Blogging at BlogHaus: Discussion of the gold standard
I’m blogging from BlogHaus at the Bellagio. I met and spoke briefly with Robert Scoble, the (in)famous blogger who was recently kicked off of Facebook for scraping information with a script (Google it if you’re that interested). He and I have very, very opposing political views (he’s a Clinton fan apparently, given his reaction to the news that Clinton won New Hampshire’s primary election [I could be wrong, though], and I’m a Ron Paul fan). We did agree that Ron Paul does have a long shot now—Iowa and New Hampshire have spoken—but have differing views otherwise.
One person, Xavier of Notebooks.com, explained to me why the gold standard doesn’t work. I’m still trying to digest it, though.
In a nutshell, he explained that the reason the gold standard (or any other commodity) doesn’t work in our current economy is that its doesn’t take into account how we create wealth. The creation of wealth deals with assigning value to new creations. For example, if I create a web site and someone is willing to pay me $10M for it, then, essentially, I’ve created $10M worth of wealth—a lot. In a gold standard economy, or any other commodity, I’d need a lot of gold or that commodity. Even if there was, multiply this by a couple hundred web sites, or perhaps houses on beachfront property, and there’s not enough gold to match the value. If the value were instead matched to the available gold, then its value would be much, much less and everything would have a much, much lesser value. On the gold standard, the dollar would buy a lot more, but there would have to be a lot more smaller denominations in order to make up for the increased value of the dollar.
Essentially, the current monetary system is based on debt. If someone wants to mortagage a $1M house, the bank, the mortgage originator, and all other parties have to agree that that house is worth $1M, even if it was built for $1. If the bank gives the mortgage, it’s essentially created $999,999.
I’m finding it hard to digest, but I don’t have the base of knowledge to be able to dispute nor naivety to blindly accept. I need to investigate this more so I can better understand why Ron Paul is a proponent of it. I can understand if the reason for the gold standard is because the current way of doing things has some unconstitutional basis, but I need to understand why he wants it this way.
Blogging at BlogHaus: Discussion of the gold standard:
[...] unknown wrote an interesting post today onHere’s a quick excerpt I’m blogging from BlogHaus at the Bellagio. I met and spoke briefly with Robert Scoble, the (in)famous blogger who was recently kicked off of Facebook for scraping information with a script (Google it if you’re that interested). He and I have very, very opposing political views (he’s a Clinton fan apparently, given his reaction to the news that Clinton won New Hampshire’s primary election [I could be wrong, though], and I’m a Ron Paul fan). We did agree that Ron Paul does have a long shot now—I [...]
9 January 2008, 5:07 amMark Herpel:
…one of the most common myths floating around about Ron Paul in the blogosphere, namely that he supports the immediate restoration of a strict gold standard for U. S. currency. While Paul would ultimately like to see the dollar pegged to gold again, he does not advocate doing this precipitously. What he does support doing right now is legalizing private currencies backed by gold and silver.
Legalizing private commodity-backed currencies would give individuals the right to guard themselves against the inflationary tendencies of the greenback, without the various legal obstacles imposed by the current system. Paul’s hope is that over time enough people will voluntarily to switch to gold-backed currencies as to make the final transition back to a real gold standard for the dollar relatively painless.
His views on this subject are succinctly outlined in his essay “The Political and Economic Agenda for a Real Gold Standard” in the 1985 book “The Gold Standard: An Austrian Perspective,” edited by Lew Rockwell. Lurthermore, as Peter Boettke explains in recent posts on his blog, these views are not merely the eccentric ramblings of a deluded old man, but similar to the opinions on monetary policy held by a number of distinguished economists, such as the Nobel Laureate Friedrich von Hayek. [ http://andrewsullivan.theatlantic.com/the_daily_dish/2007/12/a-reader-writ-3.html ]
Mark
9 January 2008, 8:35 amDGCmagazine
David A. Harding:
If we make static the amount of currency in a growing economy, the currency will appreciate in value — it will deflate. In the U.S., we’re used to inflation between 2% and 20% per year. What’s the effect of deflation?
A 3% per year deflation rate means that $100 in your pocket is worth $103 at the end of the year. That sounds great. But a 3% deflation rate also means that if you spend $100 today researching an article that you sell at the end of the year for $100, you’ve lost $3.
Small deflation rates, like small inflation rates, aren’t normally a problem. (Since their market crash in the late 1980s, Japan occassionally undergoes periods of 1-5% deflation.) Large deflation and inflation rates are the problem. If the defaltion rate is 30% per year, everyone hoards their money: employeers find excuses not to pay their employees; employees find excuses not to pay their bills; bill collectors stop providing services and fire their employees who perform the services.
Economic history is littered with real examples of rampant inflation, but I’m unaware of any real examples of rampant deflation. When people stop spending their money (“the monetary supply dries up”), we stop creating weath; when we stop creating wealth, the deflation ends; when the deflation ends, people spend their money again. And so a fixed currancy manages to regulate itself.
Chapter 9 (The Cure for Inflation) of Milton and Rose Friedman’s book, Free to Choose, will help you better understand political capital and fixed currency.
I hope this helps,
-Dave, (non-degreed) member of the American Economic Association and Planet Ubuntu Pennsylvania LoCo reader (harding on #ubuntu-us-nj on irc.freenode.net)
9 January 2008, 11:29 am