Just an essay on my overall thoughts of the Gold Standard
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|CynicAbstracted96||Posted: Jan 24, 2017 - 00:12|
In most governments, especially in the United States, Monetary policy is one of the big issues surrounding the economy itself. Monetary policy talks about changes in the quantity of money in circulation designed to alter interest rates and affects the overall spending. It is also where it discusses the financial sector with business firms and private individuals. It also important for currency and the flow of money to be generated throughout the whole country. With that being said, however, despite all the good aspects of money does for people, economic recessions, and depressions occur. As a result, economists like to point the finger at a specific person or entity as the reason to all our problems. One such entity is the currency that's in use today which is paper money or another word for it would be fiat currency. Neo-classical and Austrians like to vehemently criticize paper money as one of the main reasons why capitalism is not performing in the way it should be. Keynesians on the other hand, defend paper money 100% of the time by saying that money is circulating because its depend entirely on consumption while both sides seem to have a point there is one solution that Neo-classical/Austrians say will solve the currency problem and that is instituting a Gold Standard. Where the Gold Standard is a monetary system where the standard unit of currency is a fixed quantity of gold or that it's forced to be kept at a certain value (Encyclopedia Britannica, Gold Standard, 2016). Now in the next two paragraphs it will be explained in detail what is the arguments for Gold Standard and then it will be explained as to why it has so many problems.
To start off, advocates for the gold standard will state that Paper money (or as they call; fiat currency) is that it causes inflation within prices itself. This, in turn, creates overspending and massive amounts of printing. They would conclude that the Gold Standard would produce deflation which could incentives consumers to save money rather than spend it (Gleason. May 12, 2016). What is also displayed is that prices did not stabilize once the gold standard was replaced with paper money being the main currency during the Great Depression. They even go further to explain that private citizens right to redeem dollars for gold by FDR in 1933, and then the "central banks" were removed the ability to do so by Nixon in 1971 (Murphy, 2009). The most important argument that advocates of the Gold Standard use is that government intervention creates market Bubbles in the first place. Governments tend to intervene within markets in case of emergencies, but Neo-classicals and Austrians say that it's because of government control over currencies, it causes all of the discrepancies in the market when it comes to pricing. The over influx of paper money circulating around the free market will cause money overall to be devalued as worthless. In the end, Gold would be used as a backup of paper money, that is why the government stores large amounts of Golds within one deposit, it is in case of some emergency. But if gold was destabilized, silver would be able to hold the price of Gold in place, hence the Law of Supply and Demand.
Now there are many problems as to why the gold standard cannot work in today world. It has to be mentioned first on how Gold (and silver) functions in the overall economy. Before the foundation of America, many empires and civilizations such as the Greeks and Romans, adapted Gold as they currency due to no other form of currency that could have been used effectively as a standard. With the value that society produced through commodity exchange, Gold was its best option. Fast-forward to the time of 1903, where several countries had gold and silver being official co-existing measures of value. However, in this present age, every commodity (Gold and Silver) are subject to constant fluctuations in value. If for example both are made legally the same value by law, then the payments would have to be made in the metal whose value is falling. Even if silver were taken out of the example, it would still not function properly because if gold prices are rising, the value of gold will serve as a price, not as the value of the commodity itself. If gold by its own is really valuable, it will be worth more than the commodity it will be exchanged for. An example would be "if the cost is worth 10 grams and the price of gold doubles, the buyer won't give all 10 grams for that coat, they'll demand they only pay 5"(Katsuky, Unrhue, pg.37). Another point that needs to be addressed is the reason why the government (more specifically the U.S. government) stores up tons of gold? The reason as to why this happens because it's for an emergency in times of economic meltdown. This would be the same case for the individual citizen, they would save all their gold rather than spend it, and overall we can see that government and society often share the same motives and that is to survive.
One of the two best arguments against the Gold Standard is the cause of the Great Depression and crypto-currency. Of course, the Gold Standard was not the major factor behind the Great Depression, it was one factor that stopped countries from advancing out of the depression.
"The authorities may have been hesitant to abandon the gold standard, but the rise of unemployment rendered them increasingly reluctant to defend it. Balancing the budget was a conventional remedy, but governments were hesitant to raise taxes or cut support for veterans, pensioners and the unemployed in the deepening economic distress. Left-leaning governments like Britain's were least prepared to apply such cuts, but they also had to convince the markets of their fiscal rectitude if their defense of the gold standard was to succeed. If they proved reluctant to raise taxes, the markets might attack, and the government would fall for having failed to defend the financial foundation of the nation" (Eichengreen and Temin, pg. 199)
. Now with today's standards, even Gold is an outdated currency from the past and there is better alternatives. One such alternative is a crypto-currency called Bitcoin and people who classify themselves as libertarians are going up against the Old Austrian economists on the Gold Standard. They state how the government has no control over Bitcoin itself, making it self-sufficient for a new market against the government itself.
"If it hasn't become clear by now, I hope you can see why Bitcoins (or another similar currency like it) are superior to a gold standard. They simply can't be inflated. It can't happen. And further, since there is no bank issuing the notes, there is no one group of people who can use the power of the press to influence the public or political class with the bribery of free money...This core problem must be addressed by gold standard advocates if they want to argue that gold is superior to encrypted digital currencies like Bitcoin. Since gold cannot be shoved down a transmission wire unless the gold standard advocates want to argue that all transactions must be made with physical specie, they have no possible way of getting around this one fatal flaw with the gold standard" (Suede, June 21,2011).
To conclude Gold was one of the only useful currency back then because it could not be arbitrarily inflated and met with requirements of scarcity, divisibility, fungibility, and recognizably better than any other physical commodity. But now due to technology and the overall situation surrounding geopolitics, the Gold Standard would be unreliable and unproductive in an international market that we have today.
1.) Eichengreen, Barry and Temin, Peter (N.A). "The Gold Standard and the Great Depression". Harvard Press. Retrieved From http://isites.harvard.edu/fs/docs/icb.topic467999.files/October%2022%20and%2027%20-%20Trade%20Money%20and%20Finance/Eichengreen.pdf
2.) Encyclopedia Britannica (2016) "The Gold Standard". Retrieved From https://www.britannica.com/topic/gold-standard
3.) Gleason, Stefan. (May 12, 2016). "What Can Gold Do for Our Money?" Retrieved From https://www.soundmoneydefense.org/news/2016/05/12/relinking-gold-and-silver-to-our-currency-000032
4.) Kautsky, Karl and Unrhue, Jason. (June 13, 2016) "Marxist Economics Made Simple"/ "The Economic Doctrines of Karl Marx". Retrieved From https://www.marxists.org/archive/kautsky/1903/economic/index.htm\
5.) Murphy, P., Robert (March 16, 2009). "Defend the Gold Standard".Mises Institute. Retrieved From https://www.mises.org/library/defend-gold-standard
6.) Suede, Michael (June 21, 2011). "Against the Gold Standard". Libertarian News. Retrieved From https://www.libertariannews.org/2011/06/21/against-the-gold-standard/
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