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My problem with this book is that he doesn't deal at all with the gold standard. During the timeline of his survey, the currencies were almost all gold-backed

My problem with this book is that he doesn't deal at all with the gold standard. During the timeline of his survey, the currencies were almost all gold-backed and by the end, are all fiat currencies. He completely ignores it, yet at the least he should have explained why it was not relevant.

rosser 10y ago
I think the question of what's backing the units used to denominate wealth is pretty orthogonal to that of inequality, itself.
metaphorm 10y ago
what is the importance of that? can you inform me of any historical instances of currency being redeemed for its face value of gold?
- smallnamespace 10y ago
  It wasn't very long ago. Up until 1968, dollars were convertible into gold and pegged at $35 / oz [1], meaning the government intervened to keep it at that price. From 1968-1971, the US still honored that rate with other countries, but stopped intervening in the private gold market [2]. Then the US left the gold standard, and everyone else followed suit. [1] https://en.wikipedia.org/wiki/History_of_the_United_States_dollar#The_Gold_Reserve_Act https://en.wikipedia.org/wiki/History_of_the_United_States_d... [2] https://en.wikipedia.org/wiki/Bretton_Woods_system https://en.wikipedia.org/wiki/Bretton_Woods_system
  - metaphorm 10y ago
    well, that's not at at all what I asked for an example of. I know the history of the gold standard and when/how/why the dollar was taken off gold backing. I would like to know of a historical example of when a significant (meaning large quantity, high economic impact) exchange of dollar denominated treasury notes were redeemed for their face value in gold metal. did that ever even happen? I'm unaware of any instances of that, but then, I'm not a scholar in the field.
    - smallnamespace 10y ago
      How is that any different from redeeming notes in dollars, then buying gold for the pegged price of $35/oz.? Since the markets were open and liquid, I'm sure people converted between gold and dollars all the time. It just wasn't anything to make note of. What did cause Nixon to take the US out of Bretton Woods is when a bunch of our trading partners threatened to redeem dollars for gold all at once, and we didn't have enough gold to cover it.
smallnamespace 10y ago
This is a sort of facile answer, since there are a lot of details to prove, but in short, because monetary policy over the long run should not have any effect on the real rate of return r and economy-wide growth rate g, which is what the book's argument hinges on. The two big differences between the gold-backed system before the 70s and afterwards are: - We picked fixed pegs to gold, meaning exchange rates were fixed and not floating as they are now - Fixed exchange rates + free flow of capital is incompatible with being able to exercise monetary policy (banks can't print money since it needs to backed by gold) [1] But it doesn't matter whether central banks exercise monetary policy or not! Let's say a central bank today decides to print money. In the short run, that stimulates the economy, but in the long run it will lead to large rises in both nominal rates and inflation expectations, which cancel out (since real return = nominal return - inflation). The long run real rate of return is unaffected, as is the GDP growth rate.[2] [1] https://en.wikipedia.org/wiki/Impossible_trinity https://en.wikipedia.org/wiki/Impossible_trinity [2] http://www.frbsf.org/education/teacher-resources/us-monetary-policy-introduction/real-interest-rates-economy/ http://www.frbsf.org/education/teacher-resources/us-monetary...
- trapperkeeper79 10y ago
  Some people believe central banks are essentially printing money right now (since 2008, so for nearly a decade). Why has inflation not picked up?
  - smallnamespace 10y ago
    'Long run' in economist-speak means multiple decades, generally. But to answer your question directly, it's because the financial crisis and the massive deleveraging it caused effectively sucked a lot of money from the world economies. In the absence of QE we would've seen a painful, grinding deflation like Japan went through during the 90s. Central banks can print money to increase the monetary base, but that's directly offset by 1) the large destruction of financial value during the crisis and 2) the fact that people are just taking that money and sitting on it. The net effect is less leverage in the system and not much effective change in liquidity. Note that less leverage is a good thing in this case -- it makes banks less likely to go bankrupt, and makes a repeat of the '08 crisis much less likely. http://www.investopedia.com/articles/investing/022615/why-didnt-quantitative-easing-lead-hyperinflation.asp http://www.investopedia.com/articles/investing/022615/why-di...
Mikeb85 10y ago
It's because the gold standard is meaningless, only trotted out by gold bugs conspiracy theorists. The concentration and division of wealth is what matters, not nominal values or gold pieces.
- patrickg_zill 10y ago
  If gold is so meaningless, why is it continually being purchased by central banks? Maybe you need to share your economic wisdom with China (buying several hundred tonnes per year) or Russia (bought 200,000 ounces in the July 2016 alone). You don't agree, fine. But "conspiracy theory" is just an ad hominem at this point.
  - Mikeb85 10y ago
    They also buy other currencies (both have foreign reserves in the hundreds of billions), commodities (gold, oil, silver, aluminum), stocks and bonds, etc... Gold's value is as a commodity, and a historic store of value, much like other commodities (businesses and governments also hoard oil to ride out price and fluctuations). But it's not about to replace fiat any time soon (or ever again really). Edit - I should add, at various times throughout history, grain, livestock and spices were all used as currency. Gold's special place comes from the fact it was one of the very first metals to be worked (~7000 years ago), it's easy to work, it doesn't tarnish, and of course it's shiny (so it was widely used as jewellery). It's durability and perceived value allowed it to be traded in a way that you can't trade goats or barley. But at the same time, there's nothing particularly special about it, it's always traded much the same as other durable commodities, that fact is just hidden sometimes by the fact that for a period of history, everything was compared to gold, instead of another unit.
dredmorbius 10y ago
Specie money hasn't fared any better against inflationary trends than fiat currency. It's just expressed differently, through devaluation. You'll find a long treatment of this in Adam Smith's Wealth of Nations, which also introduces the concept that England had, effectively, three separate currency systems in simultaneous circulation: copper-based pence for retail, silver-based shillings and pounds for wholesale, and gold guineas for finance. There's also the story of the Roman denarius, which was devalued from 90+% silver to less than 5% over the course of about 250 years. https://dollarvigilante.com/blog/2012/02/28/the-decline-and-fall-of-the-roman-denarius.html https://dollarvigilante.com/blog/2012/02/28/the-decline-and-... https://www.lehigh.edu/~inarcmet/papers/pense%201992.pdf https://www.lehigh.edu/~inarcmet/papers/pense%201992.pdf

rosser 10y ago

I think the question of what's backing the units used to denominate wealth is pretty orthogonal to that of inequality, itself.

metaphorm 10y ago

what is the importance of that? can you inform me of any historical instances of currency being redeemed for its face value of gold?

smallnamespace 10y ago
It wasn't very long ago. Up until 1968, dollars were convertible into gold and pegged at $35 / oz [1], meaning the government intervened to keep it at that price. From 1968-1971, the US still honored that rate with other countries, but stopped intervening in the private gold market [2]. Then the US left the gold standard, and everyone else followed suit. [1] https://en.wikipedia.org/wiki/History_of_the_United_States_dollar#The_Gold_Reserve_Act https://en.wikipedia.org/wiki/History_of_the_United_States_d... [2] https://en.wikipedia.org/wiki/Bretton_Woods_system https://en.wikipedia.org/wiki/Bretton_Woods_system
- metaphorm 10y ago
  well, that's not at at all what I asked for an example of. I know the history of the gold standard and when/how/why the dollar was taken off gold backing. I would like to know of a historical example of when a significant (meaning large quantity, high economic impact) exchange of dollar denominated treasury notes were redeemed for their face value in gold metal. did that ever even happen? I'm unaware of any instances of that, but then, I'm not a scholar in the field.
  - smallnamespace 10y ago
    How is that any different from redeeming notes in dollars, then buying gold for the pegged price of $35/oz.? Since the markets were open and liquid, I'm sure people converted between gold and dollars all the time. It just wasn't anything to make note of. What did cause Nixon to take the US out of Bretton Woods is when a bunch of our trading partners threatened to redeem dollars for gold all at once, and we didn't have enough gold to cover it.

smallnamespace 10y ago

This is a sort of facile answer, since there are a lot of details to prove, but in short, because monetary policy over the long run should not have any effect on the real rate of return r and economy-wide growth rate g, which is what the book's argument hinges on. The two big differences between the gold-backed system before the 70s and afterwards are: - We picked fixed pegs to gold, meaning exchange rates were fixed and not floating as they are now - Fixed exchange rates + free flow of capital is incompatible with being able to exercise monetary policy (banks can't print money since it needs to backed by gold) [1] But it doesn't matter whether central banks exercise monetary policy or not! Let's say a central bank today decides to print money. In the short run, that stimulates the economy, but in the long run it will lead to large rises in both nominal rates and inflation expectations, which cancel out (since real return = nominal return - inflation). The long run real rate of return is unaffected, as is the GDP growth rate.[2] [1] https://en.wikipedia.org/wiki/Impossible_trinity https://en.wikipedia.org/wiki/Impossible_trinity [2] http://www.frbsf.org/education/teacher-resources/us-monetary-policy-introduction/real-interest-rates-economy/ http://www.frbsf.org/education/teacher-resources/us-monetary...

trapperkeeper79 10y ago
Some people believe central banks are essentially printing money right now (since 2008, so for nearly a decade). Why has inflation not picked up?
- smallnamespace 10y ago
  'Long run' in economist-speak means multiple decades, generally. But to answer your question directly, it's because the financial crisis and the massive deleveraging it caused effectively sucked a lot of money from the world economies. In the absence of QE we would've seen a painful, grinding deflation like Japan went through during the 90s. Central banks can print money to increase the monetary base, but that's directly offset by 1) the large destruction of financial value during the crisis and 2) the fact that people are just taking that money and sitting on it. The net effect is less leverage in the system and not much effective change in liquidity. Note that less leverage is a good thing in this case -- it makes banks less likely to go bankrupt, and makes a repeat of the '08 crisis much less likely. http://www.investopedia.com/articles/investing/022615/why-didnt-quantitative-easing-lead-hyperinflation.asp http://www.investopedia.com/articles/investing/022615/why-di...

Mikeb85 10y ago

It's because the gold standard is meaningless, only trotted out by gold bugs conspiracy theorists. The concentration and division of wealth is what matters, not nominal values or gold pieces.

patrickg_zill 10y ago
If gold is so meaningless, why is it continually being purchased by central banks? Maybe you need to share your economic wisdom with China (buying several hundred tonnes per year) or Russia (bought 200,000 ounces in the July 2016 alone). You don't agree, fine. But "conspiracy theory" is just an ad hominem at this point.
- Mikeb85 10y ago
  They also buy other currencies (both have foreign reserves in the hundreds of billions), commodities (gold, oil, silver, aluminum), stocks and bonds, etc... Gold's value is as a commodity, and a historic store of value, much like other commodities (businesses and governments also hoard oil to ride out price and fluctuations). But it's not about to replace fiat any time soon (or ever again really). Edit - I should add, at various times throughout history, grain, livestock and spices were all used as currency. Gold's special place comes from the fact it was one of the very first metals to be worked (~7000 years ago), it's easy to work, it doesn't tarnish, and of course it's shiny (so it was widely used as jewellery). It's durability and perceived value allowed it to be traded in a way that you can't trade goats or barley. But at the same time, there's nothing particularly special about it, it's always traded much the same as other durable commodities, that fact is just hidden sometimes by the fact that for a period of history, everything was compared to gold, instead of another unit.

dredmorbius 10y ago

Specie money hasn't fared any better against inflationary trends than fiat currency. It's just expressed differently, through devaluation. You'll find a long treatment of this in Adam Smith's Wealth of Nations, which also introduces the concept that England had, effectively, three separate currency systems in simultaneous circulation: copper-based pence for retail, silver-based shillings and pounds for wholesale, and gold guineas for finance. There's also the story of the Roman denarius, which was devalued from 90+% silver to less than 5% over the course of about 250 years. https://dollarvigilante.com/blog/2012/02/28/the-decline-and-fall-of-the-roman-denarius.html https://dollarvigilante.com/blog/2012/02/28/the-decline-and-... https://www.lehigh.edu/~inarcmet/papers/pense%201992.pdf https://www.lehigh.edu/~inarcmet/papers/pense%201992.pdf