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Source link: http://archive.mises.org/14785/the-gold-standard-never-dies/

The Gold Standard Never Dies

November 29, 2010 by

Gold in the money survived all the way to Nixon, and it was he who finally drove the stake in once and for all. That was supposed to be the end of it, and the beginning of the glorious new age of paper prosperity. FULL ARTICLE by Lew Rockwell

{ 22 comments }

fundamentalist November 29, 2010 at 11:35 am

Gold will not solve the problems created by fractional reserve banking. But as Hayek warned, FRB is not going away; never will. What we need is Hayek’s fourth generation of monetary policy in which the central bank pays attention to the relative prices of capital and consumer goods and the effects of monetary policy on those prices. Focusing on changes to relative prices instead of long term price inflation will restrict monetary growth and help keep investors from being fooled by cheap money.

Craig November 29, 2010 at 7:01 pm

Gold will not solve the problems created by fractional reserve banking.

No, but it could solve the problem of central banks’ greatly exacerbating the problems created by fractional reserve banking.

lou November 29, 2010 at 1:24 pm

BRILLIANT!!

David November 29, 2010 at 1:45 pm

Was somebody blackmailing Greenspan? Gotta wonder what the price of gold would have be to correct FRB.

billwald November 29, 2010 at 2:02 pm

In the same sense, the cigarette standard never dies.

Patrick Barron November 29, 2010 at 4:12 pm

In my introductory class to Austrian economics at the U. of Iowa I always show a couple scenes from the movie Stalag 17, starring William Holden. In a German POW camp for American flyers the cigarette was the unit of exchange.

Patrick Barron November 29, 2010 at 4:09 pm

Wonderful essay! Lew said, ” But there is one thing they could let happen right away: free the market to create its own gold standard by permitting true innovation and choice in currency.” That won’t happen, because the reverse of Gresham’s Law would drive paper money out of existence. Who would accept something of absolutely no intrinsic value and which can be inflated to infinite amounts when one has access to a standard of lasting value; i.e., gold? No, the power of the state will do everything it can to prevent an alternative to paper money. It will stop only when paper money is worthless.

Bruce Koerber November 29, 2010 at 6:11 pm

Will Gold Slay The Keynesian Goliath?

It appears that many thoughtful persons see no need for and no sustainability in the current system – political and economic – that exists in these, the Dark Ages of economics. The corrupt and decaying system only shackles humankind, serves no useful purpose, is immoral and obsolete at best, and cannot much longer hold back the irrepressible tendency of an ever-advancing civilization. There is not an ounce of justice in this man-made and ego-driven system and so it is fit only for the dustbin.

There are some enduring elements that span across the Ages and the principal economic one is gold as the basis for the order brought about by a trustworthy medium of exchange.

What is the transition going to be like? Cataclysmic. Goliath didn’t slowly sit down and ponder. We’re talking about face first to the earth with full force!

Bennet Cecil November 29, 2010 at 7:34 pm

Voters will become more interested in a stable currency when inflation is 12% or higher annually. They will watch their life savings melt away. Boomers will retire with adequate financial assets only to watch the cost of living triple or worse. Fiat money favors the borrower and punishes the prudent.

Dave M November 29, 2010 at 8:04 pm

Fractional reserve banking is just about ready to implode now.

Ned Netterville November 30, 2010 at 12:14 am

IMHO, part of the reason for gold’s increase in price during the last decade from $300 to $1300 is that more and more people are using gold as money. Money has been defined as a store of value and a medium of exchange. The US dollar works pretty well as a medium of exchange, if you exchange it quickly, but as a store of value it is a leaky vessel. So a growing number of Americans are using dollars as their medium of exchange and gold as their store of value. They accomplish this balancing act by buying coins and/or gold ETFs with any dollars they acquire that aren’t needed for spending in the near future. The proliferation of bullion-gold coins and gold ETFs imply that this phenomenon is occurring. In effect, gold is reasserting itself among Americans, and, I suspect, in other fiat-currency areas (the rest of the world) as well.

Two problems currently inhibit more widespread use of gold as a store of value, and prevent it from usurping the dollar’s place as American’s medium of exchange of choice: One is the fact that gold in its most common form for such purposes–the one-ounce bullion coin–is too large for typical cash transactions, and the other is the spread between the buying and selling price of single coins, generally at least five percent. I expect some creative entrepreneurs will resolve both of these problems in due course if the government doesn’t prevent them from doing so.

bionic mosquito November 30, 2010 at 1:12 am

Respectfully, I think one problem prevents this transformation to gold, and that is legal tender laws and the unfavorable tax treatment of using gold as opposed to USD. Neither of your two problems would stand in the way absent this primary issue. One ounce coins present no problem – via computer and communications technology, infinitely small fractions can be traded and used to make payments and clear accounts. As to the spread, there is no spread if gold is money, just as there is no spread today when using USD.

Remove legal tender laws and the tax issue, and the transition will take care of itself. As Patrick Barron pointed out above, good money will eventually drive out bad.

Ned Netterville December 1, 2010 at 9:21 pm

Correct me if I’m wrong, but I thought, thanks to Ron Paul, that US gold coins are legal tender, and do not suffer unfavorable tax treatment as compared to USDs.

I’m a poor redneck from the hills of Tennessee where the booze is cheap, made locally, and free of taxes. Your solution doesn’t solve my problem concerning the large denomination of a one-ounce coin, ’cause I can’t walk into Walmart where I do all my shopping and pay with a 1300-dollar bill nor a one-ounce gold coin. I don’t trust computer or telecommunications technology with my cash money so I can’t use Victor’s (see below) or your solutions ’til I get me more edgukashun, but Walmart could solve my problem tomorrow by being more accommodating. Of course you’re right in identifying legal tender laws as the real culprit.

victor November 30, 2010 at 8:27 am

Problem solved by the market! Enter Goldmoney….

Purchase gold in fractional amounts of “Gold Grams.” Never used the payment system, but Goldmoney allows payments to be made in fractions of “Gold Grams” to merchants.

Basically, I have used GM as an insurance policy. As opposed to much greater counter-party risk of other fractional ownership schemes such as ETFs, mint certificates, and other derivative forms of ownership if the parties default, the gold may not be there; gold is owned in the account name down to .001 of a gram of gold.

The GM gold is stored, audited, and tested. The buying commission is/was 1.0 to 4.0% depending on the purchase amount. One receives spot rate prices on sale of the gold (1-way commission). The storage fees are approximately .15% or .19% per annum which seems like a bargain.

DIY ownership of gold coins and bars have security issues, assay costs, large storage fees, and a myriad of other issues that count against them in my opinion. Total frictional headwinds seems like 14% or more in costs.

I am not suggesting betting the farm on gold purchases. But consider the advice of buying conventional life insurance from AIG and every other insurance counter-party including Uncle Sam, and I think segregated gold ownership makes more sense.

mushindo November 30, 2010 at 2:32 am

“What was worth a buck in 1973 is worth only 20 cents today.”

there’s something wrong with this sentence. I think its the other way round. And the number is surely much bigger? Whatever was worth a buck in the 70s must be worth, oh, at least $10 today, probably much more depending on what it is. 20 cigarettes were about 35 cents in the 70s and they are well over $10 today, depending on how heavily states tax them…… A comparative of Dinner for Two at an average restaurant between 1975 and today would be an instructive indicator of th decline in the value of th ecurrency.

computers and electronic goods are much cheaper today tho’, if you consider how much more functionality they offer than they did then ( that Colour TV that cost a few weeks wages in 1975 would be hardly more than , er, dinner for two today), but thats all due to the market (powered by innovation and economies of scale), and DESPITE monetary inflation – and , most of that stuff didnt even exist in the 70′s. Imagine how much cheaper all that stuff would be if there was no monetary inflation!

Gil November 30, 2010 at 2:41 am

Cheaper? I’d imagine the real prices of all the stuff would be pretty much the same. Prices were lower decades ago but people were paid less in kind.

mushindo November 30, 2010 at 3:59 am

@ Gil

that wasnt my main point it was more of an aside, but look around you – A whole range of technological goods are way cheaper today than they were in the seventies – in real terms, and even in some cases, nominal. Here in SA, a basic pocket calculator can be had for about ten rand – sometimes they come free if you buy a pen – thats less than half a packet of cigarettes. My first calculator in 1976 ( A clunky Sharp which could even do square roots!) cost R16 at the time, which amount could then buy about 4 cartons ( forty packets) of cigarettes.

when I was a teenager, a new Japanese 50cc motorbike for me would have cost my father ( an average sort of bank manager) at least 2 months salary, and his middle-range car cost him a good year’s earnings. Today you can get a 125 cc motorbike ( Ok so its from China) for scarcely more than 2 weeks’ blue-collar wages. (Today Im also an average sort of bank manager much like my father was , and I could theoretically buy one with about 3 days ( after-tax) earnings). And my car ( a much higher-spec one than my Dad’s was, but still middle-range) cost me no more than 3 months work.

All that spells ‘much cheaper’ in my book. It starts to look very different when you consider the relative costs of things where the State is heavily involved – energy, education, municipal services, professional services. These things things are incalculably more expensive now – relative to earnings – than they were then. Id warrant that food has more or less remained the same in real terms, and more expensive in nominal.

victor November 30, 2010 at 9:44 am

I remember a time when a barn full of Rhodesian tobacco received a handsome price. Owners and managers could afford a new car per year. The Rhodesian dollar a bit stronger than “The Almighty Dollar” at the time. Farm hands, mostly blacks, had running water, and light at night, and were respected, but their cash salaries were about 10% to 20% of their white managers. Blacks and Asians did attend schools with whites, save the elite schools. I’ll never forget when I used the “K” word similar to the “N” here in the State, when I was 7 or 8, and my father set me straight with using that word, with thoughtful speech and a strong hand. Times were better for most everyone…

Now the farms don’t run any more because of nationalization. Basic social services have deteriorated for 30 years…epidemics. I’ve heard South Africans even “kaks” with Zimbabwe dollars as toilet tissue. And a much larger portion of Zimbabweans are sick and starving, as life expectancy has fallen. Enough said on a socialist failure, but life seems a whole lot cheaper these days in Salisbury/Harare.

Matthew Zietzke December 3, 2010 at 6:44 pm

Agreed, the original article would be showing deflation, not inflation…

Instead of…
“What was worth a buck in 1973 is worth only 20 cents today. Stated another way: a dime is worth 2 cents, a nickel is worth a penny, and a penny is worth … nothing at all.”

It should read something like…
“What cost 20 cents in 1973 costs a dollar today. Stated another way: a dime today is worth 2 cents from 1973, a nickel is worth a penny from 1973, and a penny is worth … nothing at all.”

Jay De Montalegre November 30, 2010 at 4:31 am

Great write up. Always clear and smooth. Easy to consume.

mushindo November 30, 2010 at 4:50 am

Incidentally, I attended a small workshop with Nourel Roubini about 3 weeks ago, in which he made an offhand comment to the effect that gold was a de-facto currency anyway!

Im afraid I wasn’t in a position to really get stuck into arguing with him, but after he made several references to ‘kicking the can down the road’, at the end I couldnt resist pointing out that that can has been kicked a long way already – like at least the last decade…..

Edward December 2, 2010 at 12:57 am

What I don’t get about you guys is this-GOLD IS STILL A GOVERNMENT STANDARD. This pro-gold mania truly astounds me, and I’m a Chicagoite libertarian What if the citizens don’t want to use gold/ What if they want silver instead? (the Crime of 1873, anyone?) And gold is no guarantee against inflation, Suppose we discover new gold stores, or better yet, a technology like a star trek atomic replicator that allows us to create gold at low cost atom by atom.
Folks, the issue is not gold vs paper, or silver, or “funny” money (Gah! how intellectually bereft is that word! After all money isnt funny, its neutral at least in the long run) The issue is legal tender laws that centralize monopolies of currency issuance versus endogenous free market currencies of the hayekian world, which i support

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