How did the gold standard work? | Hacker News Reader

How did the gold standard work?

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For a good history of the use of gold as money see The power of gold: the history of an obsession by Peter Bernstein:

* https://www.goodreads.com/book/show/249245.The_Power_of_Gold

* https://en.wikipedia.org/wiki/Peter_L._Bernstein

Also good are Money : the true story of a made-up thing by Jacob Goldstein (also of NPR's Planey Money) and Debt: The First 5000 Years by Graeber:

* https://en.wikipedia.org/wiki/Debt:_The_First_5000_Years

There are real practical problems with gold and changing economies. What happens when your population goes up - you need more gold. Or economic growth. Similarly if gold is discovered like Spain's Latin American winnings it causes inflation.

The thought has crossed my mind that the answer is, it is impossible to have a long-term gold-backed system (or any other commodity), for all the various reasons that doesn't work, and it's impossible to have a long-term system not based on gold or some other set of commodities, because it is impossible for a government to be given the power to print arbitrarily without eventually using it, unto the death of that currency.

There is no guarantee that there is a long-term stable monetary system, after all. They may form a bistable pair together. Proponents of either state can easily read history as vindicating their claims that one or the other is superior, because look at how often the other failed, but I submit that if history vindicates anything at all it may actually be this position.

> it's impossible to have a long-term system not based on gold or some other set of commodities, because it is impossible for a government to be given the power to print arbitrarily without eventually using it, unto the death of that currency.

And this is why the US government isn't directly involved in the process, nor is it given the power to print money arbitrarily. Money is "printed" via a combination of loans and fractional reserve banking, and banks are incentivized to figure out the optimal interest rate to both produce the most amount of money for themselves while keeping a stable currency.

Aren’t interest rates set by the Fed? Banks then charge a rate based on the Fed base rate + risk premium.

The fed is largely controlled by the Federal Reserve banks, which are independent entities and are run as private businesses.

> Money is "printed" via a combination of loans and fractional reserve banking

Fractional reserve banking is not a thing. Tobin called that "The Old View" in 1963:

* https://cowles.yale.edu/sites/default/files/files/pub/d01/d0...

It is a convenient crutch to get a '101' level understanding, but people end up continue to think it's real and so the teaching of money multiplier should really be stopped:

* https://research.stlouisfed.org/publications/page1-econ/2021...

Several countries haven't even had reserve requirements for decades:

* https://en.wikipedia.org/wiki/Reserve_requirement#Canada

Roche published a good intro to how the modern monetary system works:

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625

I'm not so sure that this is true, but I do agree that as of this moment it is so.

The key thing you are looking at is (capital goods at time 1 / currency at time 1 ) / (capital goods at time 2 / currency at time 2).

Under a gold standard, mostly this means deflation with some periods during a gold rush rapidly going the other way. It becomes better to hoard gold and do nothing, and as you hoard the value rises further. This leads to economic stagnation because we don't actually encourage innovation.

Under a Fiat currency scheme, the reverse happens. The value of the currency is constantly dropping. So what you see is people hoarding capital goods. What makes this worse is that we are incorrectly treating land as a capital good. So this is what we see today, people buy shares or land, that value appreciates as the money is printed, and they earned nothing. And as people learn of this, we get crazy things like 401k's that invest in everything in order to grab a piece of this appreciation. We get crazy things like companies taking out bonds, then using those bonds to buy their stock, never actually using it to become more productive, because productivity doesn't pay. More economic stagnation.

If this rate is changing over time, we get speculation. We get rent-seeking. But if we were to introduce a system that forced this rate to never change, we could get through. Of course, the leading power would never allow that, because it's the leading power that is speculating on the assets that are appreciating.

> So what you see is people hoarding capital goods.

owning capital goods isn't hoarding, since that implies you are not making use of it (like a squirrel would "hoard" nuts, which over time would rot).

Capital goods are doing something productive - or the capital is misallocated and is losing you money. Too much misallocation would indeed cause problems, but every owner of capital is incentivized to allocate their capital to the highest returning task they can accept a risk for.

Those who do not own capital will sell their labour. Any excess they earn apart from their sustenance would be spent on acquiring capital. In this way, everyone who produce more than they consume would accumulate capital, and partake in the economic growth.

As for why land is treated as capital good - land is required for a lot of things, and the properties of land is not any different from any other capital good. The problem may be that there are some gov't interventions on land use that prevent it from being used for the most productive purpose - this should be corrected, but i have no idea how as vested interests are preventing it from happening.

There's a fundamental difference - nobody created land, and the value that you are capturing is of your neighbors producing it. You can buy an empty plot of land, do nothing on it, and then sell it for double you bought it for 10 years later. Someone else could have had a use for that land. That's obviously hoarding. It doesn't rot.

Stocks are less egregious for this trait as it's just zeros and ones, but the fact remains that if you want to hold value, you must invest in something. For a typical person who just wants to store their labor and not make a bet, they are unable to. Back in medievil times when population and productivity were flat, the money supply was flat, and there was no need to invest to store. There's nothing other than politics saying that it can't be true again today, the math just might be trickier, but I think we can handle that.

You are portraying a false dichotomy here:

Why would the government need to be involved in your currency at all (commodity based or otherwise)?

Because the backing of a state provides a veneer of credibility to the currency that your own say-so doesn't. Like, barter economies built on trust still exist and if that's what you want, knock yourself out. But at some point you want to pin down how many chickens your bedroom dresser is worth, which means you need a token to represent a value, which means you need someone or something to provide backing for the trust placed in the tokens. Unless this is a coy way to argue we should replace our currency with crypto (in which case the controllers of the consensus mechanism and/or the person(s) who designed the particular algorithm for ensuring inflation/deflation/stability are the "government" just as surely as the Fed are the government in the real world)

States actually have a very hard time giving credibility to their currency.

You see, the problem is that governments are too powerful: they can not make promises that they can't break.

In contrast, private companies have it much easier. They can use plain old contracts to bind themselves.

Eg Amazon could issue physical notes and promise to redeem then in eg USD on demand. (Wal-Mart could issue tokens they promise to redeem in gold. Etc.)

Amazon doesn't have to have one dollar on hand for each note they issue. As long as the overall balance sheet of Amazon is strong, they can sell assets to serve a sudden spike of redemption requests.

(Historically, note-issuing banks in Scotland also had a tool to deal with situations where they were solvent but not liquid. The contracts that governed their notes gave them the option to delay redemption requests in return for paying a punitive interest rate. That way they could take a few days or weeks to liquidate assets as necessary.)

Keep in mind that USD or gold or whatever provides the unit of account here, but not the backing. The notes would be (and historically were) backed by the whole balance sheet of the issuing banks. Scottish banks typically financed themselves with about 2/3 debt (bonds and deposits) and 1/3 equity. That's a rather thick equity cushion by today's standards, but it's what customers demanded.

About crypto: if you really wanted to, Amazon could also denominate their notes in bitcoin. I don't think that's necessarily a good idea. (But I do think that _if_ bitcoin or crypto is going to ever become the underpinning of the global financial system, it will have to look a bit like what I just described.)

The original pitch was "why does the government have to be involved in currency". You're proposing a hypothetical world where Amazon is a fractional reserve bank, but seemingly subject to no regulations that make it a fractional reserve bank -- because otherwise we're bank in the world where it's operating more or less as a government, except no longer even indirectly accountable to voters -- but also presumably there still exists a state that's regulating Amazon's balance sheet to enforce the trust of the balance sheet. So it still boils down to that the state's monopoly on the use of force is what guarantees the balance sheet is what guarantees the currency.

In some bizarre ancap reality where there are multi-trillion dollar rug pulls because there's no stock regulation and every company uses their stock to leverage themselves into an unregulated fractional reserve bank and we also have some other third party non-governmental market maker scrip converting institution that tells you how many BezosBucks to a YahooYuan, then yes, I guess you have a world where no state is backing the currency. I would argue that the institutions that govern this process would still become quasi-sovereign.

I don't really accept the Scottish retail bank note system as being non-state backed. For at least the last 200 years there has been some kind of regulatory linkage between the apparent retail bank note and the backing of a sovereign state. I can't speak to the deeper history here, but whether or not there exists song legal- or regulatory- jiu-jitsu, at some point somewhere down the stack a government is guaranteeing it.

> The original pitch was "why does the government have to be involved in currency". You're proposing a hypothetical world where Amazon is a fractional reserve bank, but seemingly subject to no regulations that make it a fractional reserve bank -- because otherwise we're bank in the world where it's operating more or less as a government, except no longer even indirectly accountable to voters -- but also presumably there still exists a state that's regulating Amazon's balance sheet to enforce the trust of the balance sheet. So it still boils down to that the state's monopoly on the use of force is what guarantees the balance sheet is what guarantees the currency.

No regulation, apart from standard contract law.

Just like, eg, a shoe factory by and large doesn't have special shoe regulation. And we don't say that the government is particularly involved in producing shoes.

I am not arguing against any taint of government at all here. Just that government need be involved no more than in the production of shoes or any other widget.

Why does Amazon need to be subject to voters? They are subject to control by shareholders and the whim of consumers.

The Scottish banking system of the 19th century was close to what I describe. The current Scottish system ain't. (Similar for the Canadian system.)

Governments were emphatically not backing these. That's part of why they worked: customers and business partners were incentivized to keep an eye on their bank's balance sheet.

I don't get your argument about the (quasi) sovereignty? Amazon already issues gift cards today, and what I describe could evolve gradually from there (with some loosening of regulations) without Amazon acquiring anything like sovereignty in the process.

See also how mobile phone service providers got into financial services in many poor countries. That development was at first completely unplanned by the companies and driven by customers trading airtime vouchers (or rather the codes on them) as if they were money. Later on the companies added the ability to transfer balances.

No sovereignty involved; unless you have a very expansive definition of that concept?

> In some bizarre ancap reality where there are multi-trillion dollar rug pulls because there's no stock regulation and every company uses their stock to leverage themselves into an unregulated fractional reserve bank and we also have some other third party non-governmental market maker scrip converting institution that tells you how many BezosBucks to a YahooYuan, then yes, I guess you have a world where no state is backing the currency. I would argue that the institutions that govern this process would still become quasi-sovereign.

I'm not sure how you do rug pulls in this setting? There's still normal contract liability; and Amazon would contractually promise to redeem their notes in a base unit that Amazon doesn't control.

(You can also have pure fiat systems, were Amazon backs are not redeemable in anything else. But historically, customers only accepted private notes redeemable in some outside money.)

As an aside: in practice these sort of systems also work without a government enforcing things. See https://en.wikipedia.org/wiki/Hawala for an example of similar systems. (But let's not discuss that too much; I only wanted to make the weaker claim that money-printing doesn't need special regulation, and can be treated like any other general industry.)

Well, we tried that, and it has its own problems too.

However, in practice, the monopoly on violence ends up implying a desire for the monopoly on money. Drawing that out would take more than an HN comment, but I don't think it's too shocking a thesis.

Who's we?

Canada and Scotland did really well with privately issued money.

(The US did well enough, but not as well as them. Mostly because of inane regulations in the US. Like bans on branch banking and forcing banks to buy government bonds.)

See eg https://www.alt-m.org/2015/07/29/there-was-no-place-like-can... for some background.

> However, in practice, the monopoly on violence ends up implying a desire for the monopoly on money.

Not sure. Plenty of countries use money they don't control. See https://en.wikipedia.org/wiki/Currency_substitution for some examples.

Yeah, a big thing that makes gold messy is that you can have massive supply shocks. Asteroid mining in the next few centuries are likely to make that worse.

Gold being poorly divisible also makes it very impractical for day to day coinage of a growing population. Eventually, the coins start getting so tiny as to be impossible to work with. I believe that's a big reason why we started using silver and copper for smaller denominations at some point.

I would bet the asteroid mining supply shock is going to happen this century, I would not be surprised if it happened before 2040.

It doesn't even have to be asteroid mining. Simply more investment in digging out reserves in countries that have gold to be mine could create imbalances. Those reserves could be in countries that we are in conflict with (e.g. Russia, perhaps China), creating issues in power dynamics (do we want to give Putin and Xi a seat at the table in dictating US monetary policy?).

Well, going on the gold standard would also make Australia much more important, so it isn't all that bad.

An increasing population wouldn’t need more gold, gold (and money backed by it) would just become more valuable, right? Or, in other words, prices would drop and there would be deflation, for better or for worse.

Which means people need to work harder for every hamburger or the like and a deflationary spiral could occur which is even more terrible than an inflationary one.

I think the parent was referring to ‘to keep the commodity/cash stable’

Why would people need to work harder for each hamburger?

The relative prices of hamburgers to labour don't need to be impacted by the price of gold, or do they?

What do you mean by deflationary spiral? A decrease in price level during a recession is bad news indeed; but a decrease in prices in some sector due to productivity growth is great for business. Just look at falling prices of electronics in the last few decades.

If ‘currency’ becomes more valuable every year (deflation), people try to save as much as they can and reduce spending as much as they can to compensate for it in advance. So people would get paycuts every year instead of raises, and the ‘better employers’ would just cut less than everyone else.

The hamburger shack would also have layoffs regularly, as every time the expectation for how fast the ‘currency’ got valuable increases, everyone would cut back on non-essential (or even essential) spending to save more. And burgers are generally not seen as truly essentially/someone would die from not having it.

Especially since in a deflationary spiral, ideally you’d literally not spend ANY of the currency, since any that you save now would be worth far more the more you delay it. Folks would rather grow food in their back yard than go to the grocery store so they’d be rich in a year.

This is in contrast to a inflationary spiral, where the incentive is to spend all money as soon as you get it, so the value of it doesn’t have time to decrease and prices increase before you do.

What you are describing as a 'deflationary spiral' is a collapse of nominal demand. Or, equivalent, of nominal GDP. Nominal GDP unexpectedly dropping is indeed bad news.

However, it's perfectly feasible to eg stabilize nominal GDP at some desired level. Productivity increases would then lead to a drop in the price level; without any of that spiral you describe.

That's similar to the productivity increases we have seen in eg the electronics industry over the last few decades, which lead to dropping prices for electronics.

George Selgin wrote a lot about this topic. See eg https://www.mercatus.org/bridge/podcasts/05232016/george-sel...

I think you could just lower the exchange rate for how much gold the central bank will give for dollars then print more money. This devalues the currency, but that's precisely what you want in the case you gave.

This is likely to lead to a run on the bank as everybody rushes to exchange their money for gold. Eventually the peg collapses and we are back to non-exchangeable currency. Gold standard only works as long as everybody believes that the exchange rate will not change.

> […] prices would drop and there would be deflation, for better or for worse.

I have yet to see an historical example of "good" deflation:

* https://en.wikipedia.org/wiki/Deflation#Deflationary_spiral

I think most of the poorer people would be happy with deflation right now. Between housing and fuel inflation hasn't been kind to people either.

A lot of poorer people have debts, which would be made worse by deflation. Even the not-poor people who have mortgages are helped by inflation.

those poorer people imagines, incorrectly, that their jobs would remain when deflation happens.

Uncontrolled deflation would be linked with growth and wealth concentration would be a serious problem with corresponding unwillingness to purchase anything.

need is of course a complicated word

When I first read up on economics, I had similar doubts about the gold standards.

It doesn't help that most modern day advocators of a gold standard have but a dim understanding of history and economics.

So, first: if the population in one country goes up, they can import more gold from elsewhere. It's a commodity after all.

Similar for one country digging up a lot of gold.

(The global economy wasn't quite as integrated back when Spain had their windfall from the new world. But even then, the long term impact on the price level in Spain compared to the rest of the world was rather modest compared to levels of inflation we see today.

Spain just imported more goods and services from the rest of Europe for a while than they exported; naturally losing gold in the process.)

So the real concern is about global population vs global gold stocks.

Similarly for economic growth: productivity increases under a gold standard lead to decrease in nominal prices. See https://news.ycombinator.com/item?id=26386115 for how this works (and worked in history).

The more important problem isn't so much population changes or economic growth; it's changes in demand for money balances!

Depending on the state of the economy, people want to hold on to different amounts of money vs other assets. That's true not only in nominal terms, but also in inflation adjusted real terms.

Those swings can be wild.

A central bank can print money (or take money out of circulation) to adapt to those swings in the desire for money balances. Look at the various measures of amount of money, like M1 or M2, change over time. Eg M2 for the US at https://fred.stlouisfed.org/graph/?g=MSEz

It is entirely fair and accurate to say that this would a disaster for an economy trying to run on gold coins.

Luckily, we have and had the technology to make the gold standard work: fractional reserve banking and privately issued bank notes. See https://www.alt-m.org/2015/07/29/there-was-no-place-like-can... for how that worked fabulously in Canada, and why it worked so much worse in the US.

> So, first: if the population in one country goes up, they can import more gold from elsewhere. It's a commodity after all.

Unless governments ban the exporting of gold, which has historical precedent.

It is possible to run out of gold on which to run an economy. We know this because it has happened:

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

For a good history of the topic see The Power of Gold: The History of an Obsession by Bernstein:

* https://www.goodreads.com/book/show/249245.The_Power_of_Gold

We've used/tried gold and the world has moved on for good reason. There's no reason to regress (unless you want to relearn the painful lessons of the past).

> Luckily, we have and had the technology to make the gold standard work: fractional reserve banking and privately issued bank notes.

It's interesting that you bring up fractional reserve banking and Canada in the same paragraph, as Canada hasn't had reserve requirements for about thirty years now:

* https://en.wikipedia.org/wiki/Reserve_requirement#Canada

> It's interesting that you bring up fractional reserve banking and Canada in the same paragraph, as Canada hasn't had reserve requirements for about thirty years now:

Yes, exactly! In the heyday of Canada's gold standard and privately issued notes, they didn't have a reserve requirement either. Minimum reserve requirements are bad for the financial system!

(Sorry, not enough time to respond to the rest. Have a look at George Sergin's work, if you are interested.

The reasons that countries moved off the gold standard were mostly bad, actually. However, I don't think it's realistic these days to move back onto a gold standard.)

The worlds population has quadrupled in 100 years, you can't say that "they can import from elsewhere" or each country can just dig it up. What happens if you live in a country where you can't just dig it up and people are poor.

Sorry, I wrote 'So the real concern is about global population vs global gold stocks.', but I never addressed that.

So for your first question: there was lots of global population increase during the time when many countries where on a gold standard. We can have a look at how they dealt with it.

Basically, in the long run you can dig gold out of the ground. If gold prices get too high, more mines will become profitable, so people mine more. If gold prices drop, fewer gold will be mined.

Empirically in the long run the price of gold compared to eg the price of labour had been really rather stable in the past.

It helps that the global population and the global stock of gold typically change much slower than individual countries'.

> What happens if you live in a country where you can't just dig it up and people are poor.

Almost by definition a poor country has less economic activity. So they would need less gold.

Instead of me writing a lot of hypotheticals here, have a look at how 'dollarisation' works in the real world. That's when countries abandon their own currency (either officially or de facto) and run their economy on eg the USD or the Euro or so.

See https://en.wikipedia.org/wiki/Currency_substitution

That happens mostly with poor countries, and just like they can't dig up gold in our example, they can't print new USD either. They have to get their hands on them via exporting more than they are importing. (Or in the short run they can also take out loans; but those need to be serviced eventually.)

How does the greater number of nations (and therefore currencies) affect things?

For example, when Sudan splits in half, there are now two currencies that need gold reserves.

Presumably they'd need only roughly half the amount each?

> For a good portion of the time that the Bretton Woods system actually operated, the head of that Treasury division was Paul Volcker (yep, THAT Paul Volcker!)

Bretton Woods operated from 1945 to 1971. Paul Volker served as the under secretary of the Treasury for international monetary affairs from 1969 to 1974. What am I missing here?

The fact that gold reserves are still a very common feature in almost every country indicates to me that our governments aren't completely committed or secure in this grand experiment of unbacked fiat currency that's been going on for 50 years.

https://tradingeconomics.com/country-list/gold-reserves

And since the 2008 financial crisis and recent events with Russia, it seems like that uncertainty might be justified.

I'm surprised by Canadians having 0% Gold according to that, when they actually mint one of the most popular bullions: https://en.wikipedia.org/wiki/Canadian_Gold_Maple_Leaf

Canada is definitely the odd exception. I don't know what's going on there.

Gold makes up a tiny fraction of the total reserves.

A little less than 10% in the US, https://www.federalreserve.gov/data/intlsumm/current.htm

edit; wait no. This table is valuing gold at only $42 an ounce, not the open market value of $2000 an ounce. Based on actually market value, the US gold reserves is double the value than all other currency reserves.

why are they not updating the value?

I found this - https://www.bullionstar.com/blogs/jp-koning/golds-official-p.... The whole article is worth a read, this is the important bit -

“And that is probably why the U.S.’s statutory price of gold stays fixed at a decades-old level of $42.22. The consensus that independent central banking is a good thing (because it keeps a lid on inflation) dictates that the Fed have plenty of ammo. If the official gold price stays at $42.22, the Fed can lay claim to the full 261,498,927 ounces held by the Treasury. If the price is increased, the Fed gets only a sliver of that, the Treasury laying claim to the rest. And with fewer resources, the Fed’s has less control over the purchasing power of currency.”

And it’s reasons like this that the Fed is so distrusted.

The should just openly admit to the general public that dollars are backed by an excel sheet that can be changed at anytime.

It's not so much about 'ammunition': for that it doesn't matter how the central bank accounts for their gold.

The archaic official value of gold is just a political left-over from when the US was part of the Bretton Woods system, and no politician has found it advantageous to change that relict.

Just like we are still labouring under lots of other old regulations. Like taking our shoes off at the airport.

It looks like an archaic reason, https://www.bullionstar.com/blogs/jp-koning/golds-official-p...

tldr; the Fed owns gold certificates which give it a claim on a $11 billion worth of gold held by the US Treasury. They don't have a claim on a number of ounces of gold, so the US hasn't changed the convertibility value of gold certificates of $42.22 set in 1973 so that the Fed's claim on an absolute mass of gold remains unchanged.

It still doesn't quite make sense to me, because if the official value matched the market value, the Fed would still have the same claim to their book value of gold. It makes me think that something else is going on that's intentionally obscured.

Fiat currency is a deal between the government & the people. Gold reserves seem to me like stakes between governments.

In other words, if my government holds a bunch of gold, your government will take my fiat currency more seriously.

The total value of all currency right now is far higher than the value of all the gold - if there was some sort of rush back to gold the price increase would be tremendous

Not necessarily. Fractional reserve banking works and worked just fine; now and back on a gold standard.

No need to have one unit of gold for each unit of currency. You just need to redeem them on demand.

Yes, the thing that ended was pegging currencies to specific amounts of gold. Central banks / nations still hold large supplies of assets to "back" their currencies. It is just quite a lot more efficient to be able to manage the money supply.

Well, let's start with commodities. They have value, see, and that value contains both the exchange value (what it's worth in exchange for another commodity) and the use value (the value it provides as a commodity, like a coat keeping you warm.)

But exchange value of commodity to commodity is a pain, so inevitably people tend to turn to a commodity that can be the "money commodity". A universal store of value, in this case gold.

Then exchange becomes commodity -> money -> commodity. Gold becomes the interface between commodity exchange.

But, over enough time something else happens. Hoarding, luck, and gains in the money form mean someone now has enough spare gold to skip straight to money -> commodity, which then can be sold for more money when prices fluctuate.

Now you have two flows: commodity -> money -> commodity and money -> commodity -> more money.

The first one uses gold as a means of smoothing the interface between commodity transactions, the second, however, makes increasing the store of gold the goal. But that surplus gold doesn't come from just anywhere. It's not just ethereal excess, it needs to come from either the raw material value or the labor that was used to produce the commodity. While rarely, surplus value comes from making a commodity cheaper, the bulk of the excess gold in a money -> commodity -> money transaction comes from extracting value from labor.

> Well, let's start with commodities. They have value, see, and that value contains both the exchange value and the use value

Worth remembering also, that what you call "exchange value" is essentially a derivative of what you call "use value". I can use (eat) a side of beef. I cannot eat 50 sides of beef before it spoils. To get any value at all our of the other 49 sides of beef I have to find a market (49 other people who want to eat beef) and exchange it for something else. If there is no "use value" though, there's no market. Exchange value (prices) will change based on market conditions, but use value only changes with occasional technological innovation (freezers to freeze your beef, new industrial or chemical uses for gold, etc).

This is where fiat currencies come in. Fiat currencies like the US$ have a "use value", and that use is legally settling debts (being legal tender[0]), and paying my taxes (which actually are debts).

In any case, I think the extreme gold bugs who see fiat currencies all collapsing and gold going to the moon really over-estimate the market demand for gold in any scenario where shit hits the fan that bad. I mean, one way or another, whatever Government is in power is going to want to eat 25-50% of your income in taxes, regardless of what currency you use.

[0] Many people also misunderstand what "legal tender" means. The Bank of England has a good explanation of this: https://www.bankofengland.co.uk/knowledgebank/what-is-legal-...

Even in a world where the only model is commodity -> gold/money -> commodity, there will be people who will hoard a commodity to sell it when the demand is high. So, hoarding and making profits is a human nature, that just cannot be avoided.

The desire to do that is human, sure, but we can build systems to limit its impact.

We could have a negative interest rate, tax wealth rather than income, etc etc. People going to try to hoard, but you can add friction to make that harder.

That is popular thinking right now but exactly the opposite of what makes economic sense.

Taxing income is counterproductive - an economy should reward, not penalize, the creation of value, whether that is individually or in groups/companies.

But taxing wealth is even worse - savings and investment are what generates higher rates of productivity.

By far the best thing to tax is consumption. But it will always be unpopular because it just seems unfair since people must consume to survive. But it's the only truly fair tax, since it actually makes taking from the world more expensive, rather than making contributing to the world less valuable/profitable.

Services are 77% of US GDP, and you cannot "hoard" services.

You can hoard services coupons aka money. Just think about being the guy on the other side. One guy accumulates 50 years of burger flipping and you are 60 years old and now owe someone 50 years of burger flipping. That money is effectively worthless its value will be reduced by inflation and no the government didn't steal 40 years of burger flipping. The simple act of 40 years of aging did that.

In case you missed it, I was using the example from the parent comment to elucidate the deep-rooted nature of the problem of hoarding.

> , the bulk of the excess gold in a money -> commodity -> money transaction comes from extracting value from labor

Huh? Thats just speculation, why would gains come from labor? Would losses go to labor? I dont see a connection.

That's a fair question, my comment was getting long in the tooth.

So, let's take a commodity like a wool blanket (or some other simple commodity to illustrative purposes). That blanket has more value than the wool that made it, but where did that come from?

When the wool becomes a blanket and gains value, it does so because someone put the labor into converting the wool to a blanket. So the generic function here is commodity + labor = higher value commodity.

This goes all the way down. The wool comes from someone putting in labor to get it from the sheep. And it continues up, the blankets become part of hotels, bedding, other higher value commodities, etc.

More expensive commodities are more expensive because they need more labor to produce.

So a commodity is essentially a crystallization of labor value. It represents a complex chain of labor value multiplying other labor value.

So back to your question. CMC transactions are about using gold to compare labor value crystalized in commodities. I'm selling my blankets to an iron miner, but I don't need iron ore. But with a universal money commodity like gold I can go buy the commodities I do need.

The MCM transaction has you buy my blankets and sell them later for more than you paid me without adding labor. If the value has increased, but no additional labor has been done to it, it's still the same blanket I made. I can also sell my blankets at the higher current price, so what have you done except taken some value from me? Where else does the value come from?

I'm pretty sure the Marxists got that wrong. Most economic transactions hurt the consumer i.e. the person that spends most of his money on the daily necessities of life and other unavoidable expenses. Capital gains are paid by consumers to owners of capital.

I mean the consumer decides how much he is going to spend on a product and thereby sets an upper bound to how profitable a product can be.

Your boss uses external financing through debt and stocks must at least compete with the yields on bank accounts. The costs of capital are passed onto product prices as they aren't something that differs from company to company that much.

In the Good Old Bad Old Days...

The South African Rand Note had the words, "I promise to pay the bearer, on demand at Pretoria, one Rand" and had the facsimile of the signature of the Governor of the Reserve Bank at the time.

I don't know of anybody who made the trip to exchange one. But by the time I could read that and understand it... you wouldn't of got much gold!

I'm curious of which countries would be benefited by a gold standard today, and which countries would be hurt by it.

And also, with the way things work today as far as gold trade and keeping gold stock goes, which countries benefit the most?

Why some arguments for 'Gold money standard wouldn't work' do not make a lot of sense

1. 'Co-operation under anarchy is impossible to achieve'

The whole point of money is to get people with different motives to co-operate. It is a technology that allows people to produce, store and exchange value. This system does not require perfect coordination, it only has to be good enough and humans have built good enough systems of coordination based on gold many times over the course of history. Is there any good reason to think humans have lost this ability?

2. 'The specie-flow numbers are not perfect'

Neither are most financial models including discounted cash flow, interest rate models etc. They do bake in many assumptions and conditionals but that does not mean it cannot be used to build a system.

However, there is a point to be made about the fact that gold is not that useful in the modern world because of the invention of new alloys like stainless steel, improved metalworking technologies etc. Also, economic activity would be correlated with gold extraction if we move into a gold standard.

However, we already have economic activity correlated to commodity extraction when it comes to oil. Oil (and other forms of cheap energy) consumption are a direct predictor of the economic output of a nation and so far there are no substitutes for oil.

Technically speaking the world might be better served by an oil standard. Ideally, there could be a central bank that exchanges (standardized) oil for paper currency. The system could be kept honest as new currency is only issued when people supply oil to the reserves and currency is destroyed when it is redeemed from the reserves. This would mean that currency circulation and economic activity is proportional to oil extraction which is already roughly how modern economies work.

However, this will never happen since western countries have deadly militaries and they are not going to let middle east economies set their own agenda on the global stage.

Long term however, if we can get hydrogen as currency that might be best. I am not a chemist, but it might be possible to develop good electrolysis technology to store energy by splitting water into hydrogen and oxygen. Then burn hydrogen to generate power and release harmless water vapor. We could have a decentralized monetary system that could potentially benefit everyone.

I'm pretty sure the fatal flaw of a gold standard is that we are using something permanent to account for fleeting human "energy". People age but gold does not.

Question though, does Fort Knox gold still exist?

https://en.wikipedia.org/wiki/United_States_Bullion_Deposito... “… currently holds roughly 147 million troy ounces (4,580 metric tons) of gold bullion, over half of the Treasury's stored gold.”

> (4,580 metric tons)

Somehow I always forget the actual (as opposed to figurative) definition of metric ton: “unit of weight equal to 1,000 kilograms (2,205 lbs)”

So 4,580 metric tons is 4,580,000 kg (10,098,900 lbs.)

That’s… a decent amount of gold.

> gold bullion

Bullion: “uncoined gold or silver in bars or ingots.”

Random page that lists heavy objects: https://247wallst.com/special-report/2018/05/11/the-heaviest...

(Interestingly it includes a lot of objects related to the current Russian invasion of Ukraine, even though the article was written 4 years ago.)

Yes! “ 147.3 million ounces. About half of the Treasury’s stored gold (as well as valuables of other federal agencies) is kept at Fort Knox”

https://www.usmint.gov/about/mint-tours-facilities/fort-knox

6k tons of gold is held in Manhattan by the Federal Reserve: https://www.wsj.com/articles/the-fed-has-6-200-tons-of-gold-...

My understanding is that most of that gold isn't the US's, but other countries' gold that the US is holding for them (because securing tons of gold isn't easy).

“ because securing tons of gold isn't easy”

Why not?

People are surprisingly motivated to try to steal generalized stores of value that are untraceable? Especially when it’s worth a lot in even small quantities.

So everyone from guards to govts would love to get their hands on it.

6000 tons of gold is worth around 384 billion dollars.

If you’re able to topple governments, sure.

Interesting question to consider how they might make gold more traceable. They must dope it with traceable elements, yes?

Well, if you succeeded in stealing it, some gov’ts would definitely topple.

The real question is, has some of it been stolen already? Not like anyone would want to say if it has been.

heist movie music starts

yes, but then you could still mix it with enough untainted gold to have plausible deniability. Gold is like everting bitcoin wishes it were.

u cannot get your hand on enough gold to make it worth the criminal penalties. that stuff is heavy

What if you could sneak off with some every day with no one noticing?

The criminal penalties are heavy and the investment in countermeasures is extreme BECAUSE the motivation/enticement and payoff is high.

Hundreds of billions of dollars of gold would be a decent motivation to go to war.

If Manhattan fell to a foreign power in war, it wouldn't be such a bad bet to say that human extinction would be not far behind.

Ukraine's locally held bank reserves could possibly be lost to Russia in a matter of weeks.

Plenty of countries want to increase the faith in their local currency by storing reserves somewhere which would be among the last to be lost to war.

It's too dense. It will literally sink into the soft London bedrock. New York is lucky to have granite bedrock so they can stack the gold higher.

then spread it out? this does not seem like that hard of an engineering problem. store it in the desert or mountains where land is cheap and abundant.

> by 1944, the US held most of the world’s gold

What actually caused this? Countries buying US arms in the lead up to ww2?

I don't get what's so confusing about gold. It's limited because it was created by the universe and it can be easily stored. If we had some gold-backed system, a real one, then where's the inflation ? Where's the problem for the average person ?

> It's limited because it was created by the universe and it can be easily stored. If we had some gold-backed system, a real one, then where's the inflation ? Where's the problem for the average person ?

Being on the gold standard does not help with inflation specifically, or with monetary stability generally, as the historical record in the US shows; see the first chart:

* https://www.theatlantic.com/business/archive/2012/08/why-the...

* https://archive.ph/FWKcL

Further a monetary system based on fixed currency often leads make deflation a problem for the average person. Look at the history of the Great Depression: the longer a country stayed on the gold standard, the longer it's economy stalled. Countries who left the gold standard sooner started to recover sooner.

It's been used / tried and we've moved on for a reason:

* https://www.vox.com/2014/7/16/5900297/case-against-gold-stan...

> as the historical record in the US shows; see the first chart.

The Greeks didn't print money out of paper. But let's be us-centric and focus on a short span of history to keep your point.

> a monetary system based on fixed currency often leads make deflation a problem for the average person

Why is this a problem? The problems arise from rising prices not the contrary.

Yeah we've moved on for a reason : to print more "money".

After years in finance/economics, I've never heard a real argument against deflation. It all comes down to : trust me it's better. And that's why we use fiat currencies, "trust".

Deflation has lead to two world wars in Germany.

Remember the austrian school of economics? They thought all you have to do in a depression is do austerity and liquidationism.

At the beginning of the 20th century the Germans followed their advice strictly and made a third of its population redundant in the process. This happened twice and everyone knows how many world wars they started.

By the way, central banks don't print money and commercial banks usually lend out money because saving reduces the active money supply and lending replenishes the active money supply. What people refer to as printing money is actually people saving more money.

People complain about low or negative interest rates because they want to save but they are too stupid to notice that this increase in savings leads to an increase in the money supply. Maybe they aren't stupid maybe they are just evil?

>> a monetary system based on fixed currency often leads make deflation a problem for the average person

> Why is this a problem? The problems arise from rising prices not the contrary.

For one, moderate inflation reduces the burden of debt, which a good portion of people are in, e.g., mortgages, student loans. Deflation makes debt more burdensome. Further, The Haves are generally the ones lending money to the Have-Nots, and so deflation would make worse the effects of wealth inequality (which have hit levels last seen in the Gilded Age).

* https://en.wikipedia.org/wiki/Deflation#Effects

> Yeah we've moved on for a reason : to print more "money".

It allows for more flexibility for various economic conditions. See James and Bemanke for example:

> Deflation (and the constraints on central bank policy imposed by the gold standard) was an important cause of banking panics, which occurred in a number of countries in the early 1930s. As discussed for the case of the United States by Bernanke (1983), to the extent that bank panics interfere with nor- mal flows of credit, they may affect the performance of the real economy; indeed, it is possible that economic performance may be affected even without major panics, if the banking system is sufficiently weakened. Because severe banking panics are the form of financial crisis most easily identified empiri- cally, we will focus on their effects in this paper. However, we do not want to lose sight of a second potential effect of falling prices on the financial sector, which is "debt deflation" (Fisher 1933; Bernanke 1983; Bernanke and Gertler 1990). By increasing the real value of nominal debts and promoting insol- vency of borrowers, deflation creates an environment of financial distress in which the incentives of borrowers are distorted and in which it is difficult to extend new credit. Again, this provides a means by which falling prices can have real effects.

[…]

> Once the deflationary process had begun, central banks engaged in competitive deflation and a scramble for gold, hoping by raising cover ratios to protect their currencies against speculative attack. Attempts by any individual central bank to reflate were met by immediate gold outflows, which forced the central bank to raise its discount rate and deflate once again. According to Temin, even the United States, with its large gold reserves, faced this constraint. Thus Temin disagrees with the suggestion of Friedman and Schwartz (1963) that the Federal Reserve's failure to protect the U.S. money supply was due to misunderstanding of the problem or a lack of leadership; instead, he claims, given the commitment to the gold standard (and, presumably, the absence of effective central bank cooperation), the Fed had little choice but to let the banks fail and the money supply fall.

* http://www.nber.org/chapters/c11482

The sooner that countries got off the gold standard in the Great Depression the sooner they started to recover.

* https://en.wikipedia.org/wiki/Gold_standard#Causes_of_the_Gr...

For a history of the use of gold as currency see The Power of Gold: The History of an Obsession by Bernstein (the second edition has an introduction by Volcker):

* https://en.wikipedia.org/wiki/Peter_L._Bernstein

Economic activity can be hampered by the lack of money if there is only a fixed amount:

> Although there are instances in economic his- tory in which moderate deflation is accompanied by economic growth, deflation as extreme as in the 1930s is virtually always linked to falling output and employment. The literature suggests various mecha- nisms through which deflation may affect production and employment. Three in particular appear to have played a role in the Great Depression (see Bernanke and James, 1991; Bernanke, 1995):

* https://www.snb.ch/en/mmr/reference/quartbul_2003_2/source/q...

It is possible to literally run out of money and not be able to do business:

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

(Bernstein has a chapter on this.)

Austerity economic measures are associated with deflation (or at least deflationary tendencies) in the past as well:

* https://en.wikipedia.org/wiki/Austerity:_The_History_of_a_Da...

So we must trust that money printing is better, yet I have not seen any evidence of such a system being any better for average people than a gold-based system.

Do you mind explaining with an example what could potentially happen ? I don't see it. This is all I see :

1. Group A has tons of gold because it's the ultimate (physical) store of value. Group B has nothing.

2. Group B gets nano bits of gold in exchange for goods/labor.

3. Group A realizes the limits of their wealth.

4. Group A tries to convince group B of exchanging back their nano bits of gold for nano bits of paper + x%. They can also exchange their land and other assets for micro bits of paper + y%.

5. The system falls, everybody and nobody get blamed with no-one taking financial responsibility.

6. Group B ends up with tons of paper, zero assets and zero gold.

...

This has already happened several times and even though it's quite unlike in a modern economy, it looks like the world's historical evidence does not support the theory that this is any better for average people holding average nano bits of gold.

> So we must trust that money printing is better, yet I have not seen any evidence of such a system being any better for average people than a gold-based system.

Do you trust the historical record?

> What about economic growth? Again, the gold standard was associated with greater volatility, not less. The following chart plots annual growth as measured by gross national product (gross domestic product only came into common use in the 1991.) The pattern looks quite a bit like that of inflation: the standard deviation of economic growth during the gold-standard era was more than twice that of the period since 1973. And, despite the Great Recession, the past quarter century has been even more stable. To use another, simpler, measure, in the period from 1880 to 1933 there were 15 business cycles identified by the National Bureau of Economic Research. That is, on average there was a recession once every 3½ years. By contrast, since 1972, there have been 7 recessions; one every 6 years.

* https://www.moneyandbanking.com/commentary/2016/12/14/why-a-...

Do you trust economic historians (like Bernstein)? Have you read much economic history?

> 1. Group A has tons of gold because it's the ultimate (physical) store of value. Group B has nothing.

It is debatable whether gold (or sea shell or giant stones (like in Micronesia)) are a useful or "ultimate" stores of value given they're completely arbitrary and a social constructs. Pre-Columbian societies (e.g., Actecs) were quite fond of gold for jewelry, but were puzzled by the Spanish fetish for it. The Chinese used silver as money because gold was for ceremonial purposes; see Goldstein:

* https://www.goodreads.com/en/book/show/50358103-money

The Chinese used paper currency successfully for many years/decades until it was stopped because the Imperial Court wanted to exert more control over people.

> 6. Group B ends up with tons of paper, zero assets and zero gold.

So Group B has absolutely no possessions? No clothes? No consumer goods (computers, cars)? No homes?

The easy availability of credit allows for economic activity, and when folks gets "money" (however defined) for their labour, they can trade it for goods and services. A non-fixed money supply allows for greater monetary and fiscal flexibility so that people can prosper and be happy (which is the point of society; see Aristotle's Nicomachean Ethics).

What you want in life is not money (however defined) in itself, but the things money can get you; see Housel:

* https://www.goodreads.com/en/book/show/41881472-the-psycholo...

I would hazard to say that the modern monetary system has helped to create more material prosperity for more people than any other period of time. By allowing private banks (née central banks or governments) to create money on an as-needed basis it has allowed for more economic activity by more people to create wealth for a larger portion of the population:

* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1905625

All that even with the wealth equality levels being what they are (i.e., roughly the same as in the Gilded Age).

> Pre-Columbian societies (e.g., Actecs) were quite fond of gold for jewelry, but were puzzled by the Spanish fetish for it.

At the beginning, but later they realized what was going on. They first "traded" their gold for mirrors, a new technology to them. Once they learnt that gold could be easily created by humans they stopped and started to hide their gold. Eventually it became clear what they were there for : to steal their gold. It ended, of course, in a war.

They even got a saying out of it in Spanish : "El vivo vive del bobo". It's sad but empirically true.

Gold isn't confusing, it just doesn't work so great for the economy as money. Money is more complicated than just being a token that you can own.

Gold makes for a decent enough unit of account.

Money that's based on gold and redeemable into gold on demand worked fairly well in history.

(Do note, that different from using gold directly for all transactions. And also different from the interwar gold standard or Bretton Woods, were private individuals did not have the right to demand redemption.)

The amount of value exchanged in an economy changes over time, the value exchange between two separated economies trading with each other changes with trade imbalances. The inability to control this because you're pegged to the amount of gold available has significant consequences.

Growing populations and economy increases the demand for gold but there's not much that can be done to increase supply. You get deflation where people who already have money get progressively more spending power, not by investing but just by existing so there's a lot of idle capital, this trend increases hording further reducing available gold increasing deflation.

The average person would be faced with regular pay cuts to keep up with deflation and an extra source of volatility with no recourse for nations who would from time to time just go bankrupt and be overthrown because they run out of money to spend and have no out.

The average person is mortal.

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

I wish HN would ban twitter links.

Fun fact: France sent a warship to New York harbor in early August 1971 with instructions to bring back its gold from the New York Federal Reserve Bank. Guess how that ended up.

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