Punchinello's Chronicles

May 11, 2011

Gold Standard? Not So Much

Filed under: Word of the Day — Punchinello @ 5:40 pm
Tags: , , , , ,

Steve Forbes has come out with a statement suggesting that the US will likely go back to a gold standard. Several potential 2012 presidential candidates are also jumping on this bandwagon. I have to admit that not so long ago, I would have thought this was a great idea. But I’ve taken the time to learn a bit about economics, and I now understand that a gold standard would be foolish.

What’s money in the first place? Money is simply stored work and effort. It’s a symbolic “something” that’s easy to carry around and exchange in various ways. Paper money (cash) is easy to use between people for everyday transactions. Checks are useful to mail payments. Electronic transactions use digital numbers to represent whatever money is in a bank account. All in all, money is “something” that we can give to folks or get from folks, and use it to buy stuff.

We “get” money through some sort of work and effort. If we have no money, then we have to somehow figure out a way to get shelter from the weather, put clothing on our body, grow food, collect water and all the other basics of survival. The next step up is to grow or build enough surplus that we can trade our surplus for someone else’s surplus. Trading and barter make up a basic, primitive economy.

The problem with barter begins when we have a larger society, separated by geographic distance. The next immediate problem is when needs are separated in time. For example, if you mow someone’s lawn today, you might not want to immediately trade that service for a fried chicken dinner. So how do you store your lawn-mowing work until such time as you want the chicken dinner?

Another example would be that you want to trade your lawn-mowing service for a sweater made by someone 500 miles away. It’s not so easy, first because of your having to travel the distance to mow their lawn, and secondly because they might have someone closer at hand. Not to mention the travel involved to pick up the sweater. You want a way to assign your work to “something” that you can put in the mail.

Money is a way we can store our work and effort so that we can postpone an exchange. We can store up a lot of work in order to exchange that work for something more “expensive.” Maybe the knit sweater is worth 4 mowed lawns. How do you do that, unless you postpone getting the sweater until after you’ve mowed the person’s lawn four times.

A better way would be to mow four different people’s lawns in one afternoon, then trade all that work for one sweater. Now the problem is that you only mowed the sweater maker’s lawn one time. What about all that work you did for the three other people?

Throughout history, people have come up with a symbol of some sort that represents value. The value is work and effort. We might say that mowing one lawn is worth 1 pearl, 15 shells, 40 beads, 2 packs of cigarettes, 12 bullets, 2 rabbit pelts, or whatever else we want to make up. What matters is that EVERYone agrees on the basic symbol.

The problem with assigning a symbol is that we also have to work out some kind of formula that connects the symbol with work and effort. How many plastic beads will equal one mowed lawn?

Another problem is the exact specification of the symbol. What kind of plastic, in what colors, made under what sort of engineering specifications?

Finally, we have the problem of counterfeiting, where someone can make copies of the symbol we’re using for money, but there was NO work or effort behind the symbol.

Imagine if someone started manufacturing plastic beads by the truckload, and used them to buy real goods and services! This is what the Federal Reserve is doing, in cahoots with the US Treasury when they both print dollar bills that have no connection to gross domestic product (GDP).

The key here is the connection between a money symbol and the underlying, real-world goods and services. There must be a true connection between work and effort produced by real people, and the “something” the society is using for money.

Until I did some studying and learning, I thought that a good money symbol should also be limited in access and quantity. Gold, for example, is limited. There’s only a small supply of gold in the world, therefore it would be very hard to counterfeit. But there’s a fundamental problem with that concept!

  • What happens when there are more and more goods and services, and more and more work and effort, but there’s only a limited amount of gold?

It isn’t the symbol that matters. It’s who controls the symbol!

Back in 1913, the United States made a decision to use a Gold Standard for money. That simply means that the US assigned 35 pieces of paper to equal 1 ounce of gold. They called the pieces of paper “dollars.”

Now comes the major, major, really big problem: Who connects how many pieces of paper with how much work and effort?

There are two basic theories about how to assign work and effort to a monetary symbol. The one theory comes from John Maynard Keynes and gives us the Keynesian school of economic theory. The other theory is from Friedrich August Hayek, producing the Free-Market Capitalism school of economics.

Keynes tells us that a central authority, a government or state will determine how much symbol should equal how much work and effort. This has become known as “top down” economics, where someone at “the top” tells everyone else at “the bottom” how much money they can have for how much work and effort.

Free-market capitalism tells us that “the market” will determine how much symbol will equal what amount of goods and services. This “market” means every individual in the society, working on their own, in their own self interest, figuring out how much they’re each willing to exchange for whatever they want.

Hayek’s concept has become known as “bottom up” economics. The individuals at the bottom of the process each, individually determine prices and value, which eventually comes together to form statistical “market prices.”

When the US government made the determination that 35 dollar bills will equal 1 ounce of gold, that was a top down decision. When the State of Illinois government tells you that 1 hour of work and effort will equal $8.25 (eight and a quarter pieces of paper), that’s a top down decision.

Everything is still okay, as long as whomever at the top makes sure that the number of symbols (paper dollars) matches up with the amount of work and effort being produced by the entire society. In theory, the amount of money in circulation is supposed to match up with the total production of everyone in America’s work and effort. That total production is the gross domestic product — the GDP that you hear about all the time.

  • When money symbols can increase with the amount of goods and services, we have fiat money.

A gold standard would mean that “someone” would have to be in charge of storing all the gold somewhere. That gold would be the representation of real work and real effort. That “someone” would then issue pieces of paper (dollars) in an exact formula. Back in 1913, you could take 35 pieces of paper, go to “someone” and redeem the paper for 1 ounce of gold. The gold (in theory) was stored in Fort Knox.

What happens if that group or person who stores the gold is corrupt? What if they start printing more dollar bills then there actually is gold?

It’s no different than when a corrupt person or group prints more pieces of paper than there actually is real production!

It doesn’t matter if we use gold or we use yours and my work and effort to “back” the value of our dollars! Nobody cares, and it means nothing at all to the world economy! What matters is ONLY that the amount of symbolic money matches the real, underlying “stuff” the money symbolizes!

Bottom-up economics, as advocated by Hayek and the Chicago School of Economics is pretty simple. For each person’s work and effort, the servant government then produces “money.” Only after a product or service has been created does “someone” produce the money to match that real stuff!

  • Top-down economics allows whomever is in control to produce arbitrary amounts of money. In theory, that will therefore cause products and services to magically appear! (In the same way, producing more and more gasoline will cause new cars to magically appear.)

Every time you hear about “stimulus” and how QE1 or QE2 or QE-whatever will “grow job and stimulate the economy,” you’re hearing the fantasy of Keynesian economics. They believe that printing more money will somehow produce more real-world work and effort.

At the same time, more and more people are doing NO work, expending NO effort. Unemployment benefits, welfare, food stamps, and every other government benefit or entitlement program is producing yet MORE paper money without a connection to goods and services.

Going to a gold standard would do absolutely nothing! Zero, zilch, nada! In fact, what it would do would be to limit even more the free market determination of prices and value. What if you want to start a business and borrow some money for a machine? What if there isn’t enough available gold to generate the money for you to borrow? Then what?

The solution is NOT a gold standard! Instead, the solution is to get rid of the corruption taking place in the government and the banking system. People should be in jail by now! Remove the phony statistics from the Bureau of Labor & Statistics. They’re busy telling us how all the magic money pouring into the economy “matches” the GDP! It’s total hogwash designed for a single purpose: to give the super-rich more and more paper money.

We can use gold, silver, wooden sticks, or Kryptonite as the underlying basis of our money. It doesn’t matter! What matters is only who controls the supply of that underlying basis. When you and I, in a a free market, with only the most basic regulatory oversight systems — when we control the supply (and demand) of money, then we’ll have a solid economy!

Government should serve the people, not the other way around! And that service is to only print new money whenever new products, goods and services enter into the market. That’s it! That’s all she wrote! No more, no less, but a government BY the people, FOR the people, which SERVES the people.

Okay…that’s the end of my rant for now.


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