From: tcox@ssrl01.slac.stanford.edu (Tony Cox - (415)926-3105)
Subject: Re: gold standard
Followup-To: alt.individualism
Summary: continuing discussions on the gold standard
Keywords: gold money keynes 
Reply-To: tcox@ssrl01.slac.stanford.edu
Organization: SSRL, Stanford Synchrotron Radiation Lab
Date: Thu, 1 Oct 1992 23:55:50 GMT
Expires: Sun, 1 Nov 1992 07:56:32 GMT

 {Rather large, I'm afraid}

 In article <1992Oct1.054648.29921@genie.slhs.udel.edu>, starr@genie.slhs.udel.edu (Tim Starr) writes:
> It seems that our disagreement with Tony Cox is one of structure, rather than
> content.  Us libertarians argue for free banking, and that the best base for
> currency is presently gold.  Cox argues for an ill-defined "independent"
> central bank, and fails to see the merits of the policy of such banks switching
> to the gold standard.
> 

   Whoa! An Us vs. them debate, with me in a minority of one! I like
   this. Oh well, since you are paraphrasing my arguments, I'd better
   let you know that I too am a lib. party member. There is thus no need
   to argue your philosophical points with me, practicalities here are
   sufficient.

   I started into this thread stating my amusement, so I'm honour bound
   to start by explaining what I found so funny. It is just that many
   normally sensible libertarian-inclined posters have this stubborn
   attachment to gold as a currency standard, reminiscent of old time
   republicans and crusty old men who buttonhole you in coffee shops.
   They ignore in this the absolutely staggering changes within the world
   financial system which have occurred this century - even the shackled
   mixed-economy system has delivered! And this from people who should,
   if noone else, have had faith in the free market.

   Money has two functions - that as a medium of exchange, and that as a
   store of value. Lets take these two functions apart, and see how the
   retreat from the gold standard has affected these functions.

   Firstly, as a medium of exchange, money is serving pretty much in the
   same way as it has always done. Although confidence plays a
   significant part in the currency system, you have to severly
   mismanage your economy before exchange money loses it's utility. You
   can, even in CarterVille USA, get your paycheck out of the bank, go
   down the road, and convert it into beer in the local bar - with very
   little decline of value on the way.

   As a store of value, retreat from the gold standard has allowed
   politicians to do just what you would expect them to - they have
   devalued the money supply and generated quite remarkable inflation.
   In doing so, they have in effect stolen money from those people who
   had a "preference for liquidity", just as Keynes told them to do. (It
   is small wonder that few people have such a preference anymore, and I
   find it quite humourous that politicians are so dismayed at the low
   savings rate in the US.)

   The market has responded to this in the way that Le Chetalier would
   have expected - the system (financial market) has responded to annul
   the constraint (the devaluing of the currency). There are no Silas
   Marners around today, except for the very stupid - people invest in
   stocks, futures, bonds, foreign currency and all manner of 'stores of
   value'. Amongst these various 'investment instruments' are gold, gold
   options and gold futures. You can store the fruits of your hard
   labour in gold, and preserve its value that way.

   The impediments to this scenario are the usual governmental
   impediments which libertarians are keen to overthrow - capital gains
   tax affecting the transfer into and out of gold, currency export
   controls, and 'managed trade'. With these out of the way, you DO NOT
   NEED a currency based on gold; you just buy gold. The free market has
   made buying gold simple - just pick up the phone.

   Currencies are 'backed' by confidence. THe markets are far more
   confident than most posters who have had any input to this thread.
   The fact is, that like it or not, believe it or not, fit in with your
   personal philosophy or not, the $ has a worth in the world market,
   WITHOUT being backed by gold, or anything else but a vague promise to
   accept it in exchange for government debt (see my last post).

   Now, how is that different from stocks, bonds, platinum, wheat or
   even gold? The fact is, that in the final analysis, IT IS NO
   DIFFERENT. If you sit on the gold standard, then you are promising to
   exchange anyone's $$$'s for a fixed quantity of gold. The value of
   your currency becomes tied to peoples' collective assertion as to the
   value of gold, AND THE BELIEF OF THE MARKET THAT YOU WILL MAKE GOOD
   ON YOUR PROMISE.

   So why base the currency on Gold? Pure whim! There is NO difference
   in the final analysis.

   Now, as there is no difference (are you still with me Tim?), we are
   free to discuss what agreeable properties we would like from our
   money, and then go on to discuss how to implement them.

   Since the 'store of value' argument has come out in the wash, lets
   approach the solution from the medium of exchange point of view.
   Several people have pointed out that a money unit based upon "a
   basket of commodities" makes sense. This is proposed to compensate
   for the volatility of individual commodities (of which gold has been
   one, btw). The desire is for the money unit to be somehow
   resilient in value, and what better unit to tie it to that the
   overall size of the economy!

   Now we come to my so called "Ill-defined independent central bank".
   The only 'ill-defined' part about it is the human input. Who decides
   how the economy is doing, and based upon what? Who polices its role
   to insure against fraud?

   Well, there is a well known Libertarian answer to that one - let the
   market decide. The market has decided, even in this distorted,
   imperfect world. The Mark does better than the Franc, the Pound and
   the Dollar. The greater the independence, the more confident the
   market, and the more resilient the value.

   EVEN if all major currencies were back on the Gold standard, their
   values would change depending on the political wind blowing in the
   respective countries. If you can go on the gold standard again, you
   can certainly go off it. Any politician who mentioned a retreat from
   the gold standard  would cause a distortion in the currency
   value. This is why independence is so vital. Gold is again NOT
   SPECIAL.



> BTW, Tony, I tried to return your mail, but it failed.  This will have to
> suffice for now.

   no problem. the newsserver is up again.

> We argue for separation of finance and state (well, existence and state, but
> that's another case).  No bank is truly independent if coercively monopolized
> by the State.  It's correct to observe that coercively monopolized currencies
> which the State hasn't done much with are relatively stable, but as long as
> the State plays a role, the potential for such meddling remains.

   Who said anything about a monopoly? Even in the current system, you
   can use Pounds, Marks, Dollars etc.

   If the State DOESN"T play a role, there is still scope for meddling, so
   what is your point? Fraud is a well know technique of enrichment.

   The key to stability is competition, which is why free trade in
   currency is so important.
> 
> Cox seems to be asking: "Why should central bank policy be the gold standard?
> All that is necessary is that the bank be independent."  We argue that such

   ..add "and there are no capital gains taxes and currency export
   controls" and you pretty much have my position down well.

> independence is transient at best, and that the sort of monetarism practiced
> by most banks only minimizes inflation, it doesn't eliminate it, as free
> banking would tend to.
> 

   Inflation is an irritating feature of money I'll agree, but hardly a
   show stopper. It leads to interest bearing cheque accounts (etc.
   etc.), but apart from the tax consequences of artificially inflating
   asset values, it is harmless. As long as the RATE can be predicted
   (well, as long as Inflation = fn(time) can be predicted), its NO BIG
   DEAL.

   You have made no convincing argument for a return to the gold
   standard that I can see, I'm afraid. In fact, I would go as far as to
   say that a return to the gold standard is CONTRARY to libertarian
   principles. So I have a few questions on your proposal...

 1) Why pick on Gold as having a special place in the system? My
 attraction to libertarianism has always been based upon its even handed
 approach to human relationships. Why give owners of Gold an advantage
 in the market place? On the gold standard, owners of Gold (or gold
 miners) have a GUARANTEED price for their product. Why should they have
 advantages over (say) Milk producers? Why not a guaranteed price for
 milk?

 2) Suppose that someone comes up with a cheap way of extracting gold
 (Oh Rubbish! says an earlier post). Well, suppose that Rumours start
 that someone is experimenting with such a process (shades of cold
 fusion, if you will). Energy stocks gyrated after cold fusion hit the
 world. Why make your currency system fluctuate with peoples fears in
 such a limited way. Surely you should base your currency on as large a
 'value sink' as possible?

 3) Who decides how much gold to store, and how much currency to issue?
 Will anyone who brings gold to the bank be able to exchange it for
 currency? If not, why not? If so, and '2)' ever occurs, how do you stop
 a massive expansion of the money supply.


 4) A process to generate cheap gold would be a license to print money.
 The rewards would be so substantial that it would create an artificial
 impetus to design such a process - the philosophers stone of the 21st
 century. Why should libertarians tolerate such a market distortion?


 5) Suppose that a new industrial process comes along which uses large
 quantities of gold. The owners of the factories come to you with
 fistfuls of dollars to retrieve their gold (it is a very profitable
 and useful process). Do you keep exchanging gold until it is all gone
 and there is no money in circulation? Who makes that decision? 

> 
> Tim Starr - Renaissance Now! - Think Universally, Act Selfishly
> starr@genie.slhs.udel.edu
> 
> "True greatness consists in the use of a powerful understanding to enlighten
> oneself and others." - Voltaire


 In short, you can corner the market in a commodity, or in trying to do so,
 drive the price up to unnatural levels (re: Hunt brothers). Money tied
 to this is susceptible to such machinations.
 You just cannot do this if your money is tied to the size of the
 economy - it is a zero-sum game.

 Does this pass your Economic Literacy test, Tim?

 Tony Cox, Stanford, CA
Newsgroups: alt.individualism