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.
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.
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.
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
Why would the government need to be involved in your currency at all (commodity based or otherwise)?
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.)
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.
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.)
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.
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.
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.
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.
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.
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.
Well, going on the gold standard would also make Australia much more important, so it isn't all that bad.
I think the parent was referring to ‘to keep the commodity/cash stable’
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.
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.
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...
need is of course a complicated word
I have yet to see an historical example of "good" deflation:
* https://en.wikipedia.org/wiki/Deflation#Deflationary_spiral
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 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.)
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:
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.)
For example, when Sudan splits in half, there are now two currencies that need gold reserves.