From: starr@genie.slhs.udel.edu (Tim Starr)
Subject: Re: gold standard
Keywords: gold money keynes
Organization: UDel, School of Life & Health Sciences
Date: Sat, 3 Oct 1992 05:37:05 GMT

In article <1992Oct1.155550.1@ssrl01.slac.stanford.edu> tcox@ssrl01.slac.stanford.edu writes:
}
} {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.

Well, that narrows the field some.  I'm a free banking proponent.  You?

}   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.

Understood, and agreed thus far.

}   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.

Accepting this, as I do, the question then becomes: will this be practiced?
I think so, in which case there would be a gold standard, de facto.

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

No.  As others have pointed out before, gold has advantages over other
commodities.  Unlike silver, it doesn't tarnish.  Unlike apples, it doesn't
grow on trees (the point being that its supply is highly stable).  And unlike
platinum, it has a highly successful history of serving as money.

}   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!

Actually, my layman's opinion is that the commodity basket standard will at
best take quite some time to evolve, as it's a much more difficult concept
for people to accept.

}   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?

Not quite.  Please define independence.  My position is that without
separation of Banking and State, there is no such thing as an absolutely
independent bank, only relative degrees of freedom.

}   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.

For international trade, yes.  But Germany recently inflated about 4% when
it absorbed the former DDR, thereby robbing most West Germans.  For domestic
policy, it's still fiat currency, and will be until we have free banking.

}   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.

Partly true, partly false.  It's much harder to inflate if gold coins are
used as money, n'est-ce pas?  It's much easier to do so if banking is
coercively monopolized, even if a policy of minimal inflation a la commodity-
basket monetarism is practiced.  It's a lot harder to confiscate gold as did
Roosevelt Minor than to perform a takeover of the Fed, the Bundesbank, etc.

}> 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.

Bullshit.  I can't buy groceries with anything but FRNs at my local grocery
store.  You keep omitting domestic trade!

}   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.

Inflation is a form of fraud, and one of the worst.  Free banking could
easily be protected against fraud, by competition, the best form of regulation.
Suppose bank A inflates a bit.  Banks B, C, D, E, etc., are going to decrease
their exchange rates with A, customers will flock away from A, and A will go
out of business until it reverses its inflationary practice.

We're sort of seeing this now, but ONLY on the international level.  Domestic
banking remains monopolized, at least until the International Bankers
Conspiracy comes to fruition :-)...

}   The key to stability is competition, which is why free trade in
}   currency is so important.

Exactly my point!  We need to remove barriers to competitive entry in domestic
banking.

}
}   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.

Pfaw!  Economists have how good a record of predicting the inflation rate?
This is a absurd assumption.  First of all, there's no way to determine
quantitatively how much, e.g., the Consumer Price Index, will be raised by
increasing the money supply by 5 trillion FRNS, or any other amount.  All
economics can do is predict qualitatively that nominal prices will rise.

Secondly, inflation doesn't hit everyone the same way.  It has a ripple
effect.  Think of it as a stone dropped in a still pool of water.  Those
closest to the middle get wealth transfered from those furthest away from it.

Third, the rate remains at the mercy of any gang that can take over the
bank monopoly (if it's "central", it's a monopoly, at least domestically,
and there's nothing in principle that would preclude statists from global
banking monopoly or oligopoly - in fact, there's a good case to be made that
what we have now is an international banking cartel) to raise or lower to
its own delight.  This has happened PLENTY in the past.  It's probably the
highest risk of statism.

}   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...

Seems to me that our disagreement is based upon methodology.  I'm much more
of follower of the Austrian school than you seem to be.  You seem more
positivist.

} 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?

There has to be money, ergo something has to be the standard.  Even if
it were a basket of commodities, you'd be guaranteeing the owners of either
identical baskets or its constituent commodities the same sort of market
for their possession.

} 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?

Suppose we look at the facts.  Gold mostly comes from supernovae, a rather
infrequent occurence.  We can either discover such gold, or synthesize it
ourselves by a process which is presently more expensive than mining it.

} 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.

Who decides it now?  The international banking cartel, with some competitive
and political forces setting the reserve rates.  Free banking would probably
have very high reserve rates, approximating 100%.

I don't understand your second question.  The problem with fiat currency is
that it distorts pricing.  If there actually is more money, then this doesn't
happen.

} 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?

See above.  If you actually produce more goods, then that isn't inflation,
even if the commodity produced is the money standard.  Your basket solution
doesn't eliminate this, it merely diversifies the product.

} 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? 

Yah, according to contract between bank and depositor, the parties to the
decision-making.  In this case, the standard would probably switch to whatever
it is that the process results in.

} 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.

I'd interpret the Hunts as an instance of why cornering the market in a
good is a bad strategy.  They drove up the price of silver to high that it
literally started coming out of the woodwork.  People melted down jewlery,
silverware, etc., to sell it.  They made a profit at the Hunts' expense,
since the Hunts' attempt failed, thus depriving them of the benefit they
bargained for.

} Does this pass your Economic Literacy test, Tim?
}
} Tony Cox, Stanford, CA

Pass, yes.  But not with flying colors :-).


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