that since gold is by nature a finite resource (whereas many others, while finite, are growable (eg crops, industry, etc)), there would be no reason to have an “exchange” between different countries, and that it would make an effective universal currency – to some extent, undervaluing the currency systems of every country that chose to use the standard, and globalize (even more) our economies.

Plus, it makes issuing loans (and receiving them) substantially more difficult – and loans are NOT always a Bad Thing™.

For example, if, say, Canada and the US use the gold standard and decide that $1000 US is one ounce of gold, and $500 Canadian is one ounce of gold, the exchange “rate” is fixed – and it’s fixed to something that is increasable, but only at a fairly fixed rate (how fast you can acquire/generate gold). Whereas if you have floating currencies with no “real” backing, exchange rates can change based on the relative health of each country.

By setting a fixed exchange (which is what the gold standard would do … like what China has been doing for years to the US, but only on paper), is that it can cyclically under- and over-value individual countries currencies and economies, ultimately bringing more down at once when a few fail (or, of course the reverse – bring more up when some few major ones succeed).

During the early part of the last century, we were still mostly working with gold, and we had both the Great Depression, and some of the greatest economic growth ever seen.

The Great Depression, imho (though, admittedly, a biased, and fairly-underinformed opinion), was about 90% perception, and 10% reality – a fairly commonplace occurrence in economics, but one that was exacerbated by the [initially] fixed relations between the various national currencies

Also, imho, basing currency on a fixed standard (like gold) was truly only viable in an era of poor communication (I’d personally argue that shortly after the telegram became more than a technological marvel, this became more and more true until it was universal) – with poor communication, perceptions take a LONG time to be transferred – which correspondingly means that “news” was A) old, and B) taken with larger grains of salt than we *tend* to take it with now, since comunication is [effectively] instantaneous. {I have no research or citations to this point – yet: it is currently only my opinion.}

In my opinion, by floating currencies against each other and the relative strengths of each country involved, crashes are slowed (not eliminated, of course). Of course, again, the reverse is also true – booms are flattened-out. So, I’d view the floating-currency approach as one that will *tend* to flatten local (and global) booms and busts into substantially smaller ripples, rather than major mountains and troughs.

Not being an economist, I’m not sure I understand why that should be. What’s the evidence for that? How can we be certain that’s a good thing? Maybe the cycle of mountains and valleys is important, socially?

[not being an economist either,] I’d *think* that it would be better to keep the mountains and valleys more stable / less high|deep, so that slowdowns aren’t felt by a disproportionately small community/niche of the economy, and so that speed-ups can have a “good neighbor” effect to bringing some of the underperforming sectors ‘along for the ride’.

As to question 2 – I don’t *know* that it’s “a good thing” … but I also can’t say it’s a ‘bad thing’, either.

I’d be happy to hear arguments that either oppose mine, or are different 🙂

I think my strongest one would be that we used the gold standard for like 4000 years, and it seemed to work very well for us nearly globally during that time. As far as any possible good neighbor effect from flattening things out, it may be that social upheaval is an important component of progress: almost all major advances thus far in history have had some component of socio-economic shift; flattening those upheavals could very well have consequences that we can’t foresee (I realize this is a weak, speculative argument, but it’s worth considering).

There’s also part of me that feels like floating currencies are so much handwaving and voodoo. You talked about how they allow countries to create exchanges that are tied to their relative health, instead of some fixed point – but isn’t how much currency they’ve arbitrarily decided to create often used as one of the measures of health? If so, that’s somewhat circular logic: if floating currencies let us control how much inflation we’ve got, and inflation is one of the health metrics, then what prevents nations from trying to hide economic problems, just the way that nearly every EU member has done over the last 15 years?

Isn’t it exactly the fact that their currencies were floating relative to one another before hand that allowed them to hide so much of their debt before entering the euro zone? Or have i misunderstood that?

Prior to the “euro zone” cluster****, country finances were a LOT less open/transparent, too … kinda like a private vs public company (not that public companies are as transparent as would be helpful, but the comparison stands).

I feel like if they’d been the gold standard, the euro zone negotiations would have been more along the lines of:

“ok, so how much gold have you got?”
“oh, quite a bit!”
“ok, well, we’re going to need to count all of it, so that we can figure out how many euros to give you.”
“oh, well, we have quite a bit of gold!”
“yeah, still need to count it.”
“oh. um. crap. …fine”

It’s a lot harder to hide how much actual wealth you have, when your wealth can be reduced to a physical object, instead of just assertions on paper.

However, if you’re going to count the gold nuggets (or whatever), it’s also trivially-simple to elect to *NOT* show your whole hand … which would seem to me to be the same economic sleight-of-hand as can be done when asked “how many barrels of oil do you have?” and you reply “we’re recovering 5million bbl/day”

That’s not an answer – it’s interesting information … but not an answer.

In this particular case, there’s no benefit I can immediately think of to hiding your wealth – the whole point was to get your finances into a good enough shape to be able to qualify for the euro zone. The shenanigans were more about hiding debt than hiding wealth.

I think that hiding wealth *could* be beneficial to make yourself *appear* weaker than you are, so that when you “need|want” to be “strong”, you can be. It could also be from a detail-vs-gestalt approach.

So now I ask all of you – is this plausible/reasonable/right? Or am I smoking some serious space crack?


*He gave me permission to quote him as appropriate if desired