(MIG Tournament) Conservative Showdown #2: Gold Standard

C1: The business cycle I agree with Pro on several important issues. With Pro, I reject the notion tat continually expanding the money supply benefits the economy. As Pro contends, that leads to a deepened business cycle in which over-expansion from excessively created money ultimately leads to recession. My point of departure is in using the gold standard as the remedy. The gold standard ties the money supply to mining and exploration technology. If the economy expands at a roughly constant rate and new old is recovered at about the same rate, then the claimed positive effect of the gold standard on the business cycle will be achieved. However, here is nothing requiring the gold supply from expanding at the same rate as the economy, or even at a close approximation.Starting the 1500s Spain imported large quantities of gold from the New World. Since gold was money, thy thought they were rich. The actual result was one of the greatest inflationary episodes in history. Cecil Adams summarizes, "Although prices had dropped steadily during the 1400s, after 1500 they began to rise dramatically — 300 percent by 1600, according to economist Earl Hamilton, who wrote a well-known book on the phenomenon. The reasons for this are complex, but it seems clear that at least in part it was a matter of a sharply increasing amount of money (in the form of silver and gold) chasing a relatively fixed output of goods and services, thus bidding up the price." [1. http://www.straightdope.com...]Gold supplies could increase dramatically due to a technological breakthrough. Only a tiny percentage of the gold on earth has been exploited, so it's there to be extracted. For example, here is a lot of gold in sea water, although no one has figured out an economical way of extracting it. But, "With so many technological advancements, the theory of extracting gold from sea water might turn in to a living reality." [2. http://www.marineinsight.com...] It's not a high probability, but if it happens it would be fatal to a gold standard economy.A group of billionaire high tech investors formed Planetary Resources, Inc. with "plans to send swarms of robots to space to scout asteroids for precious metals and set up mines to bring resources back to Earth." [3. http://www.wired.com...] We don't know their chances of success, but the point is that it's a mistake to build a monetary system that requires that no technological breakthrough be achieved.C2: Threat of deflationPro established that deflation does not equate to economic contraction, and he cites several short periods when the economy grew despite deflation. There are also many periods when economies grew despite inflation. After devastating inflation, inflation dropped to 3% in 1983. [4. http://en.wikipedia.org... ]Despite 3% inflation the economy boomed. The fact that growth is possible with either modest inflation or modes deflation, neither are good things. The Great Depression is an example of the severe effects of deflation, and another is the recession of 1920-21. We don't know how mining and exploration technology will match up against economic growth. If mining fails to keep up, we will have long term deflation. "Limited gold supply causes deflation. True, inflation is bad, but deflation is even worse. Firms had to lay off workers as price declined. According to the World Gold Council, annual production of gold is about 2,500 metric tons or 80 million troy ounces. This implies that world GDP cannot grow more than about $80 billion (at $1000/oz), had we been on the gold standard today. Thus, the gold standard would cause a severe deflation in the world economy." [5. http://www2.econ.iastate.edu...]The gold standard worked well for a long period from about 1750 to 1900. That's because gold mining kept up with economic growth. We have no good reason to suppose that will e the situation in the future. Right now mining is lagging world growth, so we would expect deflation under a gold standard. A technological breakthrough like asteroid recovery could flip that situation around and produce massive inflation.C3: The chance of war Let's suppose that Pro's claim is true, and " the U.S. cannot be warring at all, i.e., under the strict discipline of the gold standard it would not be possible." If that were true, then the U.S. could not defend itself if threatened or attacked. We would have had to concede World War II and the Cold War. when terrorists struck on 9/11, we would simply surrender, knowing that resistance would be unaffordable. So if Pro's claim is true, it is a fatal defect in adopting the gold standard.However, during the period when the U.S. was on the old standard, it fought the War of 1812, the Mexican War, and the Civil War. The Civil War consumed 13.2% of GDP. The total of the Iraq and Afghanistan Wars was about 1.2% of GDP through 2008. [6. http://www.history.navy.mil...] and Since 2008, the GDP and yearly war costs have been roughly constant so the percentage wouldn't change. N1: Using a formula is superior to the gold standardWhat we would like a monetary system that always matches growth, so there is no inflation or deflation. The Federal Reserve is supposed to control the money supply, but they have traditionally added too much to the money supply. One alternative is proposed by Libertarian economist Milton Friedman,"I have, for many years, been in favor of replacing the Fed with a computer," he adds. Each year, it "would print out a specified number of paper dollars" to augment the money supply. "Same number, month after month, week after week, year after year." [7. http://www.cato.org...]N2: Transitioning to gold is impracticalAbout 5.3 billion ounces of gold have been mined in human history. [8. http://en.wikipedia.org...] The U.S. has 147.2 million oz. troy in it's reserves, about 2.5% of the total. [9. http://en.wikipedia.org...]The U.S. money supply, M3, is about $6 trillion. So to back all U.S. currency with gold using existing reserves, the exchange rate would have to be set at $40,816 per ounce, compared to the present world market price of about $1643 per ounce.The U.S. cannot maintain a price of gold different from the world market price, otherwise gold would flow in the direction of the higher price. Clearly the U.S would have to start buying very large quantities of gold, driving the world price up substantially. Roughly $6 trillion in gold would have to be purchased to back our $6 trillion of money supply since our current supply is only about 5% of what is needed. So where do we get the spare $6 trillion? Creating fiat money doesn't work, because whatever is created has to be backed by gold, so there is no net gain. At this point in history, there is no practical way to make the transition. Propnents of the gold standard have postulated elaborate transistioning schemes, but there is no escaping the need to have full monetary reserves at the world market price, and that's too much to pay. Friedman's proposal to control fiat money gets the advantages claimed for the gold standard, and it can be accomplished seamlessly without the enormous costs.It's too late to tie the monetary system to mining technoogy. Computers are a better alternative.The resolution is negated.