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Friday, January 14, 2011

The Midas Touch...no thanks.

video

7 comments:

rEVOLution said...

You said "anything that increase the relative price of gold for whatever reason means that the prices of everything else has to go down". Could you explain how/why it is that the relative price of gold must go up? Isn't the purpose to fix the price (ie: $20.67/oz)?

Was 1930's Spain & China on a fiat standard?

Randall Parker said...

rEVOLution: Note the words "relative price". If the price of gasoline rises and the price of bread stays the same, then the price of bread is constant but its price relative to gasoline has fallen. Fixing gold at $20.67/oz would not fix its relative price. Usually when a country's commitment to the gold standard was questioned, people hoarded gold and shot its relative price up very high since holding gold just before a devaluation is a handsome way to make huge profits. Its price of $20.67 did not change, but subsequent deflation did the work of decreasing gold's relative price. When Britain left the gold standard that was one of the major things that transformed the Depression from a major recession into the Great Depression. The fact that the US did not follow Britain's lead kept us in Depression and the gold standard accelerated the downward spin cycle. Only when Roosevelt jettisoned the gold standard did we begin to recover.

China was on the silver standard until 1935. Spain, I believe (not 100% sure), did have a fiat currency.

rEVOLution said...

Thanks for the quick answer Doc!

I understand the relative relations but didn't understand why the relative price of gold must increase. Are you saying that the real problem with a G.S. is when/if the public questions a nation's commitment to the G.S. thus leading to hoarding and an increase in the relative price of gold? If the public were not to do such a thing, could a G.S. work?

Additionally, would the equation of exchange (in a growing economy) alone be sufficient argument against a G.S. considering the limitations on increasing gold reserves and thus money supply too?

Randall Parker said...

Well...if the relative price of gold never changes, then you have the perfect monetary system since prices of all goods would be constant in long-run equilibrium. People not hoarding gold to make the gold standard work is like saying murderers won't kill if they don't shoot and stab people. True, but not operational. Additionally, the level of co-ordination and co-operation among countries needed to make the gold standard work is not something that is going to be realized in this world today. Moreover, the internal imbalance brought about by the gold standard is not something that the American public is going to accept ... nor should.

One of the many problems of the gold standard is the linking of the world's money supply to the world stock of gold. As the world economy grew, necessary increases in world money growth would be constrained unless new gold were discovered to provide for the monetary increase. Otherwise there would be a competitive scramble for gold reserves by the countries of the world. The last time we saw that it was 1930-31.

Anonymous said...

What are the implications of a single nation on a gold standard? Why can't it be unilateral?

Randall Parker said...

Because if you are backing your currency with gold and trading goods with other nations that are then holding your currency, if there is the slightest difference between your expected inflation rate and that of your trading partners both your country's citizens and the citizens of the world will vacuum up your gold supplies in 30 seconds. No wait, 10 seconds.

Ashton said...

One: we do love your vblog.

Two: can't wait to listen to that podcast. I enjoyed the panel you were on during that CATO program.

Three: you must recognize the attraction of intending to use the gold standard as a way of taking back a significant power away from a select few economists. Though, I do not personally believe the gold standard would solve that problem, I still fear (enlighten me if it is an unwarranted feeling) what arbitrarily expanding and contracting a money supply does that taxes do without the oversight of congress.

Hayek, I believe, proposed denationalizing money as a way to avoid this problem.

Could you elaborate a little bit on this or in the future reserve a blog post for it?

Your faithful blog reader,
Ashton