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There are real practical problems with gold and changing economies. What happens when your population goes up - you need more gold. Or economic growth. Similarl

by rr808 5y ago

There are real practical problems with gold and changing economies. What happens when your population goes up - you need more gold. Or economic growth. Similarly if gold is discovered like Spain's Latin American winnings it causes inflation.

anonporridge 5y ago
Yeah, a big thing that makes gold messy is that you can have massive supply shocks. Asteroid mining in the next few centuries are likely to make that worse. Gold being poorly divisible also makes it very impractical for day to day coinage of a growing population. Eventually, the coins start getting so tiny as to be impossible to work with. I believe that's a big reason why we started using silver and copper for smaller denominations at some point.
- colechristensen 5y ago
  I would bet the asteroid mining supply shock is going to happen this century, I would not be surprised if it happened before 2040.
- seanmcdirmid 5y ago
  It doesn't even have to be asteroid mining. Simply more investment in digging out reserves in countries that have gold to be mine could create imbalances. Those reserves could be in countries that we are in conflict with (e.g. Russia, perhaps China), creating issues in power dynamics (do we want to give Putin and Xi a seat at the table in dictating US monetary policy?). Well, going on the gold standard would also make Australia much more important, so it isn't all that bad.
hahajk 5y ago
An increasing population wouldn’t need more gold, gold (and money backed by it) would just become more valuable, right? Or, in other words, prices would drop and there would be deflation, for better or for worse.
- lazide 5y ago
  Which means people need to work harder for every hamburger or the like and a deflationary spiral could occur which is even more terrible than an inflationary one. I think the parent was referring to ‘to keep the commodity/cash stable’
  - slaymaker1907 5y ago
    I think you could just lower the exchange rate for how much gold the central bank will give for dollars then print more money. This devalues the currency, but that's precisely what you want in the case you gave.
    - zarzavat 5y ago
      This is likely to lead to a run on the bank as everybody rushes to exchange their money for gold. Eventually the peg collapses and we are back to non-exchangeable currency. Gold standard only works as long as everybody believes that the exchange rate will not change.
  - eru 5y ago
    Why would people need to work harder for each hamburger? The relative prices of hamburgers to labour don't need to be impacted by the price of gold, or do they? What do you mean by deflationary spiral? A decrease in price level during a recession is bad news indeed; but a decrease in prices in some sector due to productivity growth is great for business. Just look at falling prices of electronics in the last few decades.
    - lazide 5y ago
      If ‘currency’ becomes more valuable every year (deflation), people try to save as much as they can and reduce spending as much as they can to compensate for it in advance. So people would get paycuts every year instead of raises, and the ‘better employers’ would just cut less than everyone else. The hamburger shack would also have layoffs regularly, as every time the expectation for how fast the ‘currency’ got valuable increases, everyone would cut back on non-essential (or even essential) spending to save more. And burgers are generally not seen as truly essentially/someone would die from not having it. Especially since in a deflationary spiral, ideally you’d literally not spend ANY of the currency, since any that you save now would be worth far more the more you delay it. Folks would rather grow food in their back yard than go to the grocery store so they’d be rich in a year. This is in contrast to a inflationary spiral, where the incentive is to spend all money as soon as you get it, so the value of it doesn’t have time to decrease and prices increase before you do.
jerf 5y ago
The thought has crossed my mind that the answer is, it is impossible to have a long-term gold-backed system (or any other commodity), for all the various reasons that doesn't work, and it's impossible to have a long-term system not based on gold or some other set of commodities, because it is impossible for a government to be given the power to print arbitrarily without eventually using it, unto the death of that currency. There is no guarantee that there is a long-term stable monetary system, after all. They may form a bistable pair together. Proponents of either state can easily read history as vindicating their claims that one or the other is superior, because look at how often the other failed, but I submit that if history vindicates anything at all it may actually be this position.
- alexb_ 5y ago
  > it's impossible to have a long-term system not based on gold or some other set of commodities, because it is impossible for a government to be given the power to print arbitrarily without eventually using it, unto the death of that currency. And this is why the US government isn't directly involved in the process, nor is it given the power to print money arbitrarily. Money is "printed" via a combination of loans and fractional reserve banking, and banks are incentivized to figure out the optimal interest rate to both produce the most amount of money for themselves while keeping a stable currency.
  - laurencerowe 5y ago
    Aren’t interest rates set by the Fed? Banks then charge a rate based on the Fed base rate + risk premium.
    - alexb_ 5y ago
      The fed is largely controlled by the Federal Reserve banks, which are independent entities and are run as private businesses.
  - throw0101a 5y ago
    > Money is "printed" via a combination of loans and fractional reserve banking Fractional reserve banking is not a thing. Tobin called that "The Old View" in 1963: * https://cowles.yale.edu/sites/default/files/files/pub/d01/d0159.pdf https://cowles.yale.edu/sites/default/files/files/pub/d01/d0... It is a convenient crutch to get a '101' level understanding, but people end up continue to think it's real and so the teaching of money multiplier should really be stopped: * https://research.stlouisfed.org/publications/page1-econ/2021/09/17/teaching-the-linkage-between-banks-and-the-fed-r-i-p-money-multiplier https://research.stlouisfed.org/publications/page1-econ/2021... Several countries haven't even had reserve requirements for decades: * https://en.wikipedia.org/wiki/Reserve_requirement#Canada https://en.wikipedia.org/wiki/Reserve_requirement#Canada Roche published a good intro to how the modern monetary system works: * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625
eru 5y ago
When I first read up on economics, I had similar doubts about the gold standards. It doesn't help that most modern day advocators of a gold standard have but a dim understanding of history and economics. So, first: if the population in one country goes up, they can import more gold from elsewhere. It's a commodity after all. Similar for one country digging up a lot of gold. (The global economy wasn't quite as integrated back when Spain had their windfall from the new world. But even then, the long term impact on the price level in Spain compared to the rest of the world was rather modest compared to levels of inflation we see today. Spain just imported more goods and services from the rest of Europe for a while than they exported; naturally losing gold in the process.) So the real concern is about global population vs global gold stocks. Similarly for economic growth: productivity increases under a gold standard lead to decrease in nominal prices. See https://news.ycombinator.com/item?id=26386115 https://news.ycombinator.com/item?id=26386115 for how this works (and worked in history). The more important problem isn't so much population changes or economic growth; it's changes in demand for money balances! Depending on the state of the economy, people want to hold on to different amounts of money vs other assets. That's true not only in nominal terms, but also in inflation adjusted real terms. Those swings can be wild. A central bank can print money (or take money out of circulation) to adapt to those swings in the desire for money balances. Look at the various measures of amount of money, like M1 or M2, change over time. Eg M2 for the US at https://fred.stlouisfed.org/graph/?g=MSEz https://fred.stlouisfed.org/graph/?g=MSEz It is entirely fair and accurate to say that this would a disaster for an economy trying to run on gold coins. Luckily, we have and had the technology to make the gold standard work: fractional reserve banking and privately issued bank notes. See https://www.alt-m.org/2015/07/29/there-was-no-place-like-canada/ https://www.alt-m.org/2015/07/29/there-was-no-place-like-can... for how that worked fabulously in Canada, and why it worked so much worse in the US.
- rr808 5y ago
  The worlds population has quadrupled in 100 years, you can't say that "they can import from elsewhere" or each country can just dig it up. What happens if you live in a country where you can't just dig it up and people are poor.
  - 5y ago

by rr808 5y ago

anonporridge 5y ago

Yeah, a big thing that makes gold messy is that you can have massive supply shocks. Asteroid mining in the next few centuries are likely to make that worse. Gold being poorly divisible also makes it very impractical for day to day coinage of a growing population. Eventually, the coins start getting so tiny as to be impossible to work with. I believe that's a big reason why we started using silver and copper for smaller denominations at some point.

colechristensen 5y ago
I would bet the asteroid mining supply shock is going to happen this century, I would not be surprised if it happened before 2040.
seanmcdirmid 5y ago
It doesn't even have to be asteroid mining. Simply more investment in digging out reserves in countries that have gold to be mine could create imbalances. Those reserves could be in countries that we are in conflict with (e.g. Russia, perhaps China), creating issues in power dynamics (do we want to give Putin and Xi a seat at the table in dictating US monetary policy?). Well, going on the gold standard would also make Australia much more important, so it isn't all that bad.

hahajk 5y ago

An increasing population wouldn’t need more gold, gold (and money backed by it) would just become more valuable, right? Or, in other words, prices would drop and there would be deflation, for better or for worse.

lazide 5y ago
Which means people need to work harder for every hamburger or the like and a deflationary spiral could occur which is even more terrible than an inflationary one. I think the parent was referring to ‘to keep the commodity/cash stable’
- slaymaker1907 5y ago
  I think you could just lower the exchange rate for how much gold the central bank will give for dollars then print more money. This devalues the currency, but that's precisely what you want in the case you gave.
  - zarzavat 5y ago
    This is likely to lead to a run on the bank as everybody rushes to exchange their money for gold. Eventually the peg collapses and we are back to non-exchangeable currency. Gold standard only works as long as everybody believes that the exchange rate will not change.
- eru 5y ago
  Why would people need to work harder for each hamburger? The relative prices of hamburgers to labour don't need to be impacted by the price of gold, or do they? What do you mean by deflationary spiral? A decrease in price level during a recession is bad news indeed; but a decrease in prices in some sector due to productivity growth is great for business. Just look at falling prices of electronics in the last few decades.
  - lazide 5y ago
    If ‘currency’ becomes more valuable every year (deflation), people try to save as much as they can and reduce spending as much as they can to compensate for it in advance. So people would get paycuts every year instead of raises, and the ‘better employers’ would just cut less than everyone else. The hamburger shack would also have layoffs regularly, as every time the expectation for how fast the ‘currency’ got valuable increases, everyone would cut back on non-essential (or even essential) spending to save more. And burgers are generally not seen as truly essentially/someone would die from not having it. Especially since in a deflationary spiral, ideally you’d literally not spend ANY of the currency, since any that you save now would be worth far more the more you delay it. Folks would rather grow food in their back yard than go to the grocery store so they’d be rich in a year. This is in contrast to a inflationary spiral, where the incentive is to spend all money as soon as you get it, so the value of it doesn’t have time to decrease and prices increase before you do.

jerf 5y ago

The thought has crossed my mind that the answer is, it is impossible to have a long-term gold-backed system (or any other commodity), for all the various reasons that doesn't work, and it's impossible to have a long-term system not based on gold or some other set of commodities, because it is impossible for a government to be given the power to print arbitrarily without eventually using it, unto the death of that currency. There is no guarantee that there is a long-term stable monetary system, after all. They may form a bistable pair together. Proponents of either state can easily read history as vindicating their claims that one or the other is superior, because look at how often the other failed, but I submit that if history vindicates anything at all it may actually be this position.

alexb_ 5y ago
> it's impossible to have a long-term system not based on gold or some other set of commodities, because it is impossible for a government to be given the power to print arbitrarily without eventually using it, unto the death of that currency. And this is why the US government isn't directly involved in the process, nor is it given the power to print money arbitrarily. Money is "printed" via a combination of loans and fractional reserve banking, and banks are incentivized to figure out the optimal interest rate to both produce the most amount of money for themselves while keeping a stable currency.
- laurencerowe 5y ago
  Aren’t interest rates set by the Fed? Banks then charge a rate based on the Fed base rate + risk premium.
  - alexb_ 5y ago
    The fed is largely controlled by the Federal Reserve banks, which are independent entities and are run as private businesses.
- throw0101a 5y ago
  > Money is "printed" via a combination of loans and fractional reserve banking Fractional reserve banking is not a thing. Tobin called that "The Old View" in 1963: * https://cowles.yale.edu/sites/default/files/files/pub/d01/d0159.pdf https://cowles.yale.edu/sites/default/files/files/pub/d01/d0... It is a convenient crutch to get a '101' level understanding, but people end up continue to think it's real and so the teaching of money multiplier should really be stopped: * https://research.stlouisfed.org/publications/page1-econ/2021/09/17/teaching-the-linkage-between-banks-and-the-fed-r-i-p-money-multiplier https://research.stlouisfed.org/publications/page1-econ/2021... Several countries haven't even had reserve requirements for decades: * https://en.wikipedia.org/wiki/Reserve_requirement#Canada https://en.wikipedia.org/wiki/Reserve_requirement#Canada Roche published a good intro to how the modern monetary system works: * https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625

eru 5y ago

When I first read up on economics, I had similar doubts about the gold standards. It doesn't help that most modern day advocators of a gold standard have but a dim understanding of history and economics. So, first: if the population in one country goes up, they can import more gold from elsewhere. It's a commodity after all. Similar for one country digging up a lot of gold. (The global economy wasn't quite as integrated back when Spain had their windfall from the new world. But even then, the long term impact on the price level in Spain compared to the rest of the world was rather modest compared to levels of inflation we see today. Spain just imported more goods and services from the rest of Europe for a while than they exported; naturally losing gold in the process.) So the real concern is about global population vs global gold stocks. Similarly for economic growth: productivity increases under a gold standard lead to decrease in nominal prices. See https://news.ycombinator.com/item?id=26386115 https://news.ycombinator.com/item?id=26386115 for how this works (and worked in history). The more important problem isn't so much population changes or economic growth; it's changes in demand for money balances! Depending on the state of the economy, people want to hold on to different amounts of money vs other assets. That's true not only in nominal terms, but also in inflation adjusted real terms. Those swings can be wild. A central bank can print money (or take money out of circulation) to adapt to those swings in the desire for money balances. Look at the various measures of amount of money, like M1 or M2, change over time. Eg M2 for the US at https://fred.stlouisfed.org/graph/?g=MSEz https://fred.stlouisfed.org/graph/?g=MSEz It is entirely fair and accurate to say that this would a disaster for an economy trying to run on gold coins. Luckily, we have and had the technology to make the gold standard work: fractional reserve banking and privately issued bank notes. See https://www.alt-m.org/2015/07/29/there-was-no-place-like-canada/ https://www.alt-m.org/2015/07/29/there-was-no-place-like-can... for how that worked fabulously in Canada, and why it worked so much worse in the US.

rr808 5y ago
The worlds population has quadrupled in 100 years, you can't say that "they can import from elsewhere" or each country can just dig it up. What happens if you live in a country where you can't just dig it up and people are poor.
- 5y ago