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> And the central bank can still manipulate that value, they just have to buy and sell the asset to do it. Yes, true. But the fact that there is SOME LIMIT is

> And the central bank can still manipulate that value, they just have to buy and sell the asset to do it. Yes, true. But the fact that there is SOME LIMIT is pretty nice. In other words, the Fed could create as many dollars as there are bits to represent them without much effort at all. Only once you start overflowing a 64 bit integer does there start to be any kind of restraint on the amount of dollars created and only for a year or two until all the software gets migrated to use 128 bit long long long longs! Commodities -- especially gold and silver which have widespread historical precedent as money -- can't really just be made up. Yes they're vulnerable to the vagaries of the market, but that market is at least based on some reality! And before you say "but the central bank can just make the prices go to infinity" thus achieving their price goals anyhow, I would respectfully disagree. The point of commodity backing of paper notes is that if you lose faith in the value of the notes you can always demand the commodity and hold that instead.

gcb0 12y ago
they can be made up when you have enough of them. just look how usa dictated crude oil prices at will or how the diamond business work for the last couple of centuries.
- msandford 12y ago
  First thanks for replying instead of just downvoting. I might argue that the commodities you're referencing and precious metals are a little different. What you want to look at is the size of the stores versus the yearly production. I don't know what the crude stockpiles are worldwide above ground, but they don't amount to much more than a few months worth of consumption. So if you were going to pick a single commodity to use, you probably wouldn't pick crude. Because there's very little buffer, supply or demand shocks quickly work their way into prices. This is not ideal. http://en.wikipedia.org/wiki/Global_strategic_petroleum_reserves http://en.wikipedia.org/wiki/Global_strategic_petroleum_rese... Diamonds do satisfy the "large reserves relative to production" as DeBeers supposedly has many decades worth of diamonds locked up in vaults. This is to keep the price higher than it otherwise would, made possible by demand they manufactured through advertising. So while diamonds do have the buffer we want, they aren't divisible. Take a barrel of crude and pour it into two different containers. Each is now worth basically half of the first container. But split a diamond in half, and its value isn't cleanly divided in two. Diamond prices are based more on the carat square or cube (http://forums.udacity.com/questions/100166221/power-law-or-exponential http://forums.udacity.com/questions/100166221/power-law-or-e...) so dividing a diamond in half makes each of the halves worth 1/4 of the whole. Not a good feature of something monetary; getting change for a dollar doesn't destroy any value. Gold and silver on the other hand are divisible, fungible, and have high value relative to size and weight. Gold doesn't tarnish at all and silver very slowly and whatever oxide it does produce is protective. Also the yearly production of gold and silver from mining only represents a few percent of world stockpiles so supply or demand shocks have to be very large indeed to make drastic price changes; also a nice feature. Diamonds aren't fungible nor divisible. Crude doesn't have large stocks and has much lower per-unit value.
jokr004 12y ago
It's been well demonstrated that economies with gold standard currencies fall apart.. it played a big role in the global great depression and every affected nation ditched the gold standard before their economies were able to recover. There is no example of this system working well and plenty of examples of it failing.
- msandford 12y ago
  > It's been well demonstrated that economies with gold standard currencies fall apart Then why were gold and silver considered money for thousands of years if they were so awful and horrible and destroyed everyone's economies? We still use forks and spoons even after the spork was invented, and regular chairs even after beanbag chairs were invented. Perhaps it was the financial innovations that caused the problems, not the actual money? It's obviously hard to disentangle the two, but the East India Company didn't make up a bunch of gold, they issued a lot of stock. That was the innovation that really enabled things to go nuts. The Great Depression here in the US was the result of tremendous amounts of credit being issued against stocks; people were allowed to buy on margin in absolutely insane ways. Eventually prices went down and the margin calls were made and the whole thing collapsed. But the gold didn't cause the problem. The problem was the issuance of credit based not on the creditworthiness of the individual or the project but based on the assumed value of the instruments that the credit was being issued to purchase. Blaming the money for not being able to inflate is like blaming the victim for being weak enough that the criminal is able to murder them. It confuses the cause (the criminal) with the outcome (the victim is murdered).
  - snowwrestler 12y ago
    There is a big difference between using gold and silver for currency--which people did for thousands of years--and a gold- or silver-backed paper currency, which only existed for a couple hundred years at most. I know gold standard fans like to equate them, but they are not the same thing at all. Gold and silver used as money were actually a form of barter. They did not require people to trust a government, and in fact predated government as we know it today. Gold- and silver-backed currency were actually paper, and thus required people to trust the government to redeem them. Well, if you're going to stipulate that people have to trust the government, then gold or silver is just an implementation detail. In operation, it works like government price fixing of gold and silver. Like any price fixing, it leaves the economy open to outside manipulation by anyone who controls enough of the price fixed item. Fiat currency is resistant to such manipulation because no one can ever control enough of it to manipulate the economy. The government can create or destroy as much as it needs to.
bkeroack 12y ago
When your money supply is pegged to a physical resource, the primary economic activity that is incentivized within that economy is producing more of that resource (ie, digging gold up out of the ground, or invading/"colonizing" countries to get theirs). There are few people who would consider that a healthy way to grow a modern economy.

gcb0 12y ago

they can be made up when you have enough of them. just look how usa dictated crude oil prices at will or how the diamond business work for the last couple of centuries.

msandford 12y ago
First thanks for replying instead of just downvoting. I might argue that the commodities you're referencing and precious metals are a little different. What you want to look at is the size of the stores versus the yearly production. I don't know what the crude stockpiles are worldwide above ground, but they don't amount to much more than a few months worth of consumption. So if you were going to pick a single commodity to use, you probably wouldn't pick crude. Because there's very little buffer, supply or demand shocks quickly work their way into prices. This is not ideal. http://en.wikipedia.org/wiki/Global_strategic_petroleum_reserves http://en.wikipedia.org/wiki/Global_strategic_petroleum_rese... Diamonds do satisfy the "large reserves relative to production" as DeBeers supposedly has many decades worth of diamonds locked up in vaults. This is to keep the price higher than it otherwise would, made possible by demand they manufactured through advertising. So while diamonds do have the buffer we want, they aren't divisible. Take a barrel of crude and pour it into two different containers. Each is now worth basically half of the first container. But split a diamond in half, and its value isn't cleanly divided in two. Diamond prices are based more on the carat square or cube (http://forums.udacity.com/questions/100166221/power-law-or-exponential http://forums.udacity.com/questions/100166221/power-law-or-e...) so dividing a diamond in half makes each of the halves worth 1/4 of the whole. Not a good feature of something monetary; getting change for a dollar doesn't destroy any value. Gold and silver on the other hand are divisible, fungible, and have high value relative to size and weight. Gold doesn't tarnish at all and silver very slowly and whatever oxide it does produce is protective. Also the yearly production of gold and silver from mining only represents a few percent of world stockpiles so supply or demand shocks have to be very large indeed to make drastic price changes; also a nice feature. Diamonds aren't fungible nor divisible. Crude doesn't have large stocks and has much lower per-unit value.

jokr004 12y ago

It's been well demonstrated that economies with gold standard currencies fall apart.. it played a big role in the global great depression and every affected nation ditched the gold standard before their economies were able to recover. There is no example of this system working well and plenty of examples of it failing.

msandford 12y ago
> It's been well demonstrated that economies with gold standard currencies fall apart Then why were gold and silver considered money for thousands of years if they were so awful and horrible and destroyed everyone's economies? We still use forks and spoons even after the spork was invented, and regular chairs even after beanbag chairs were invented. Perhaps it was the financial innovations that caused the problems, not the actual money? It's obviously hard to disentangle the two, but the East India Company didn't make up a bunch of gold, they issued a lot of stock. That was the innovation that really enabled things to go nuts. The Great Depression here in the US was the result of tremendous amounts of credit being issued against stocks; people were allowed to buy on margin in absolutely insane ways. Eventually prices went down and the margin calls were made and the whole thing collapsed. But the gold didn't cause the problem. The problem was the issuance of credit based not on the creditworthiness of the individual or the project but based on the assumed value of the instruments that the credit was being issued to purchase. Blaming the money for not being able to inflate is like blaming the victim for being weak enough that the criminal is able to murder them. It confuses the cause (the criminal) with the outcome (the victim is murdered).
- snowwrestler 12y ago
  There is a big difference between using gold and silver for currency--which people did for thousands of years--and a gold- or silver-backed paper currency, which only existed for a couple hundred years at most. I know gold standard fans like to equate them, but they are not the same thing at all. Gold and silver used as money were actually a form of barter. They did not require people to trust a government, and in fact predated government as we know it today. Gold- and silver-backed currency were actually paper, and thus required people to trust the government to redeem them. Well, if you're going to stipulate that people have to trust the government, then gold or silver is just an implementation detail. In operation, it works like government price fixing of gold and silver. Like any price fixing, it leaves the economy open to outside manipulation by anyone who controls enough of the price fixed item. Fiat currency is resistant to such manipulation because no one can ever control enough of it to manipulate the economy. The government can create or destroy as much as it needs to.

bkeroack 12y ago

When your money supply is pegged to a physical resource, the primary economic activity that is incentivized within that economy is producing more of that resource (ie, digging gold up out of the ground, or invading/"colonizing" countries to get theirs). There are few people who would consider that a healthy way to grow a modern economy.