10 ms·

Isn’t the point that gold is finite?

by symlinkk 6y ago

UncleMeat 6y ago
We pull gold out of the ground all the time. It is finite only in theory.
- gher-shyu3i 6y ago
  It's infinitely easier to print money at will, which is what keeps happening. Gold has intrinsic value for practically all of human existence.
  - gruez 6y ago
    >Gold has intrinsic value for practically all of human existence. The intrinsic value argument hardly makes any sense because it's almost always lower than the actual value. Someone interested in intrinsic value would be buying copper, not gold.
  - tudorconstantin 6y ago
    Nothing has intrinsic value
    - hyko 6y ago
      Obviously a statement like that requires some explanatory notes? When talking about money, the term intrinsic value means the market value of the commodity the money is made from, versus the face value of the money. This is very real and has been exploited in the past, with people effectively melting down large quantities of money and selling it as a commodity.
  - rpz 6y ago
    Coming from a gold bug: you can still create an infinite number of IOUs on gold. Thats what the dollar was before Nixon closed the gold window. The fed was running a fractional reserve on their gold. Believe it or not they still are today, despite folks and major nations no longer have the ability to trade their dollars for some amount of the US treasury gold. Look into the market value of the gold certificates that the fed has on its books. The fed hasn't marked their gold position to the market since the 70s. Very peculiar if you ask me. Also consider why each of the federal reserve banks trade these certificates amongst one another. On top of that you can read the treasury's website and find that the policy states that the treasury gold plays an important role as collateral on the dollar https://www.treasury.gov/resource-center/faqs/Currency/Pages/legal-tender.aspx https://www.treasury.gov/resource-center/faqs/Currency/Pages... "Congress has specified that a Federal Reserve Bank must hold collateral equal in value to the Federal Reserve notes that the Bank receives. This collateral is chiefly gold certificates and United States securities. This provides backing for the note issue. The idea was that if the Congress dissolved the Federal Reserve System, the United States would take over the notes (liabilities). This would meet the requirements of Section 411, but the government would also take over the assets, which would be of equal value. Federal Reserve notes represent a first lien on all the assets of the Federal Reserve Banks, and on the collateral specifically held against them."
    - gher-shyu3i 6y ago
      > you can still create an infinite number of IOUs on gold This is why Islam, Judaism, and Christianity prohibit interest. That closes the door on exploits like this.
    - jkhdigital 6y ago
      Yeah... sometimes I think Mises should be required reading for anyone commenting on HN threads about money. If anything, his descriptions of money and money substitutes are even more relevant in the modern financialized economy, where substitutes (i.e. derivatives) now exist for every imaginable asset class.
  - imtringued 6y ago
    The intrinsic value of gold is an answer to whether gold will stay relevant 5000 years from now. It will guarantee that gold will always have some residual value, it doesn't guarantee that its current valuation is correct. Compare this to Bitcoin which can be replaced by any competitor. Compare this to the US dollar which is required to pay taxes. You will still see a use case for the dollar in a hundred years.
- bartvk 6y ago
  The rate is limited, though.
- deleted 6y ago
  [deleted]
- BurnAphterRead 6y ago
  We pull gold out of the ground when it is economical to do so. That is to say when the exchange of gold to currency is favorable for extraction, which can also be conveyed to mean that when there isn't enough gold to the demand of currency for gold.
beefield 6y ago
Even if we think gold is finite (doubtful in any meaningful sense), it does not follow that the amount of money (in the modern sense) would be finite in gold standard. Gold standard means that the value of an unit of currency is tied to a specific amount of gold. In addition it may mean that the amount of bank notes in circulation in such system matches the amount of gold in the vaults of central bank. Neither of those means that the amount of money people have lent to the banks (i.e. money at their bank account) has any meaningful relationship to the amount of gold - at least without extremely strict regulation of financial companies, lending and saving. (Of course, same applies to cryptocurrencies, the claim that current cryptocurrencies would somehow set a limit for money creation is just a massive misunderstanding of money and credit.)
- symlinkk 6y ago
  I don’t understand what you’re trying to say. How does “lending and saving” change the fact that money can’t be created out of thin air?
  - SpicyLemonZest 6y ago
    Under standard definitions, every bank loan creates money out of thin air. When you get a $10k car loan, for example, that means the amount of money floating around the economy has increased by $10k; there's nobody else in the market who has to spend $10k less because you got that loan.
  - smallnamespace 6y ago
    His point is that most money is indeed created out of thin air through the mechanism of fractional reserve banking and the creation of debt. This happens even if the monetary 'base' remains a fixed quantity, like bullion gold.
    - dnautics 6y ago
      Yes, but minimally you can create disclosure regulations requiring entities that are lending to disclose the level of leverage they are operating at. Customers can then discriminate when they deposit based on withdrawal risk.
SpicyLemonZest 6y ago
The finiteness of gold doesn’t imply any particular monetary value for it. The pre-1971 gold standard was maintained not by concrete standards of value but by global scale market manipulation; as we can see in market data since then, the actual market clearing price of gold is much more dynamic than the fixed peg imposed by gold standard laws.
- dTal 6y ago
  It does not follow from the post- gold-standard instability of gold that the prior stability was due to market manipulation; the nature of the asset changed fundamentally. You might say the gold was "backed by" the financial system, whereas now it's a speculative asset no better than BTC.
  - SpicyLemonZest 6y ago
    The point is that there was no underlying law of nature attaching gold to the financial system. The only thing "backed by" meant was, the government promised to trade gold and regulate the gold market as required to maintain their declared peg. Maybe it's a bit of a "hot take" to call that manipulation, but I don't think it's untrue or unfair - in some countries (although not the UK) governments went as far as simply prohibiting private speculation in gold.
- jkhdigital 6y ago
  The monetary value of gold emerged organically because it turned out to be the best available option for transactions between untrusted parties. After the emergence of modern states, this use case was restricted to cross-border payments since strong legal protections and centralized banking systems made fiat currencies trustworthy enough for domestic commerce. But anyways, if one looks at why gold emerged as the preferred money for its time and place, “finiteness” aka non-zero marginal cost of production is certainly a relevant factor.
simonh 6y ago
A lot of excellent other answers, so I hesitated to chip in but I think there is a useful way to think about this. If the unit of exchange was always physical gold coins then yes, there would be a finite amount of money. However the moment we turned to promissory notes, cheques, bank notes and financial instruments such as in fractional reserve banking the link to physical gold was a fiction. Such notes have been around a very, very long time although of course increasing in prominence over time. It was a fiction even for precious metal coins as well because the moment a government started running low on the metal, or just wanted to inflate it's currency, it would just debase the coins.

Isn’t the point that gold is finite?

UncleMeat 6y ago

We pull gold out of the ground all the time. It is finite only in theory.

gher-shyu3i 6y ago
It's infinitely easier to print money at will, which is what keeps happening. Gold has intrinsic value for practically all of human existence.
- gruez 6y ago
  >Gold has intrinsic value for practically all of human existence. The intrinsic value argument hardly makes any sense because it's almost always lower than the actual value. Someone interested in intrinsic value would be buying copper, not gold.
- tudorconstantin 6y ago
  Nothing has intrinsic value
  - hyko 6y ago
    Obviously a statement like that requires some explanatory notes? When talking about money, the term intrinsic value means the market value of the commodity the money is made from, versus the face value of the money. This is very real and has been exploited in the past, with people effectively melting down large quantities of money and selling it as a commodity.
- rpz 6y ago
  Coming from a gold bug: you can still create an infinite number of IOUs on gold. Thats what the dollar was before Nixon closed the gold window. The fed was running a fractional reserve on their gold. Believe it or not they still are today, despite folks and major nations no longer have the ability to trade their dollars for some amount of the US treasury gold. Look into the market value of the gold certificates that the fed has on its books. The fed hasn't marked their gold position to the market since the 70s. Very peculiar if you ask me. Also consider why each of the federal reserve banks trade these certificates amongst one another. On top of that you can read the treasury's website and find that the policy states that the treasury gold plays an important role as collateral on the dollar https://www.treasury.gov/resource-center/faqs/Currency/Pages/legal-tender.aspx https://www.treasury.gov/resource-center/faqs/Currency/Pages... "Congress has specified that a Federal Reserve Bank must hold collateral equal in value to the Federal Reserve notes that the Bank receives. This collateral is chiefly gold certificates and United States securities. This provides backing for the note issue. The idea was that if the Congress dissolved the Federal Reserve System, the United States would take over the notes (liabilities). This would meet the requirements of Section 411, but the government would also take over the assets, which would be of equal value. Federal Reserve notes represent a first lien on all the assets of the Federal Reserve Banks, and on the collateral specifically held against them."
  - gher-shyu3i 6y ago
    > you can still create an infinite number of IOUs on gold This is why Islam, Judaism, and Christianity prohibit interest. That closes the door on exploits like this.
  - jkhdigital 6y ago
    Yeah... sometimes I think Mises should be required reading for anyone commenting on HN threads about money. If anything, his descriptions of money and money substitutes are even more relevant in the modern financialized economy, where substitutes (i.e. derivatives) now exist for every imaginable asset class.
- imtringued 6y ago
  The intrinsic value of gold is an answer to whether gold will stay relevant 5000 years from now. It will guarantee that gold will always have some residual value, it doesn't guarantee that its current valuation is correct. Compare this to Bitcoin which can be replaced by any competitor. Compare this to the US dollar which is required to pay taxes. You will still see a use case for the dollar in a hundred years.
bartvk 6y ago
The rate is limited, though.
deleted 6y ago
[deleted]
BurnAphterRead 6y ago
We pull gold out of the ground when it is economical to do so. That is to say when the exchange of gold to currency is favorable for extraction, which can also be conveyed to mean that when there isn't enough gold to the demand of currency for gold.

beefield 6y ago

Even if we think gold is finite (doubtful in any meaningful sense), it does not follow that the amount of money (in the modern sense) would be finite in gold standard. Gold standard means that the value of an unit of currency is tied to a specific amount of gold. In addition it may mean that the amount of bank notes in circulation in such system matches the amount of gold in the vaults of central bank. Neither of those means that the amount of money people have lent to the banks (i.e. money at their bank account) has any meaningful relationship to the amount of gold - at least without extremely strict regulation of financial companies, lending and saving. (Of course, same applies to cryptocurrencies, the claim that current cryptocurrencies would somehow set a limit for money creation is just a massive misunderstanding of money and credit.)

symlinkk 6y ago
I don’t understand what you’re trying to say. How does “lending and saving” change the fact that money can’t be created out of thin air?
- SpicyLemonZest 6y ago
  Under standard definitions, every bank loan creates money out of thin air. When you get a $10k car loan, for example, that means the amount of money floating around the economy has increased by $10k; there's nobody else in the market who has to spend $10k less because you got that loan.
- smallnamespace 6y ago
  His point is that most money is indeed created out of thin air through the mechanism of fractional reserve banking and the creation of debt. This happens even if the monetary 'base' remains a fixed quantity, like bullion gold.
  - dnautics 6y ago
    Yes, but minimally you can create disclosure regulations requiring entities that are lending to disclose the level of leverage they are operating at. Customers can then discriminate when they deposit based on withdrawal risk.

SpicyLemonZest 6y ago

The finiteness of gold doesn’t imply any particular monetary value for it. The pre-1971 gold standard was maintained not by concrete standards of value but by global scale market manipulation; as we can see in market data since then, the actual market clearing price of gold is much more dynamic than the fixed peg imposed by gold standard laws.

dTal 6y ago
It does not follow from the post- gold-standard instability of gold that the prior stability was due to market manipulation; the nature of the asset changed fundamentally. You might say the gold was "backed by" the financial system, whereas now it's a speculative asset no better than BTC.
- SpicyLemonZest 6y ago
  The point is that there was no underlying law of nature attaching gold to the financial system. The only thing "backed by" meant was, the government promised to trade gold and regulate the gold market as required to maintain their declared peg. Maybe it's a bit of a "hot take" to call that manipulation, but I don't think it's untrue or unfair - in some countries (although not the UK) governments went as far as simply prohibiting private speculation in gold.
jkhdigital 6y ago
The monetary value of gold emerged organically because it turned out to be the best available option for transactions between untrusted parties. After the emergence of modern states, this use case was restricted to cross-border payments since strong legal protections and centralized banking systems made fiat currencies trustworthy enough for domestic commerce. But anyways, if one looks at why gold emerged as the preferred money for its time and place, “finiteness” aka non-zero marginal cost of production is certainly a relevant factor.

simonh 6y ago

A lot of excellent other answers, so I hesitated to chip in but I think there is a useful way to think about this. If the unit of exchange was always physical gold coins then yes, there would be a finite amount of money. However the moment we turned to promissory notes, cheques, bank notes and financial instruments such as in fractional reserve banking the link to physical gold was a fiction. Such notes have been around a very, very long time although of course increasing in prominence over time. It was a fiction even for precious metal coins as well because the moment a government started running low on the metal, or just wanted to inflate it's currency, it would just debase the coins.