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Regarding the ups and downs of gold, I bought a gold ring for my girlfriend in 2003 for $100. We are now married, and I just got the ring resized a few months ago. The price of gold has risen so much in that time that the resizing cost $60.

The economists who supported the gold standard were already ancient when they died over a decade back. Off the top of my head, Rothbard and Mises are all I can think of.

Hayek, and obviously Friedman, had lots of ideas about macroeconomic stability and systems. Toward the end, Hayek believed in free banking, in which there is no lender of last resort, and private banks issue currency. I still support that idea.

However, the gold standard is just bunk. Because, by a chance of history, the value of the dollar, pegged to gold, was about the same in 1915 as it was in 1789, people think that that means it was stable, when it fact it fluctuated, with inflation for 80 years and deflation for 40.

I can see wanting to take control away from the Fed, given their history. But, why not a constant monetary expansion, of, say, M2 by 5% a year? Why keep money powers in the hands of government, and then use the stupidest imaginable backing?


You're right about the economists; the gold standard is a dinosaur fossil to almost all of them. But it's been more than a generation, and the idea still has legs with others who should know better by now.

Regarding the 5% (or 4%) rule, here's my problem with it: If the real economy only grows at 1%, we'd have inflation; if the real economy could grow at 9% if only money grew at 9%, we'd have deflation, and the upside-down situation of money growth stifling real growth. That's why I prefer the inflation target of 1-2%. Besides, the money supply is difficult or impossible to measure -- which makes the MV=PT equation an educational thought-provoker, but unusable as a policy tool. I'd rather see us fund a large effort to get better at measuring inflation, which I think is still overstated by about ½-point if not more.


I wonder if you could clear something up for me. You raise a good point about the gold owners taking control of our money supply. They could mess with our currency even if it wasn't in their best interest.

Some people are afraid something similar will happen with the Chinese buying a lot of our bonds; they're afraid they will try to damage our country by selling most of their bonds someday. Could you explain why this is so unlikely to happen? Is it because they would hurt themselves far more that the gold miners, or is their percentage of the debt they hold just too small for them to have any real impact? Thanks for the help; I have trouble coming up with the best reasons sometimes.

Oh, and thanks for those articles on the federal reserve, I’ll forward them to this believer I know, though I doubt it will have much impact no matter how convincing they are, it’s basically a religion for him.


Excellent entry. I get into discussions with these gold standard cranks every once in awhile who think the FED is some sort of private bankers cartel and of course recommend a return to the gold standard. Incredible considering the relative monetary and economic stability we've had the past 25 years. Your entry definitely gives me a few more topics to discuss about the pitfalls of a gold standard.


Regarding the possibility that the Chinese will decide to become financial suicide-bombers, here are two articles I recommend:


A friend of mine that worked for that small company Rio Tinto once remarked to me that the majority of all the gold in the world had already been mined and sat in vaults. Therefore, the price of gold is, of course, artificial, just like diamonds. If a country should need a few quick bucks, liquiditating portions of its gold supply works like a charm, with the corresponding effect of plumetting gold prices. It has happened before...

There are lots of problems with the 5% rule. Considering that the Fed has actually been great for over twenty years at ignoring political pressures, I don't think it is worth it, all things considered.

Still, in case of slow growth, the monetary growth acts as a monetary stimulus, and in the case of rapid growth...well, growth over 5% in real terms is pretty unlikely these days, sadly.

The real problem is th one we have with any fiat system. All of our measures of money, and, as you note, inflation, are questionable. As I've said, I think the best measure of monetary expansion is our exchange rate, which does make me worry a bit at the present day.

That poker chips quote summarizes it nicely. The gold nuts never seem to realize that gold was a fiat currency too.

I've never understood the conservatives' fetish for gold. They simply do not understand what money is, and that includes any and all PhD economists who support a gold standard.

Gold is not money and money is not gold; money is in truth an abstract thing not tied to material commodities (whether people want to accept the fact or not), and by practice in the last century we've come closer and closer to understanding that.

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