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Hearing a lot that infact dropping gold standard was stupid, and it matches with humanity's tradition too. Could anyone explain why gold standard was a stupid i

by krsree 11y ago

Hearing a lot that infact dropping gold standard was stupid, and it matches with humanity's tradition too. Could anyone explain why gold standard was a stupid idea? Any link would be helpful. Thanks!

creshal 11y ago
The problem is that you cannot really control the gold/silver supply. If your gold mines suddenly run dry (which happened to the Romans), it immediately cripples your economy (debasing the currency will create a panic, not debasing the currency leads to runoff deflation). If someone suddenly finds a massive new gold source, it will… also cripple your economy, due to runoff inflation (happened in the Spanish Price Revolution after the discovery of the New World). Fiat money gives a much better control over the currency. Now we can argue what inflation/deflation rate a currency should have, instead of leaving that to random chance.
- necessity 11y ago
  I'd say it's a matter of debate how good that control is when who's controlling it is either incompetent or has it's own interests -- or worst, both. I'm not saying we should go back to the gold standard, but alternatives such as Bitcoin become increasingly interesting in countries plagued by hyperinflation.
  - creshal 11y ago
    > I'd say it's a matter of debate how good that control is It's just that having this debate is pure luxury already. Otherwise it'd be "where the hell do we get the gold we need to fuel our economy?" or "what do we do with all the surplus gold that's ruining our economy?". > but alternatives such as Bitcoin become increasingly interesting in countries plagued by hyperinflation. Bitcoin, really? Private currencies where inflation is at the mercy of random developers who may or may not control significant currency reserves as well? Using foreign currencies to supplant or replace a failed domestic currency isn't a new phenomenon, nor limited to "crypto""currencies" (the Balkans used the German Mark extensively in the late 90s, and US Dollars get you far in a lot of places).
  - weland 11y ago
    > I'd say it's a matter of debate how good that control is when who's controlling it is either incompetent or has it's own interests -- or worst, both. The problem is that, in the example quoted, no one had that control. Gold mines run dry and you're fucked. Not because some incompetent banker is controlling the gold supply, but because there is no more damn gold. The most competent financial advisor of Rome -- a figure so gargantuan in the field of finance that, if transplanted to the modern world, would not only win that fake Nobel prize for economics, but would cause every other economist to retire out of shame -- would have been powerless. Because there was literally no more gold. Obviously, it wasn't the end of all things -- new mining facilities would be open, sometimes processes would be optimized in older ones, wars would be waged, but these things took time and needed money.
    - gshubert17 11y ago
      No more gold? Wasn't there more gold in other places? Places the Romans didn't know about, but still places. I'm not suggesting the Romans needed to venture westward and discover the Americas, but did they really have no other options?
      - creshal 11y ago
        Their trade balance was massively negative – it's called the "silk road" and not the "Roman wine and glass ware road" for a reason. Gold and silver left Europe and perishable goods were bought for it. It was initially offset by spoils of war and massive mining operations (some of the Roman mines in Spain are still visible today). Apart from that, there was also normal economic and population growth – even without trade, if your population and economy grows, you'll need more money if you want to keep prices and wages stable. So, they had several options: • Conquer places that have gold! That went well for a few centuries, until it didn't any more. • Debase the currency to make more of the money still here. That was, unsurprisingly, massively unpopular. And because monetary value was still tied to precious metals, people just started to hoard old money to melt it in later (something you still occasionally see with e.g. copper pennies), which led to all sorts of economic problems (occasionally crashing all the way down to barter trade).
- PepeGomez 11y ago
  That would still make currencies far more stable than modern currencies. It's very unlikely that a significant source of gold will be found and even if it will be, it won't be in owner's interest to mine it very quickly. The price revolutions were literally a one off event and while it's usually described as "rampant", the inflation rate was at most in the range of a few percent and it would be seen as moderate to low today.
  - creshal 11y ago
    > That would still make currencies far more stable than modern currencies. Stability is not inherently good. Stable currencies that suffocate the economy because they do not allow for rapid enough expansion or reduction of the money supply are a burden. Another example would be the interwar years and great depression, were virtually all countries suspended the gold standard because it was simply impossible to uphold, and the economy recovered from it.
    - PepeGomez 11y ago
      When the economy expands, things get cheaper. Like with most electronics in the last five decades or so.
      - creshal 11y ago
        Deflation is a lot more complicated than that, unfortunately.
        PepeGomez 11y ago
        No, it isn't.
        creshal 11y ago
        Okay, so you have products that get cheaper and cheaper. Is that good? No, the computer industry is in a deep crisis because of that – first PC sales tanked, then laptop sales, then netbook sales, then ultrabook sales, then tablet sales, soon smartphone sales… if products get cheaper and cheaper, you have no incentive to buy more than absolutely necessary, because not waiting with your purchase will always lose you money. And then we have the other problems: What about rents? Debts? Wages? Do you decrease them over time, too? What happens if they aren't? Who would lend money under such circumstances, if just keeping the money under your pillow will make you richer anyway, and at zero risk, too? Etc. pp.
RobertoG 11y ago
"it matches with humanity's tradition too" I suppose you mean with the traditional way money is explained, that is very probably wrong. The idea that first was barter and then people started to use precious metals doesn't match the historical evidence. There is strong evidence that money is invented in the first states in parallel with writing and numbers in order to register debts. (see https://en.wikipedia.org/wiki/Sumer https://en.wikipedia.org/wiki/Sumer : "Several centuries after the invention of cuneiform, the use of writing expanded beyond debt/payment certificates and inventory lists to be applied for the first time, about 2600 BC, to messages and mail delivery, history, legend, mathematics, astronomical records, and other pursuits.") Metals (strong money) are not necessary and if fact was not the most used system for most part of the history (see https://en.wikipedia.org/wiki/Tally_stick#Split_tally_in_England https://en.wikipedia.org/wiki/Tally_stick#Split_tally_in_Eng... ) So, the gold thing doesn't match humanity's tradition until very recently. This is controversial, I think, because it has political implications.
- creshal 11y ago
  > So, the gold thing doesn't match humanity's tradition until very recently. Ish. There's no unified "human tradition" anyway. Mediterranean societies have used gold- and other metal-based tallies for thousands of years, until they eventually settled on (gold, silver) coins as a standard. Greek/Roman conquests and trade then spread the idea.
  - RobertoG 11y ago
    But my point was that there is an, admittedly polemic, abstraction that match all the human tradition: money is a token of debt. In this view, one important consequence, is that the material of the token is not relevant. The use of precious metals is just an added security measure against counterfeit, but not the thing that make it valuable (that would be the debt that represent). If this is true, part of the debate about strong money vs. fiat money just become pointless.
Gibbon1 11y ago
You want a link? Here is one, http://www.bradford-delong.com/2015/03/time-for-a-rant-why-oh-why-cannot-we-have-better-economists.html http://www.bradford-delong.com/2015/03/time-for-a-rant-why-o... The short answer is a run on safe assets like gold creates a positive feedback loop. A demand short fall causes people to try to acquire safe assets like gold. Spending 'money' on gold means money not spent on real goods and services. Which results in a demand shortfall. And people wanting safe assets to park their wealth. Rinse lather repeat till 1/4 of workforce is unemployed. A central bank can print or lend out any amount of paper money to satisfy investors craving for safe assets. It can't make more gold. Why not have both? Problem: Trying to peg the money supply to the price of gold hamstrings the central banks ability to supply paper. Lesson learned 1929-1939. And learned again by Argentina in 2000 with a US dollar peg serving as a de facto gold standard.
- PepeGomez 11y ago
  How do you spend gold on gold? You can't spend money on gold when money = gold.
  - creshal 11y ago
    Even with a gold standard, you're usually not using gold coins directly (if only because it's hard to make coins for smaller denominations with it), but rather bank notes that are guaranteed to be redeemable for gold (as long as you don't try it out). cf. https://en.wikipedia.org/wiki/Gresham's_law https://en.wikipedia.org/wiki/Gresham's_law
    - PepeGomez 11y ago
      Indeed, but they are still representations of gold and are for all legal purposes equivalent to gold. When you convert them to gold, you don't spend money on gold, since they are one and the same and you can convert the gold back at any time. It's technically not different from changing banknotes to coins or wwithdrawing cash from your bank account. I don't see why you think that the link is relevant. It would apply if there were gold and silver standards simultaneously, for example, but that's not what is being discussed.
JumpCrisscross 11y ago
> [gold] matches with humanity's tradition For most of history, economic growth was minimal. Growth we expect in a year would not be seen across a lifetime. A fixed supply of money worked for a fixed-size economy. In the 1800s, the economy grew on gold due to the coincidence of gold mine output roughly matching economic growth. The moment that link broke, calls for bi-metallism grew. Within a generation, the world was forced off gold.

by krsree 11y ago

Hearing a lot that infact dropping gold standard was stupid, and it matches with humanity's tradition too. Could anyone explain why gold standard was a stupid idea? Any link would be helpful. Thanks!

creshal 11y ago

The problem is that you cannot really control the gold/silver supply. If your gold mines suddenly run dry (which happened to the Romans), it immediately cripples your economy (debasing the currency will create a panic, not debasing the currency leads to runoff deflation). If someone suddenly finds a massive new gold source, it will… also cripple your economy, due to runoff inflation (happened in the Spanish Price Revolution after the discovery of the New World). Fiat money gives a much better control over the currency. Now we can argue what inflation/deflation rate a currency should have, instead of leaving that to random chance.

necessity 11y ago
I'd say it's a matter of debate how good that control is when who's controlling it is either incompetent or has it's own interests -- or worst, both. I'm not saying we should go back to the gold standard, but alternatives such as Bitcoin become increasingly interesting in countries plagued by hyperinflation.
- creshal 11y ago
  > I'd say it's a matter of debate how good that control is It's just that having this debate is pure luxury already. Otherwise it'd be "where the hell do we get the gold we need to fuel our economy?" or "what do we do with all the surplus gold that's ruining our economy?". > but alternatives such as Bitcoin become increasingly interesting in countries plagued by hyperinflation. Bitcoin, really? Private currencies where inflation is at the mercy of random developers who may or may not control significant currency reserves as well? Using foreign currencies to supplant or replace a failed domestic currency isn't a new phenomenon, nor limited to "crypto""currencies" (the Balkans used the German Mark extensively in the late 90s, and US Dollars get you far in a lot of places).
- weland 11y ago
  > I'd say it's a matter of debate how good that control is when who's controlling it is either incompetent or has it's own interests -- or worst, both. The problem is that, in the example quoted, no one had that control. Gold mines run dry and you're fucked. Not because some incompetent banker is controlling the gold supply, but because there is no more damn gold. The most competent financial advisor of Rome -- a figure so gargantuan in the field of finance that, if transplanted to the modern world, would not only win that fake Nobel prize for economics, but would cause every other economist to retire out of shame -- would have been powerless. Because there was literally no more gold. Obviously, it wasn't the end of all things -- new mining facilities would be open, sometimes processes would be optimized in older ones, wars would be waged, but these things took time and needed money.
  - gshubert17 11y ago
    No more gold? Wasn't there more gold in other places? Places the Romans didn't know about, but still places. I'm not suggesting the Romans needed to venture westward and discover the Americas, but did they really have no other options?
    - creshal 11y ago
      Their trade balance was massively negative – it's called the "silk road" and not the "Roman wine and glass ware road" for a reason. Gold and silver left Europe and perishable goods were bought for it. It was initially offset by spoils of war and massive mining operations (some of the Roman mines in Spain are still visible today). Apart from that, there was also normal economic and population growth – even without trade, if your population and economy grows, you'll need more money if you want to keep prices and wages stable. So, they had several options: • Conquer places that have gold! That went well for a few centuries, until it didn't any more. • Debase the currency to make more of the money still here. That was, unsurprisingly, massively unpopular. And because monetary value was still tied to precious metals, people just started to hoard old money to melt it in later (something you still occasionally see with e.g. copper pennies), which led to all sorts of economic problems (occasionally crashing all the way down to barter trade).
PepeGomez 11y ago
That would still make currencies far more stable than modern currencies. It's very unlikely that a significant source of gold will be found and even if it will be, it won't be in owner's interest to mine it very quickly. The price revolutions were literally a one off event and while it's usually described as "rampant", the inflation rate was at most in the range of a few percent and it would be seen as moderate to low today.
- creshal 11y ago
  > That would still make currencies far more stable than modern currencies. Stability is not inherently good. Stable currencies that suffocate the economy because they do not allow for rapid enough expansion or reduction of the money supply are a burden. Another example would be the interwar years and great depression, were virtually all countries suspended the gold standard because it was simply impossible to uphold, and the economy recovered from it.
  - PepeGomez 11y ago
    When the economy expands, things get cheaper. Like with most electronics in the last five decades or so.
    - creshal 11y ago
      Deflation is a lot more complicated than that, unfortunately.
      - PepeGomez 11y ago
        No, it isn't.
        creshal 11y ago
        Okay, so you have products that get cheaper and cheaper. Is that good? No, the computer industry is in a deep crisis because of that – first PC sales tanked, then laptop sales, then netbook sales, then ultrabook sales, then tablet sales, soon smartphone sales… if products get cheaper and cheaper, you have no incentive to buy more than absolutely necessary, because not waiting with your purchase will always lose you money. And then we have the other problems: What about rents? Debts? Wages? Do you decrease them over time, too? What happens if they aren't? Who would lend money under such circumstances, if just keeping the money under your pillow will make you richer anyway, and at zero risk, too? Etc. pp.

RobertoG 11y ago

"it matches with humanity's tradition too" I suppose you mean with the traditional way money is explained, that is very probably wrong. The idea that first was barter and then people started to use precious metals doesn't match the historical evidence. There is strong evidence that money is invented in the first states in parallel with writing and numbers in order to register debts. (see https://en.wikipedia.org/wiki/Sumer https://en.wikipedia.org/wiki/Sumer : "Several centuries after the invention of cuneiform, the use of writing expanded beyond debt/payment certificates and inventory lists to be applied for the first time, about 2600 BC, to messages and mail delivery, history, legend, mathematics, astronomical records, and other pursuits.") Metals (strong money) are not necessary and if fact was not the most used system for most part of the history (see https://en.wikipedia.org/wiki/Tally_stick#Split_tally_in_England https://en.wikipedia.org/wiki/Tally_stick#Split_tally_in_Eng... ) So, the gold thing doesn't match humanity's tradition until very recently. This is controversial, I think, because it has political implications.

creshal 11y ago
> So, the gold thing doesn't match humanity's tradition until very recently. Ish. There's no unified "human tradition" anyway. Mediterranean societies have used gold- and other metal-based tallies for thousands of years, until they eventually settled on (gold, silver) coins as a standard. Greek/Roman conquests and trade then spread the idea.
- RobertoG 11y ago
  But my point was that there is an, admittedly polemic, abstraction that match all the human tradition: money is a token of debt. In this view, one important consequence, is that the material of the token is not relevant. The use of precious metals is just an added security measure against counterfeit, but not the thing that make it valuable (that would be the debt that represent). If this is true, part of the debate about strong money vs. fiat money just become pointless.

Gibbon1 11y ago

You want a link? Here is one, http://www.bradford-delong.com/2015/03/time-for-a-rant-why-oh-why-cannot-we-have-better-economists.html http://www.bradford-delong.com/2015/03/time-for-a-rant-why-o... The short answer is a run on safe assets like gold creates a positive feedback loop. A demand short fall causes people to try to acquire safe assets like gold. Spending 'money' on gold means money not spent on real goods and services. Which results in a demand shortfall. And people wanting safe assets to park their wealth. Rinse lather repeat till 1/4 of workforce is unemployed. A central bank can print or lend out any amount of paper money to satisfy investors craving for safe assets. It can't make more gold. Why not have both? Problem: Trying to peg the money supply to the price of gold hamstrings the central banks ability to supply paper. Lesson learned 1929-1939. And learned again by Argentina in 2000 with a US dollar peg serving as a de facto gold standard.

PepeGomez 11y ago
How do you spend gold on gold? You can't spend money on gold when money = gold.
- creshal 11y ago
  Even with a gold standard, you're usually not using gold coins directly (if only because it's hard to make coins for smaller denominations with it), but rather bank notes that are guaranteed to be redeemable for gold (as long as you don't try it out). cf. https://en.wikipedia.org/wiki/Gresham's_law https://en.wikipedia.org/wiki/Gresham's_law
  - PepeGomez 11y ago
    Indeed, but they are still representations of gold and are for all legal purposes equivalent to gold. When you convert them to gold, you don't spend money on gold, since they are one and the same and you can convert the gold back at any time. It's technically not different from changing banknotes to coins or wwithdrawing cash from your bank account. I don't see why you think that the link is relevant. It would apply if there were gold and silver standards simultaneously, for example, but that's not what is being discussed.

JumpCrisscross 11y ago

> [gold] matches with humanity's tradition For most of history, economic growth was minimal. Growth we expect in a year would not be seen across a lifetime. A fixed supply of money worked for a fixed-size economy. In the 1800s, the economy grew on gold due to the coincidence of gold mine output roughly matching economic growth. The moment that link broke, calls for bi-metallism grew. Within a generation, the world was forced off gold.