Hearing a lot that infact dropping gold standard was stupid, and it matches with humanity's tradition too. Could anyone explain why gold standard was a stupid idea? Any link would be helpful. Thanks!
Fiat money gives a much better control over the currency. Now we can argue what inflation/deflation rate a currency should have, instead of leaving that to random chance.
The price revolutions were literally a one off event and while it's usually described as "rampant", the inflation rate was at most in the range of a few percent and it would be seen as moderate to low today.
Stability is not inherently good. Stable currencies that suffocate the economy because they do not allow for rapid enough expansion or reduction of the money supply are a burden. Another example would be the interwar years and great depression, were virtually all countries suspended the gold standard because it was simply impossible to uphold, and the economy recovered from it.
And then we have the other problems: What about rents? Debts? Wages? Do you decrease them over time, too? What happens if they aren't? Who would lend money under such circumstances, if just keeping the money under your pillow will make you richer anyway, and at zero risk, too?
Etc. pp.
Yes, because that's absolutely what happened. What actually happened is that there is no longet any reason to buy the top end, because the low end is enough for most people.
>And then we have the other problems: What about rents? Debts? Wages? Do you decrease them over time, too?
Why should wages decrease?
>What happens if they aren't?
People have more money to spend and the additional demand further boosts the economy.
>Who would lend money under such circumstances, if just keeping the money under your pillow will make you richer anyway, and at zero risk, too?
People would definitely go back to saving and away from making debts. That is not a problem, the need to invest money when there is no objective reason to do so is what leads to investment bubbles and excessive debts.
Sales are down down. Total sales. Not "high end sales". All sales.
> Why should wages decrease?
The economy is growing. The population is growing. Everything is growing… except your money supply. You have to make products cheaper with fixed wages, your personnel costs will explode, until it's no longer affordable to pay the current rates.
Same with rents: Building housing will become progressively cheaper. Rents, land taxes, etc. will have to go down to match these prices, or nobody will be able to afford living in existing housing any more.
> People would definitely go back to saving and away from making debts.
You seem to conflate a lot of issues here. We had inflation with gold standards (because you can debase your currency anyway). We had crashes and bubbles with gold standards (and pre-gold-standard gold based currencies, which you conflate too…). The destruction of the middle class and impoverishment of the lower classes aren't a result of fiat currencies.
> That is not a problem, the need to invest money when there is no objective reason to do so is what leads to investment bubbles and excessive debts.
Except that deflation will result in a shortage of investment even where there is objective need.
For how long? A few years? Prices have been dropping rapidly for many decades. Yes all sales are down, because you don't need high end computers any more, which also means you don't need to replace old computers as often.
>The economy is growing. The population is growing. Everything is growing… except your money supply.
Yes, that's why prices get lower to compensate.
>You have to make products cheaper with fixed wages, your personnel costs will explode, until it's no longer affordable to pay the current rates.
That's illogical. If you need to cut wages in order to decrease prices, you aren't growing, you are cutting costs.
>Same with rents: Building housing will become progressively cheaper. Rents, land taxes, etc. will have to go down to match these prices, or nobody will be able to afford living in existing housing any more.
If they will have to drop so be it. But I doubt that the costs of building the house is what determines property prices, it's more about the location.
>We had inflation with gold standards (because you can debase your currency anyway).
No, inflation started after gold standards were abandoned. As you wrote previously, the 1-2% inflation caused by influx of gold from the new world was seen as catastrophic at the time.
>We had crashes and bubbles with gold standards (and pre-gold-standard gold based currencies, which you conflate too…).
Not nearly as often. Yes, bubbles did happen as rare occurences, today they are seen almost as an unavoidable part of the economy.
>The destruction of the middle class and impoverishment of the lower classes aren't a result of fiat currencies.
That's not what I said, but it could be so. Avoiding inflation is much easier for the wealthy after all.
>Except that deflation will result in a shortage of investment even where there is objective need.
There is no reason to believe it would.
Note all of the entries that start with "Panic of.." from well before the collapse of Bretton Woods.
Even the Great Recession wasn't that bad compared to what we had before.
Not really. Let's say we're on the gold standard, and now the computer revolution happens, and the internet revolution, and so on. We've created a bunch of new businesses, which are worth a bunch of money, but the amount of gold didn't change. So the value of money had to change, because the size of the economy changed, and the amount of gold didn't.
For that matter: Which is growing faster, the population, or the amount of gold? That affects the value of money if we're on the gold standard.
The problem is that, in the example quoted, no one had that control. Gold mines run dry and you're fucked. Not because some incompetent banker is controlling the gold supply, but because there is no more damn gold. The most competent financial advisor of Rome -- a figure so gargantuan in the field of finance that, if transplanted to the modern world, would not only win that fake Nobel prize for economics, but would cause every other economist to retire out of shame -- would have been powerless. Because there was literally no more gold.
Obviously, it wasn't the end of all things -- new mining facilities would be open, sometimes processes would be optimized in older ones, wars would be waged, but these things took time and needed money.
I'm not suggesting the Romans needed to venture westward and discover the Americas, but did they really have no other options?
Apart from that, there was also normal economic and population growth – even without trade, if your population and economy grows, you'll need more money if you want to keep prices and wages stable.
So, they had several options:
• Conquer places that have gold! That went well for a few centuries, until it didn't any more.
• Debase the currency to make more of the money still here. That was, unsurprisingly, massively unpopular. And because monetary value was still tied to precious metals, people just started to hoard old money to melt it in later (something you still occasionally see with e.g. copper pennies), which led to all sorts of economic problems (occasionally crashing all the way down to barter trade).
It's just that having this debate is pure luxury already. Otherwise it'd be "where the hell do we get the gold we need to fuel our economy?" or "what do we do with all the surplus gold that's ruining our economy?".
> but alternatives such as Bitcoin become increasingly interesting in countries plagued by hyperinflation.
Bitcoin, really? Private currencies where inflation is at the mercy of random developers who may or may not control significant currency reserves as well?
Using foreign currencies to supplant or replace a failed domestic currency isn't a new phenomenon, nor limited to "crypto""currencies" (the Balkans used the German Mark extensively in the late 90s, and US Dollars get you far in a lot of places).
I suppose you mean with the traditional way money is explained, that is very probably wrong.
The idea that first was barter and then people started to use precious metals doesn't match the historical evidence.
There is strong evidence that money is invented in the first states in parallel with writing and numbers in order to register debts. (see https://en.wikipedia.org/wiki/Sumer : "Several centuries after the invention of cuneiform, the use of writing expanded beyond debt/payment certificates and inventory lists to be applied for the first time, about 2600 BC, to messages and mail delivery, history, legend, mathematics, astronomical records, and other pursuits.")
Metals (strong money) are not necessary and if fact was not the most used system for most part of the history (see https://en.wikipedia.org/wiki/Tally_stick#Split_tally_in_Eng... )
So, the gold thing doesn't match humanity's tradition until very recently. This is controversial, I think, because it has political implications.
Ish. There's no unified "human tradition" anyway. Mediterranean societies have used gold- and other metal-based tallies for thousands of years, until they eventually settled on (gold, silver) coins as a standard. Greek/Roman conquests and trade then spread the idea.
In this view, one important consequence, is that the material of the token is not relevant. The use of precious metals is just an added security measure against counterfeit, but not the thing that make it valuable (that would be the debt that represent).
If this is true, part of the debate about strong money vs. fiat money just become pointless.
http://www.bradford-delong.com/2015/03/time-for-a-rant-why-o...
The short answer is a run on safe assets like gold creates a positive feedback loop. A demand short fall causes people to try to acquire safe assets like gold. Spending 'money' on gold means money not spent on real goods and services. Which results in a demand shortfall. And people wanting safe assets to park their wealth.
Rinse lather repeat till 1/4 of workforce is unemployed. A central bank can print or lend out any amount of paper money to satisfy investors craving for safe assets. It can't make more gold.
Why not have both? Problem: Trying to peg the money supply to the price of gold hamstrings the central banks ability to supply paper. Lesson learned 1929-1939. And learned again by Argentina in 2000 with a US dollar peg serving as a de facto gold standard.
If I loan creshal $5000 at %5 interest, I have basically a note on $500 worth of income a year. I can turn around an use that note to buy something. Now someone else owns the debt worth $500/yr. Until the crisis hits, creshal loses his job and flees to Argentina and now that note isn't worth diddly.
Short: Modern economies are rife with way to turn physical assets and rent streams into something akin to cash. So even if you think you're on a gold standard, you aren't really. Your on a gold + this bond entitles the holder to £500 per annum from the Village of Shlopshire. (Because in 1804 the village borrowed money to replace a bridge)
I don't see why you think that the link is relevant. It would apply if there were gold and silver standards simultaneously, for example, but that's not what is being discussed.
For most of history, economic growth was minimal. Growth we expect in a year would not be seen across a lifetime. A fixed supply of money worked for a fixed-size economy.
In the 1800s, the economy grew on gold due to the coincidence of gold mine output roughly matching economic growth. The moment that link broke, calls for bi-metallism grew. Within a generation, the world was forced off gold.