Learning from Europe while it is , in effect, on a gold standard

[EdwardBaiamonte]

the supply of gold is fixed, and may be incongruous with the needs of the economy at the moment.

The Fed of course was created to compliment the gold standard for that very reason

 

[EdwardBaiamonte]

America has had some trmendously bad leadership for the last 50 years, folks.

Perfectly absurd!! Our Founders gave us the Constitution because they knew leaders are naturally bad. Look at history! Americans don't want to be led, they want to be free of liberal leadership. Now you know the concept of America. Conservatives run for office not to lead, while liberals do the opposite.

 

[EdwardBaiamonte]

DEFLATION is the boogieman of the GOLD STANDARD.

I don't suppose you'd care to explain why on earth you feel that is true?

 

[EdwardBaiamonte]

the money supply would still grow with the economy as gold dollars were created out of thin air in banks.

can you explain that one?

 

[expat_panama]

the money supply would still grow with the economy as gold dollars were created out of thin air in banks.

can you explain that one?

For centuries rich people have safeguarded their money in banks. At first the rich paid the banks for the guarding but what everyone went to was having banks loan out part of the deposits on mortgaged collateral. Depositors didn't mind because they got paid interest.

Take a small town with with ten rich guys each depositing 100 oz. gold. A new farmer mortgages his farm (worth 500 oz. gold) for 100 oz gold, and deposits the borrowed gold in the bank. At that moment the money supply is grown to 1,100 oz. gold becuase 100 oz was created out of thin air. All eleven depositors are satisfied that they each have 100 oz. of gold. Even if there was a run on the bank, the banker has lots of options that include his using the collateral farm title for borrowing the extra 100 from the next county --remember, the banker owns that farm now.

Bottom line here is that even when money is gold coin, the money supply grows and shrinks with banks. Some people like the system and some don't. The ones that like it get rich and the ones that don't live in squalor and complain that the rich are somehow cheating them.

 

[samjones]

Take a small town with with ten rich guys each depositing 100 oz. gold. A new farmer mortgages his farm (worth 500 oz. gold) for 100 oz gold, and deposits the borrowed gold in the bank. At that moment the money supply is grown to 1,100 oz. gold becuase 100 oz was created out of thin air. All eleven depositors are satisfied that they each have 100 oz. of gold.

The bank has 1000 oz. (t) of gold and a 100 oz. (t) of gold lien on a farm valued at 500 oz. (t) of gold.

The problem is that as the gold increases in value (deflation) the relative value of the farm decreases and the bank has a risk that the farmer would eventually simply choose to keep the gold and lose the farm. If the value of the gold decreases (inflation) the risk of default is minimized - but if the value of the gold decreases too much then transaction loses its value prop.

This is the beauty for fiat. We can believe that the government will attempt to keep inflation at a relatively low and steady rate to serve the needs of the financier (i.e. lender, investor.) In the finance arrangement volatility ultimately favors the financee (i.e. borrower)..... although the guy who has to close up his business or give back his home because a deflationary spiral has made it impossible for him to satisfy his obligations to his investors may not feel overly favored.

 

[EdwardBaiamonte]

This is the beauty for fiat. We can believe that the government will attempt to keep inflation at a relatively low.

why would we believe that when a loaf of bread costs 10 times more than it did 35 years ago in the USA and almost all other countries have had much more inflation?

What we can believe is that liberals will want to inflate the currency to help debtors and to temporarily goose the economy to get elected. In short, we can believe in the obvious history.

 

[EdwardBaiamonte]

Bottom line here is that even when money is gold coin, the money supply grows and shrinks with banks.

yes but that is perfect free market growth economics. The supply of wheat grows or shrinks with farmers too.

In the case of banks, one bank can pay 50% interest and one can pay 3% depending on the risk they take but in the end the money supply grows about at the rate the economy grows thanks to new gold and new innovations. Gold provides the best possible money stability and the most stable and consistent economic growth.

 

[EdwardBaiamonte]

money supply would still grow with the economy as gold dollars were created out of thin air in banks.

That is impossible since everyone would immediately return their dollars for gold. Excess currency immediately come back. Its the golden rule

 

[expat_panama]

...problem is that as the gold increases in value (deflation) the relative value of the farm decreases and the bank has a risk that the farmer would eventually simply choose to keep the gold and lose the farm...

In real life what deflation did first was wreck the farmers income as crops became worth less. Farmers couldn't pay back loans and the banks foreclosed long before the mortgaged farm's total market value fell below loan balances. Bankers didn't starve until the farmers starved, and then the bankers starved.

Deflation happened a lot when government fiats made money equal to gold. Fewer people starve now that fiat money is no longer gold but money pegged on consumables.

 

[Jos]

I was looking at a 100 peseta coin I have from 1966, 100 pesetas then was about two lunch menus, but by todays value 100 pesetas is about 80 cents of a euro, but that coin is 80% silver and is worth about 12 euros which would buy....(drum roll please) ...two lunch menus

 

[expat_panama]

money supply would still grow with the economy as gold dollars were created out of thin air in banks.

That is impossible since everyone would immediately return their dollars for gold...

--like with a run on the bank? That was explained with ---

...Even if there was a run on the bank, the banker has lots of options that include his using the collateral farm title for borrowing the extra 100 from the next county --remember, the banker owns that farm now...

This is how it's been for centuries. Many people don't like it and many others don't understand it. It's still how money's been created for centuries.

 

[samjones]

In real life what deflation did first was wreck the farmers income as crops became worth less. Farmers couldn't pay back loans and the banks foreclosed long before the mortgaged farm's total market value fell below loan balances. Bankers didn't starve until the farmers starved, and then the bankers starved.

Nope. Crops never become worthless. There are things more important than money, you know. Back in the olden days (like, say, 1975) a farmer might essentially finance his own crop by fronting the money to buy the seed, rent the combine, etc., etc.

These days we have commodities futures markets, which takes away all that risk.

Back in the olden days a farmer couldn't bear the risk of having the money he took out of the crop be worth less than the money he put into it, because then he might become a starving farmer, so his wife would plant a vegetable garden, and he'd keep a milk cow and he might keep a few hogs, etc. etc. This all goes back to ancient times (like, say, 1975) when farming was a way of life, not just a business.

Farmers starved when their crops failed.

But this is a sensibility from back in the day when we drew on cave walls and banged drums..... These days people would be giving those houses back to the bank way, way before they started feeling any actual pain from the deflationary pressures a gold standard would inevitably bring. These days people give back their house if it's worth 6% less than what they paid for it and they don't see the property returning to profitability any time in the next 2 or 3 years.

 

[samjones]

What we can believe is that liberals will want to inflate the currency to help debtors and to temporarily goose the economy to get elected. In short, we can believe in the obvious history.

No. That would be impossible. Fiat currency and the fed's monetary policy must, above all else, serve the needs of finance. The Fed is there to help the banks make more money. If the Fed didn't seem to be doing that then there would be a new FRB Chairman and there would be a new President and Congress very, very quickly. That's our money they got in them there vaults.

Res ipsa loquitur - if we have fiat currency, it's because the rich (banks) want fiat currency. Res ipsa loquitur - if we have a little inflation it's because the rich don't mind a little inflation.

 

[EdwardBaiamonte]

No. That would be impossible. Fiat currency and the fed's monetary policy must, above all else, serve the needs of finance. The Fed is there to help the banks make more money.

actually its mandate is stable prices and employment

If the Fed didn't seem to be doing that then there would be a new FRB Chairman and there would be a new President and Congress very, very quickly. That's our money they got in them there vaults.

what they have done is given us the Depression, many recessions, constant inflation, and now a great recession.

Res ipsa loquitur - if we have fiat currency, it's because the rich (banks) want fiat currency. Res ipsa loquitur - if we have a little inflation it's because the rich don't mind a little inflation.

lunatic

 

[samjones]

what they have done is given us the Depression, many recessions, constant inflation, and now a great recession.

I'm sure that you have some bizarro alternative economic theory that you draw on that tells you that a return to fiat (didn't happen) *caused* the Great Depression.

I couldn't argue against the notion that inept monetary policy at least contributed to the Great Depression and some of the gold standard abandonments that happened during the Depression may have been ill-timed and poorly executed..... but there's no way that fiat caused the Great Depression.

Your underlying notion that fiat currency is a scheme to rob from the rich and give to the poor doesn't add up. Fiat gives the rich the opportunity to lend money without being exposed to the risk of the volatility of gold. I already demonstrated that volatility of the currency favors the borrower. You thought long and hard about how money systems work and you got it backward. Time to rethink now.

 

[editec]

Spain was both on a Gold STandard and awash with Gold in the 17th century.

Nevertheless, within 50 years of becoming so wealthy from new world Gold, Spain's economy went into an inflationary spiral that ended its dominant position as the world's only superpower.

Gold bugs don't get it because they only read the history that supports their childish POV and they dismiss the history that puts their POV into disrepute.

The solution to spendthrift government is NOT a gold standard.

History is replete with examples of spendthrift governments on the gold standard that crashed and burned economically.

The mere existence of metal-based specie does nothing to keep governments from acting like damned fools.

 

[samjones]

Gold bugs don't get it because they only read the history that supports their childish POV and they dismiss the history that puts their POV into disrepute.

They only read the facts that support their preconceived notions of how things work. It doesn't help much that a handful of fringe economists and one crackpot demagogue presidential candidate consistently reinforces these ideas that are simply not supported by the historical record. You are correct - a gold standard does nothing to prevent a government from borrowing. It does practically nothing to prevent them from printing money and inflating their currency.

 

[expat_panama]

...Bankers didn't starve until the farmers starved, and then the bankers starved.

Nope. Crops never become worthless. There are things more important than money, you know...

LOL!! OK, So instead of the farmar paying back his loan with money he can just give the banker a big hug...

 

[EdwardBaiamonte]

but there's no way that fiat caused the Great Depression.

so then why be so afraid to tell us exactly what caused it????