Ron: You make lots of points, some of which I agree with. My comments in ***'s below:
First, I was reviewing those pages detailed in William Greider's "Secrets of the Temple". I would suggest those who have a copy review the following pages for information that details how "unstable" a gold-backed economy can be:
Pgs. 227-235 (evolution of money)
Pgs. 248-249, 261-265 (periods of deflation/inflation under a gold standard and competition between gold and silver)
Pg. 337 (going off the gold standard)
It is a must read for anyone who wants to understanding the triumphs and failings of the history of money and the Federal Reserve system.
*** One big problem throughout financial history, has been the transition between greenback, bimetallism, and gold standard. A gold standard isn't a magic potion, it just fosters restraint.
Greider's is a decent historical book, although it's filled with many of the Monetarist myths modern authors are prone to. I'd recommend reading Murray Rothbard's America's Great Depression for true enlightenment. Doug Casey's book Crisis Investing for the rest of the 90's is also a good synopsis. I can provide further titles if you're interested. ***
Now to your major points:
Growth was awful in the 70's, especially after abandoning the gold standard.
Growth was terrible after the depression of '29 when the US was on the gold standard (which we went off of in 1933 until 1944). Growth in Europe suffered a hundred years of wild inflation after the Spanish conquest of America flooded markets with cheap silver and gold. So where was the discipline at that time??
*** You bring up several good points here, and I just want to comment on these which I think call for clarification and rebuttal. The 1929 fiasco was clearly not for lack of a gold standard, since they had one. It came about because govt in its infinite wisdom, created cheap credit through artificially lowered interest rates and loose reserve requirements, and fostered speculation in asset markets. Gee, that sure sounds familiar, doesn't it? The advantage of a gold standard is it promotes more honesty, but it is not a magic bullet. It's government financial irresponsibility and speculation that can only be inhibited, not stopped, through a gold standard.
The point about 1500's Europe is quite true, and provides a rare example of a gold standard drawback. But ask yourself, for every instance of massive economic disruptions due to plundered wealth (1)how many instances can you come up with of fiat currencies that fostered disruptions and loss of wealth on a massive scale (EVERY SINGLE ONE!). ***
Wartime inevitably creates HIGHLY inflationary problems under a gold standard as the gov't waging it is forced to issue Fiat money to pay for the armaments required. (See history of Lincoln's issuing of "greenbacks" during the Civil War that were not backed by gold, in Greider's book Pg. 246)
*** So, why not just issue govt bonds or increase taxes? If it's the people's will to have a war then let's have it honestly! Why foster the illusion that you can have free wealth through fiat creation? This is a pernicious lie, the hidden assumption that pervades all statist thinking. ***
Growth is a nation's increase in net productive contribution to the planet.
And thus should be the primary consideration in valuing the worth of its currency instead of some shiny metal. Thanks for making my point.... <VBG>
*** Currency should have value apart from economic production, otherwise it can be cheapened at will by the govt. Government shouldn't even have the responsibility as caretaker of our money supply. That should be left up to the free market. ***
.. a return to at least partial gold convertibility would very likely prevent the financial collapse you envision,
Not likely. If gold gains credit as a perception of value, it will do so to the expense of each gov't ability to maintain credibility in its currency. That's why gold is valuable in inflationary times since it is "perceived" that Fiat currency is worth"less". But we're in disinflationary/deflationary times where despite the Federal Reserves relentless pumping out of liquidity (printing money), prices are still falling worldwide for basic commodities (at least in dollar terms).
Forcing a perception that inflation in the reserve currencies is taking hold through an upsurge in the price of gold will damage the Fed's and ECB's ability to reconstitute confidence and restore the willingness of investors to assume credit risk in loans. (It may be too late, that I admit... but why hurry it on and cause even more disruption?)
*** Yes, and just as the London Gold Pool in the 60's and the US gold auctions of the 70's demonstrated, governments can hold off a gold price rise, but not indefinitely. If you reach the stage where the free market upvalues gold sharply for economic reasons, then there's probably been too much damage created already. ***
I don't like what I am seeing right now. The workers of entire countries thrown into poverty. People's hard-earned life savings cut in half overnight. A nation's populace saddled with piles of fiat debt for generations. Unneeded capacity built with borrowed money only to be endlessly serviced by exorbitant interest rates.
No disagreement from me. Japan's banking system lacked transparency and solid regulatory practices (even worse than ours.. :0), and they are paying the price for it. But there were some economies that were doing fairly well and maintained a semblance of financial integrity and now they are suffering as well from the plight of their irresponsible neighbors. These excesses that were created will have to be wrung out of the system through bankruptcies and institutional write offs of the bad debts.
*** And transparency and accountability is what a gold standard instills automatically! It's the fiat money standard which greased the wheels of irresponsible governments to proliferate credit at will. When you can produce the world's de facto reserve and trade currency virtually at will, why wouldn't that have an effect on inflating everyone's credit bubble, not just your own?!? ***
Gold would do nothing to instill integrity in the financial system. It would only exacerbate the problem at this time.
*** The only reason a conversion from our present fiat system would exacerbate the problem is because any transition would involve wrenching changes, not because a gold standard has less "integrity".
Again, that was a big problem with the late 19th century US, the indecision surrounding the "money question", and the transitions between the systems of greenback, bimetallism, and gold standard. ***
I understand that we disagree. But I also find manipulation of gold to such extent irresponsible acts by bankers. After all we should all be permitted to create our own valuations on property/commodities, whether they be Van Goghs, antique Ferraris, or gold.
*** It is irresponsible. And create them we do. It's when we have to hold fiat currency as legal tender for commerce, or when you have to park money in purely fiat denominated vehicles, that you remain vulnerable to government policy. ***
But to try to claim that gold is a better unit of exchange for the services and goods that it represents (as a proxy for barter), is fallacious. As I've stated before, it's heavy and difficult to carry around or divide into small change.
*** It's not fallacious. Gold has intrinsic value, unlike paper currency, which since the 6th century China when it was introduced, has degraded in value to zero, essentially its production price, in EVERY instance. Since 1950, the dollars value has decreased 90% in real terms. What does that tell you for the value of long term fixed debt instruments? You don't need to carry it around - just have a paper or electronically backed convertibility scheme. The heaviness issue is irrelevant and has been brought up innumerable times as another straw man against gold. ***
And again, unless you have the ability to exchange gold on demand for reserve notes, all you're doing is exchanging one scheme of "smoke and mirrors" for another.
***Yes. That's why we need to have paper or electronic convertibility to make a gold backed scheme work. ****
Thanks.
Bob
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