Question on the gold standard


Derek McGowan

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Hey peoples,

I haven't read any of Ms Rand's non-fiction (I'm a noobie) but I did read The Fountainhead and Atlas Shrugged. It appeared that she favored the gold standard.

I listened to a four hour presentation by Ron Paul on the gold standard and it makes sense to me in a lot of ways

1. the costs of products and services cannot be inflated inflated and inflated because there is a limited amount of currency in the system and businesses cannot charge what the market cannot bear.

2. gold itself is a wonderful currency because of all its properties of divisibility, rarity and non volatility.

But what I dont understand, and I was hoping you could enlighten me, is what would keep the top 5-10% of individuals or businesses from pulling large amounts of currency out of circulation. Gold is only being added in at a certain rate but certain individuals will be making much more then they spend so they would save. What if some decide to save, not for retirement or a rainy day fund, not for capital improvements or investments but simply because as they take money out, the money itself becomes more valuable. You take money out and hold it for 20 years and the value of your holdings increases multiple fold through supply and demand. Now I realize that prices will stay low because as the population has less to utilize, prices will fall in conjunction will less purchasing power, but..... Im at a loss. Its so complicated. The wealth gap can grow to the largest it has ever been and then what happens once no more gold comes out of the ground but certain individuals hold (literally) 80-90% of the workable currency?

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Hey peoples,

I haven't read any of Ms Rand's non-fiction (I'm a noobie) but I did read The Fountainhead and Atlas Shrugged. It appeared that she favored the gold standard.

I listened to a four hour presentation by Ron Paul on the gold standard and it makes sense to me in a lot of ways

1. the costs of products and services cannot be inflated inflated and inflated because there is a limited amount of currency in the system and businesses cannot charge what the market cannot bear.

Ah, but what happens when there is an unlimited amount of debt, and the universal belief that debt is capital?

2008... and the return to reality from fantasy.

2. gold itself is a wonderful currency because of all its properties of divisibility, rarity and non volatility.

As well as an excellent currency, gold is also a metaphor for moral values such as trustworthiness, and incorruptibility. "As good as gold". And it is whole in itself with its electron shells complete. Gold's unwillingness to compromise itself by either losing or taking electrons puts it into the category known as "noble metals"... a fitting descriptor.

But what I dont understand, and I was hoping you could enlighten me, is what would keep the top 5-10% of individuals or businesses from pulling large amounts of currency out of circulation. Gold is only being added in at a certain rate but certain individuals will be making much more then they spend so they would save. What if some decide to save, not for retirement or a rainy day fund, not for capital improvements or investments but simply because as they take money out, the money itself becomes more valuable. You take money out and hold it for 20 years and the value of your holdings increases multiple fold through supply and demand. Now I realize that prices will stay low because as the population has less to utilize, prices will fall in conjunction will less purchasing power, but..... Im at a loss. Its so complicated. The wealth gap can grow to the largest it has ever been and then what happens once no more gold comes out of the ground but certain individuals hold (literally) 80-90% of the workable currency?

I have no idea as to the answer of your question, because the businessmen I know all prosper because they create their wealth through useful production.

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... what would keep the top 5-10% of individuals or businesses from pulling large amounts of currency out of circulation?

Gold is only being added in at a certain rate but ...

... hold it for 20 years and the value of your holdings increases multiple fold ...

Now I realize that prices will stay low because as the population has less to utilize, prices will fall in conjunction ...

... what happens once no more gold comes out of the ground but certain individuals hold (literally) 80-90% of the workable currency?

Welcome Derek. I trust that you will find much more to pique your interests here. If I may ask, are you visiting any other "Objectivish" discussion boards? They all have their latitudes and these are pretty broad. Do not assume that anyone here knows more about Ayn Rand's ideas or even knows more than you.

First of all, gold will continue to be produced, especially as its relative value rises, eventually (if need be), we will get it from sea water and then from outer space, as the value continues to increase.

Generally collusion fails by defection. The richest 5% or 10% are not sworn to loyalty before dishonor or anything like that. So, each will act in their own interests. Eventually, some or many will defect.

Bill Gates owns tons of Microsoft stock. Like tons of gold, it is his net worth. A rich person sitting on a ton of gold still has credit, all the more so for his holding so much gold. You posit them living meagerly, like Warren Buffet, and doing nothing with their stored wealth. Again, that is not likely. Look at what became of the Internet millionaires: they sought new ventures. They enjoy that more than living a middle class life while their savings do little or nothing in the present.

And the trade-off of present for future exists because of risk. At some level, you might not live that 20 years: a piano could fall on your head - didn't see that coming... So future rewards must be balanced against present needs.

Savings are never static unless you have no use for the wealth. Historically, in the Dark Ages after the contraction of Rome, warlords had treasure vaults of gold and silver goods, sitting idle. They had no active use for the wealth, no investment needs: they were warlords. That hoarding was a factor, also, in the slow climb out of the Dark Ages. However, trade and commerce did continue. English traded with Arabs. Vikings traded with Persians. So, your scenario is not impossible.

Moreover, free market economist Friedrich A. von Hayek long ago advocated for currencies other than gold, calling gold "the unsteady anchor." In other words, many monetary instruments could be (would be) created in a free market. And we do have some of this today with gift cards, credit and debit cards, Time Dollars and Bay Bucks, tokens, and such. The stock markets are actually a huge speculative currency market, if you think about it. Most stocks have no par value: they are only worth what someone want to give for them, as indeed, everything really is. So, if all the gold just evaporated or was otherwise unavailable, we would use something else.

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Ah, but what happens when there is an unlimited amount of debt, and the universal belief that debt is capital?

2008... and the return to reality from fantasy.

Thanks for the answer moralist, but I thought that within the gold standard we would have no use for credit or debt? I thought we only needed credit to satisfy (and create) inflation. I assumed that using gold, we would get away from arbitrary inflation.

Savings are never static unless you have no use for the wealth. Historically, in the Dark Ages after the contraction of Rome, warlords had treasure vaults of gold and silver goods, sitting idle. They had no active use for the wealth, no investment needs: they were warlords.

Hey Mike M, thanks for the welcome,

I didnt think they would live meagerly, I was just saving that if you spend less then you make, you will begin to accumulate. Then I supposed there would be a new way of thinking, a mentality that says that my gold isn't sitting idly, it is actually increasing in value merely by the fact that less of it is in the system. I.E. the more savings occurs, the more the savings accounts are worth because there is only so much gold added per year and the population growth could outstrip that. Pulling money out through savings could (possibly, though I do like the idea of gold from space) physically cause liquidity to ... become less liquid (?) Individuals would then almost create a stagflation with prices continuously falling as more money is pulled out and (speculated- invested through the mere act of holding) Now that I think about it, that could become a bubble in itself.... Ahh its so complicated...

Thanks for the help though, I will, as you have stated, take this on other boards as well, could you recommend one, I'm new around here : )

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Do not assume that anyone here knows more about Ayn Rand's ideas or even knows more than you.

Michael,

Based on what?

A principle?

Thinking for yourself--which is what is promoted here--does not mean becoming a total ignoramus about the context. This is a site where people interested in Objectivism hang out. A guy shows up asking for information about it and you tell him not to presume anyone knows anything.

Dayaamm!

(Walking into an ice cream parlor. Up pops someone and says, "Welcome. Do not assume anyone here knows any more about ice-cream than anyone else you may know or hear about. In fact, they might not know anything at all about ice cream and serve you frozen milk or ice cubes instead. So, what flavor do you want? :smile: )

This advice sounds like a galloping case of deducing reality from principles.

(To myself...) You can't make this stuff up...

MIchael

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Derek,

Welcome to OL.

There's a lot to read here and oodles of highly intelligent people--many of whom are quite intimate with Rand's ideas.

Make yourself at home and get to know a few. I predict you will find new friends.

(Also, it's a good idea to look at other O-Land sites if this is your first incursion into O-Land. Ask around. There are several.)

About your question, I presume you have not read Capitalism: The Unknown Ideal. There's some good stuff about the gold standard in it, including an essay by Alan Greenspan called "Gold and Economic Freedom." This was written back when he was a member of Rand's inner circle. Even after becoming Chairman of the Fed, I have read where he claimed to still adhere to what he wrote--I think it was something like he was one of the very few gold-standard supporters at the Fed or something like that.

It's a cheap book, so why not get it? Just a suggestion...

Michael

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The question of what should be used for money, gold or whatever, is not for utopia inventors or governments to decide. It is for free markets to decide. So far, gold seems to be the most popular choice of free markets. Maybe some day it will be Star Trek latinum or something that currently nobody can imagine.

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Michael,

It troubles me to hear you refer to a book by Ayn Rand as a "cheap" book because that has a connotation which I would not associate with Ayn Rand's ideas.

Why not get in the habit of using the word "inexpensive?"

Concepts are important.

I appreciate this website and just want it to be as enlightening as possible.

gg

Mike M.,

You mentioned that if the price of gold gets high enough that it will be possible and economical to extract gold from the sea. Given how small the amount of gold is to be found in a small volume of sea water I wonder how much energy must be expended to perform an extraction. Are we anywhere near to the value of gold necessary for such exploitation of gold from the sea to be economical?

gg

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MSK: I just demur easily. No one else added anything. Nobody amended or corrected anything I wrote. Does that make me the resident gold expert, or just the first person to reply on-point?

Derek - credit and debt would continue as they always have. Say that a factory can triple its cash by producing goods for sale. (It must pay wages, machinery, etc., but cash in is three times cash out and at the end, say, they clear some net for the year. The "three times" number is pretty close for many operations: finished goods have three times the market value of raw materials.) But, if you can borrow gold for 5%, then it makes more sense to use borrowed money for expansion than to tap into your own cash. So, you goto the bank. They accept you as a risk and give you a checkbook for a million ounces of gold. You expand. That checkbook is credit and debt, albeit against gold. Moreover, as noted, maybe your bank does not run on gold, maybe you are a copper bank or maybe a banker's bank that backs its currency in a basket of other currencies. As JTS noted (from Hayek) in a free market, you do not know what other people will find for solutions. The suggestion came (I believe from Dennis L. May) that libertarians who want to say what everyone will do in the future are just another class of central planner.

Your main point is valid and important. Savings per se will increase the value of everyone's holdings and drive down the prices of all other goods and services by making gold more valuable. It is a cogent observation. I never read that before. That's why I think that you probably know as much as anyone else here - or are easily conversant at the expert level.

JTS - just to note, also, that the "gold standard" was not the sum total market expression of all free actors. It was a government decision. England first, then 60 years later Germany, then the other national governments followed suit. Private gold coins were a minor exception to the rule, curios more than anything else. Mostly, most people since 500 BCE have chosen silver for every day transactions. Even commercial transactions were in Pounds-Shillings-Pence of silver, invented as an abstract "money of account" in the Middle Ages to deal with the plethora of coinages. Gold was used, of course, but the "gold standard" was an agreement among governments in the late 19th century.

In fact, silver money also, was a government invention. The myth of people bartering for goods, and then precious metals being chosen as better by myriads of anonymous transactors over time is just that: a myth.

That being as it may, it is true that today, we the people, do choose gold in anonymous millions of transactions - gold and silver both, though I do see copper bars and rounds as curiosities at coin shows.

Gulch8 - I don't know. A new process might be invented, of course. Much silver is a mere by-product of copper processing. I read that a ton of Kennecott 90% copper bars is further refined to yield a pound of silver and an ounce of gold among many other metals. Maybe in the future, just desalination will be the incentive and gold among the by-products. Dunno...

Follow this link and at the end of that essay are others on the same subject.

Mere Gold is Not Enough: Hayek's "Denationalisation" on my blog here.

"Wampum was invented by Hiawatha to ameliorate conflicts in order to rally the local tribes against the French and English invaders. Soon, those invaders, knowing money, adopted wampum as an ad hoccurrency."

"Debt: The Seed of Civilization" on my blog here. This was based on a new book by left wing anarchist and professor of anthropology David Graeber. Terrified by money and debt, he nonetheless correctly identified the origin of trade in ritual gift exchange, not in the self-interested calculation of profit. That came later. But even today, it is a hallmark of the open exchange that both parties say "Thank you" rather than jeering "Sucker!"

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Ah, but what happens when there is an unlimited amount of debt, and the universal belief that debt is capital?

2008... and the return to reality from fantasy.

Thanks for the answer moralist, but I thought that within the gold standard we would have no use for credit or debt? I thought we only needed credit to satisfy (and create) inflation. I assumed that using gold, we would get away from arbitrary inflation.

I don't think human nature could ever change that drastically! (lol)

Even though almost everyone uses credit and debt, I choose to operate solely on a cash basis for simplicity, convenience, and economy. And my own personal approach to the issue of inflation is to produce more than I consume. Then as prices go up (which is actually the value of the dollar going down), the prices I charge for goods and services also go up right along with them. It's the magic of parity... where your boat floats regardless of the level of the water. On a couple of rare occasions people have paid in silver. It's a simple matter of looking up the current free market melt value on coinflation.com to come up with the silver equivalent of Federal Reserve Notes.

If anyone regards the ideal of creditless debtless gold standard as being superior to the current economic system, there is nothing to prevent any individual from living by it like they did in Galt's Gulch. : )

Greg

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What happens to prices when the last ounce of gold on the planet earth is mined, refined and stored in a vault?

How do expanding economies cope with the finite limit of gold?

Ba'al Chatzaf

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What happens to prices when the last ounce of gold on the planet earth is mined, refined and stored in a vault?

How do expanding economies cope with the finite limit of gold?

Ba'al Chatzaf

Bob,

Lower prices.

:smile:

Michael

Of course.

Who would mind working for a gold dollar an hour

if they could buy a home for a thousand gold dollars?

This is parity.

The real world value of goods and services remains relatively stable

compared to the amount of dollars needed to purchase them which is the REAL variable.

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What happens to prices when the last ounce of gold on the planet earth is mined, refined and stored in a vault?

How do expanding economies cope with the finite limit of gold?

Ba'al Chatzaf

Bob,

Lower prices.

:smile:

Michael

That means the market value of assets held in reserve will go down in nominal cash value, does it not?

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Bob,

They use tables and indexes and all that stuff. Normally these are for devaluing the currency, but not always . They easily work the same when against a strong standard. Here we're talking gold.

"Nominal cash value" would be "amount in gold"--or paper money (or bits and bytes) based on gold. The gold quantities would not change.

So what's the problem?

Michael

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What happens to prices when the last ounce of gold on the planet earth is mined, refined and stored in a vault?

Come on, Bob! Do you think that it is going to be a surprise? I assure you, 93 people just as smart as you are going to see this coming and the Futures Markets are going to respond years in advance. Do you imagine that Warren Buffet is going to call George Soros and open up with "Dude, what happened to all the gold?"

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Anyway, I have no doubt that humans will learn how to synthesize gold, or somehow reconstruct the natural conditions where it is created, after a while.

I saw the movie Hudson Hawk, too. ; )

"Gold will always be gold!"

http://i21.photobucket.com/albums/b300/spacemonkey_fg/Blog%20Pictures%20III/HudsonHawk199112_zps7d986ea0.jpg

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Greg,

 

Hudson Hawk?

 

I haven't seen that in years. I remember it tanked in the theaters, but I thought it was funny at the time. I still remember the scene where a small irritating dog barked in a weird question-like manner before being shot with a machine of some sort and carried off...

 

By God, I just found it on YouTube!

 

 

:smile:

 

When I talked about the philosopher's stone, I had in mind the incredible amount of folly I read in Extraordinary Popular Delusions and The Madness of Crowds by Charles MacKay.

 

This was written in the mid-1800's and is quite long, but it is a hoot. The philosopher's stone is in the part called "The Alchymists" (that's the spelling MacKay gives it). The poor souls who chased after the philosopher's stone--mostly in what is today Europe, but sometimes in the Middle East--often tried to find the water (or elixir) of life along with it.

 

They usually thought that they could meld a chip from the philosopher's stone in a crucible with a base metal and it would produce gold. And they thought if they drank the water of life, even a few drops, it would grant them youth, immortality, or at least a longer life. The quest for these things went on for centuries and consumed countless lives in frustration.

 

(J.K. Rowling recently cashed in on the mental real estate these legends hold in the European mind by including a modified form of them in her Harry Potter series.)

 

I am currently at the part of MacKay's book called "The Crusades."

 

A very, very interesting book.

 

Michael

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When I talked about the philosopher's stone, I had in mind the incredible amount of folly I read in Extraordinary Popular Delusions and The Madness of Crowds by Charles MacKay.

This was written in the mid-1800's and is quite long, but it is a hoot. ...

(J.K. Rowling recently cashed in on the mental real estate these legends hold in the European mind by including a modified form of them in her Harry Potter series.)

Michael

Well, actually, the first book was Harry Potter and the Philosopher's Stone, but the US title of the first movie was Harry Potter and the Sorcerer's Stone. Clearly, no one in the accounting office was banking on American education.

MacKay's book on The Madness of Crowds is pretty much iconic. I have yet to meet anyone in a commercial walk of life who does not know the about the "Tulip Craze." Every market bubble brings the story back into the news. We do not shout "boz!" at each other - that did not last long - but I have to wonder how the quadrennial presidential madness will look from the future.

I believe that the "philosopher's stone" actually derived from the Lydian Stone or jeweler's touchstone. From the fact that it could be used to tell gold from bronze, the myth arose that it could turn bronze into gold.

Medieval alchemy had its uses. I think that a lot of it began with tanning in imperial Rome. In a sense, when you think about brewing and ceramics what we now call chemistry has always been important, but was not a separate knowledge base, like astronomy or mathematics. We still call whiskey etc. "spirits"; and "gas" comes from "ghost." We even boil down text to distill the truth and get to the essence. But when you consider the explosion in painting as an art, or the stained glass of medieval churches, you have to appreciate the spectral array of applications.

And, oh, yes, don't forget the invention of soap.

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Hear is the Real Question.

Can the economy expand and grow if the money supply does not?

Straightforward answers would be most appreciated.

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