Capitalism, mercantilism and the gold standard.

[celerystalks]

If a commodity standard currency could deliver superior economic performance and end the inflation/disinflation cycle, imagine the opportunity for small developing economies. Argentina and Zimbabwe could become the next miracle markets. Hati and Honduras could become safe havens for assets - the new Switzerlands - just by deciding to constrain their monetary base and setting up an exchange desk. Why don’t they do it?

Forgive me.. are you using these countries as examples of places where fiat currency works?

They don't for the same reason every other country avoids the gold standard: The politician would rather just spend money, and fiat makes this easiest.

You raise a good point though. Perhaps the IMF and/or world bank should insist on a commodity money standard in these countries as a condition to aid packages and loans. 

[Telecaster]

First, the depression was caused by rampant speculation in just about every type of asset fueled by an over extensions of credit, not gold.

During the depression the gold standard was suppressed in 1933 so the government could go on a politically popular massive spending binge of the New Deal. I think this exacerbated and prolonged the depression.  1920-21 is a better example of a recession on the gold standard.  The 1920-21 recession was bad but the economy recovered while staying on it.

The gold standard had to abandoned so that governments could engage in massive entitlement spending programs.  Are these good things?

Please read carefully.  I didn't say the Great Depression was caused by the gold standard, that's a stupid straw man you invented out of whole cloth.   

[celerystalks]

First, the depression was caused by rampant speculation in just about every type of asset fueled by an over extensions of credit, not gold.

During the depression the gold standard was suppressed in 1933 so the government could go on a politically popular massive spending binge of the New Deal. I think this exacerbated and prolonged the depression.  1920-21 is a better example of a recession on the gold standard.  The 1920-21 recession was bad but the economy recovered while staying on it.

The gold standard had to abandoned so that governments could engage in massive entitlement spending programs.  Are these good things?

Please read carefully.  I didn't say the Great Depression was caused by the gold standard, that's a stupid straw man you invented out of whole cloth.

A secondary problem is that interest rates should equal inflation + risk.   That is decoupled on the gold standard because banks start to run short of convertible gold, they must raise interest rates to attract more gold.  Now interest rates are primarily based on the amount of gold, not based on risk or inflation based.  This causes obvious economic problems, namely slowing down the economy.  During slow economic times, people tend to horde gold, which drives interest rates higher, which slows down the economy, on and on.  Back when the US was on the gold standard or the bimetallic standard, it was common for recessions to last five or ten years.  An example is the Great Depression, when one third of banks failed, a period of strong deflation followed, yet interest rates remained relatively high which exacerbated the deflationary spiral.


Another problem is the whole system requires banks, and countries for that matter, to play by the honor system and actually raise interest rates when gold reserves become low.  However, there is always some bank somewhere with inadequate reserves and fails. Even a single bank failure can cause a cascading series of failures of what would be otherwise healthy banks.  Again, this is not hypothetical.  There many examples of this, notably the Panic of 1907 when a single brokerage house failed and sent the entire country into recession.

Funny.. it sure seemed to me like you were arguing that the gold standard was responsible for the Great Depression...or perhaps you just meant it's length, or depth, or severity? And it seems in the next paragraph you argue that adherence to the gold standard is responsible for the panic of 1907 which lead to recession.

In any case, I still don't see that it was the gold standard that was responsible for these things.  This is your interpretation. In my opinion it was speculation and too much credit.

[ctuser1]

In any case, I still don't see that it was the gold standard that was responsible for these things.  This is your interpretation. In my opinion it was speculation and too much credit.

You got the situation the wrong way around!!

Fiat currency is the default. It is what everyone follows, and seems like throughout history whoever has attempted to use gold standard has reverted back to fiat after a while, as soon as things got tough.

You are basically arguing there is some reason someone should try gold standard *once again* for the five-hundred-and-one'th time and hope this time would be different.

Why?

Has the human nature changed?
Is your "gold standard" different from all other gold standards used and discarded?
Or is it just that this time is different?

[vand]

In any case, I still don't see that it was the gold standard that was responsible for these things.  This is your interpretation. In my opinion it was speculation and too much credit.

You got the situation the wrong way around!!

Fiat currency is the default. It is what everyone follows, and seems like throughout history whoever has attempted to use gold standard has reverted back to fiat after a while, as soon as things got tough.

You are basically arguing there is some reason someone should try gold standard *once again* for the five-hundred-and-one'th time and hope this time would be different.

Why?

Has the human nature changed?
Is your "gold standard" different from all other gold standards used and discarded?
Or is it just that this time is different?

*facepalm*

I mean.. total *facepalm"

Fiat money didn't just come into being.

Notes were originally issued as IOUs for gold deposits. The Dollar was originally defined as a quantity of silver. The GBP was originally defined as a certain weight of gold. the very word "pound" connotes a weight. It was only when the backing of the commodity was removed by government decree (hence the name) that they then became fiat.

With the possible exception of the Euro, there has never been a fiat currency in use that came into existence as a fiat currency, although even the Eur has its roots in the old German Mark which originated from gold weighting

the more you post such idiocy the more you reveal your total naivety on what money actually is. Money is not just numbers written on pieces of paper or digits stored in a banking ledger.


If fiat money is so brilliant then please answer this... why do governments around the world still bother with taxes? Governments fund their spending by collecting taxes or printing money. That's it. If printing money has no adverse consequences then why do they even bother collecting taxes? Why not just forego all taxes and just print all the money required to fulfill all the spending promises that have been made?

[ctuser1]

Fiat money didn't just come into being.

Notes were originally issued as IOUs for gold deposits. The Dollar was originally defined as a quantity of silver. The GBP was originally defined as a certain weight of gold. the very word "pound" connotes a weight. It was only when the backing of the commodity was removed by government decree (hence the name) that they then became fiat.

With the possible exception of the Euro, there has never been a fiat currency in use that came into existence as a fiat currency, although even the Eur has its roots in the old German Mark which originated from gold weighting

Ancient history. Irrelevant for why someone should go back to gold standard now and here.

the more you post such idiocy the more you reveal your total naivety on what money actually is. Money is not just numbers written on pieces of paper or digits stored in a banking ledger.

I don't follow vand-onomics.
I understand you think Adam Smith was an idiot. So I am in good company.

If fiat money is so brilliant then please answer this... why do governments around the world still bother with taxes? Governments fund their spending by collecting taxes or printing money. That's it. If printing money has no adverse consequences then why do they even bother collecting taxes? Why not just forego all taxes and just print all the money required to fulfill all the spending promises that have been made?

Who claimed fiat is "so brilliant"? Did I?
Fiat has a lot of problems. It's just that miles better than all alternatives, including Gold standard!!

I mean your entire post was made up of:
1. Irrelevant bs.
2. Ad hominem.
3. Stupid strawman.

Ways to go goldbug!!

[celerystalks]

https://www.reuters.com/article/us-lebanon-crisis-luxurygoods/rolexes-and-cars-lebanese-spend-big-to-prise-savings-from-the-bank-idUSKBN1ZP0HJ

When fiat fails people turn to gold.

[Telecaster]

You got the situation the wrong way around!!

Fiat currency is the default. It is what everyone follows, and seems like throughout history whoever has attempted to use gold standard has reverted back to fiat after a while, as soon as things got tough.

You are basically arguing there is some reason someone should try gold standard *once again* for the five-hundred-and-one'th time and hope this time would be different.

Why?

Has the human nature changed?
Is your "gold standard" different from all other gold standards used and discarded?
Or is it just that this time is different?

*facepalm*

I mean.. total *facepalm"

Fiat money didn't just come into being.

Notes were originally issued as IOUs for gold deposits. The Dollar was originally defined as a quantity of silver. The GBP was originally defined as a certain weight of gold. the very word "pound" connotes a weight. It was only when the backing of the commodity was removed by government decree (hence the name) that they then became fiat.

With the possible exception of the Euro, there has never been a fiat currency in use that came into existence as a fiat currency, although even the Eur has its roots in the old German Mark which originated from gold weighting

the more you post such idiocy the more you reveal your total naivety on what money actually is. Money is not just numbers written on pieces of paper or digits stored in a banking ledger.

It is actually hard to say.  There is a difference between an IOU for a gold deposit, and using gold (or something else) as a unit of account.   Gold and silver make good units of account because they are easy to measure and durable.  So most currencies (but not all by a long shot) are some how associated with gold or silver.  But it isn't necessarily true they started off being backed by gold or silver.  Sometimes gold or silver was just the unit of account. 

The oldest monetary system that I'm aware of was in ancient Sumeria, where the unit of account was the silver shekel and was by government decree was equivalent to 60 volumes of barley.   While taxes were calculated in shekels you didn't have to pay in shekels because there weren't any.   There were no government-issued shekel coins, and there was nothing called a shekel that was convertible into silver.  Yet we have untold numbers of cuniform tables calculating transactions in shekels.  It was just a mandated unit of account.

I mentioned tally sticks in a previous post.  Tally sticks were denominated in pounds, shillings, and pence, etc. but were issued by individuals and not convertible to gold.  As an aside,  Parliament burned down when a store of tally sticks caught fire in the basement.

https://en.wikipedia.org/wiki/Burning_of_Parliament

Which brings us to the interesting case of the Bank of England, the first central bank and creator of the modern British Pound.   The BofE was founded in 1694 when a group of merchants made a £1.2 million loan to William III in exchange for a monopoly on issuing banknotes (which had not previously been issued in England), which were backed by the promise to repay the loan.    A few years later the BofE recapitalized by issuing stock and banknotes for £1 million of tally sticks.  Tally sticks!  An important point here:  The modern British Pound originally was not backed by gold, it was backed by a promise to repay debt.  You can squint here and say that there was a thing called the pound that preceded the GBP, but the GBP as we know it started life as 100% fiat currency which was 100% debt based and didn't become convertible to gold for over 100 years.  That ticks all the boxes of a fiat currency. 

[celerystalks]

Which brings us to the interesting case of the Bank of England, the first central bank and creator of the modern British Pound.   The BofE was founded in 1694 when a group of merchants made a £1.2 million loan to William III in exchange for a monopoly on issuing banknotes (which had not previously been issued in England), which were backed by the promise to repay the loan.    A few years later the BofE recapitalized by issuing stock and banknotes for £1 million of tally sticks.  Tally sticks!  An important point here:  The modern British Pound originally was not backed by gold, it was backed by a promise to repay debt.  You can squint here and say that there was a thing called the pound that preceded the GBP, but the GBP as we know it started life as 100% fiat currency which was 100% debt based and didn't become convertible to gold for over 100 years.   That ticks all the boxes of a fiat currency.

Huh? how could they loan £1.2 million, that is pounds, if the GBP hadn't been created yet? And what is meant by being only backed by a promise to pay a debt? A debt of what? I think you are confusing notes with coined money.  They are not the same thing.  A note is a paper certificate whereas coined money contains a specific weight of fine precious metal.  A note may or may not be convertible, i.e. redeemable into coined money.  And a bank would use a fractional reserve system such that only a certain percentage of the notes in circulation are backed by coined money held in the banks vault. 

[Telecaster]

Huh? how could they loan £1.2 million, that is pounds, if the GBP hadn't been created yet? And what is meant by being only backed by a promise to pay a debt? A debt of what? I think you are confusing notes with coined money.  They are not the same thing.  A note is a paper certificate whereas coined money contains a specific weight of fine precious metal.  A note may or may not be convertible, i.e. redeemable into coined money.  And a bank would use a fractional reserve system such that only a certain percentage of the notes in circulation are backed by coined money held in the banks vault.

Read carefully.  All your questions were answered in my previous post. 

First, I said the "modern British Pound."  That's important and that's why I chose those words.   Since you didn't read it the first time, I'll explain it again for you again:  the "pound" is a unit of account.  In England (as I've explained twice now) people used the pound as a unit of account for centuries without any formal backing or currency, using measures of trade the created themselves, like tally sticks or leather tokens.  The system of pounds, shillings, and pence was created by Charlemagne and spread throughout Europe but just because it was called the "pound" back then doesn't mean it is the same thing as the modern British Pound.   It was a unit of account.  The modern British Pound was created by the Bank of England in 1694.  Similar name, not the same thing. 

Fun fact:  Charlemange never struck a coin called "the pound" (or livre in French).   It only existed in abstraction. 

I'm trying to be polite, but I don't know how else to put it....the part I bolded in your post is 100% bullshit.  When the Bank of England was founded, it did NOT have gold reserves.  It issued bank notes detonated in pounds (unit of account, again) backed by the credit of William III.  It was NOT a fractional system based on gold reserves.  It was 100% fiat currency.  This is a well documented historical fact, easy checkable from any number of sources.    Saying otherwise is complete fiction.  The fact you create pure fiction to support your arguments--and easily disprovable fiction at that--well...I'll just leave it at that.