Hacker News Reader

Comment by user22 | Hacker News Reader

I have a question, isn't the problem with the gold standard that the amount of dollars is fixed and in order to have enough currency to drive a rapidly growing economy you would in essence be buying a gallon of milk for .25 cents?

It seems to me that either you the amount of currency in circulation needs to increase or the value of the existing currency needs to increase.

Taking into account the gold standard was used for possibly centuries (not sure) was this problem encountered before and how was it solved?

View on HN

A shortage of bullion in Europe during the 15th century caused problems everywhere. That was followed by a huge influx of gold from the Americas in the 16th century, which also caused massive problems across the continent!

https://en.wikipedia.org/wiki/Great_Bullion_Famine

https://en.wikipedia.org/wiki/Price_revolution

Both under- and over-supply had negative effects on the economies of Europe.

The gold standard really was a primitive fiat currency anyway, governments would debase coins so they contained less gold in order to expand the money supply for instance. And only a small fraction of coins would be gold anyway, silver was far more common - the Pound Sterling takes it's name from a pound of silver from the easterlings (Germans). Paper money just made it obvious that physical currency was only a representation of wealth and not a fixed unit of wealth itself.

The gold standard is basically a political myth about a system that never really existed. Money is a very abstract concept, and reducing it to physical tokens and easily intuitive rules is appealing to many.

https://wtfhappenedin1971.com/

This was posted to HN and it was quite eye-opening. For those that don’t know, 1971 was when the gold standard was abandoned by Nixon. I don’t know if the graphs are cherry-picked and I hope they were honestly since the US is never going back to the gold standard and it seems to have far-reaching negative effects in every aspect of human life.

To answer your .25 cent milk question it seems to have not been a problem in history and health of the country before 1971. The profits and benefits of the rapidly growing economy have pretty much all gone to the ultra wealthy that are nearest to and in control of the money printer.

I think this is a gigantic leap. They show a whole bunch of graphs without even advancing a theory as to how abandoning the gold standard caused a decline in, for example, employee compensation growth. Or divorce rates. Or ... obesity rates, really? There's so many graphs on here that it would take forever to dispute all of them, but here's some general points.

1. A lot of these graphs start at 1940 or 1950, showing a change in the trend in the early 1970s. But that was the end of WW2, where Europe was in ruins and rebuilding and America saw a massive increase in prosperity and economic output. That was a pretty unique period, it's only natural for that trend to diminish or change over time.

2. A hell of a lot happened in the late 60s and early 70s, not just abandoning the gold standard. One of these graphs is of the incarceration rate. Do you think we started seeing mass incarceration at that time because we abandoned the gold standard, or do you think it was because of the war on drugs?

3. Some of these graphs are deliberately misleading. One is of the cumulative inflation rate, and seems to show the inflation accelerate in the early 1970s. Except a healthy economy should have a steady inflation rate each year (of around 2% I believe), so this graph is supposed to be exponential! They just picked the right window so that 1971 is the inflection point.

The change from the gold standard is almost certainly a coincidence. Whether the dollar is backed by gold or government promises doesn't make businesses decide to give less money to their workers and more to their CEOs.

A much more relevant development in the 70s was the switch in economic policy priorities from demand-side to supply-side. Nixon was the first president who prioritized tax cuts, union busting, subsidies, and legalizing outsourcing to cheaper labor markets in China and SEA. Every government since has given corporations a blank check to cut labor costs by any means necessary to prioritize profit.

Those graphs paint a fair picture of the nature of the crisis, but I am not so keen on their explanation.

Nixon ended gold convertability, but the USD was not on a true gold standard and was in danger of not being able to fulfill this obligation. The standard was Bretton Woods, it was an international framework for finance, and it was the failure of the framework together with the OPEC oil crisis that caused the mess documented in those graphs.

My rule of thumb for money supply:

adjustable, with a benign regulator > fixed > adjustable, with a corrupt regulator

So, the aim shouldn't be a return to the gold standard or a switch to BTC, but to make sure that central banks can do their job without interference from politicians.

To the left of that list I'd put "self-adjusting, without needing a regulator."

Hayek argued that a system of competitive privately-issued currencies would achieve that. I'm not qualified to say whether he was correct, but an economy built on cryptocurrencies would be exactly that.

Yes. That is called deflation. It also has to do with fractional reserve banking. The fraction of your outstanding dollars that you could actually cover with gold. If no one ever wants to make a run on your bank, you can keep the fraction very low.

I understand the deflation part, but my question really was is it an economy the size of the united states even possible if we stayed on the gold standard.

Not having enough money to transact would definitely have suppressed our economic growth, but then again maybe we would have gotten really good at mining for gold to make up for it

"Really good at mining." This might be good point to compare with BTC. Where huge amounts of electricity is spend on doing essentially useless calculations, outside keeping the system safe and running.

Good at mining would have meant spending good part of our economic output to mine gold and then just storing it somewhere or moving it around...

Reply on news.ycombinator.com