2008-2-24 07:05:00
Larry quoting JJ from a previous post wrote:
"Because of the rigidity required of a strict gold standard no country is ever able to stay on it for an extended period of time. Whenever there is a crisis, especially where national survival is at stake, the orthodox gold standard will be abandoned."
Larry then wrote:
"The fact that sometimes a country must borrow money in a crisis in no way invalidates the principle of a metallic standard for money, for example, a gold standard."
JJ:
I didn't say anything about a gold standard as being invalid. You need to argue against what I do say, otherwise there is not much I can respond to here.
Larry:
"I do not accept your argument that the fact that a crisis may occur invalidates the sound economic principles of using a gold standard."
JJ:
Again, that is not my argument.
Larry:
"What it in fact illustrates is that things are never perfectly simple. Borrowing with an honest intent to pay off one's debts in the future is a normal facet of human endeavor. That is true if one is speaking of one's family finances, and it should be equally true for the finances of a country."
JJ:
Agreed.
Larry:
"Allowing government to finance its operations with nearly unlimited borrowing (via a fiat currency) during normal times when no crisis looms is like the family that goes on the 'Visa Standard' and borrows like there is no tomorrow, like the bill will never come."
JJ:
Agreed.
Larry:
"The requirement of a gold standard during normal times is simply a prudent restriction on government."
JJ:
Yes, it is a restriction until they decide by the stroke of a pen to change the rules. Historically, this always happens in a crisis. Any stable monetary plan must take this human weakness into account. Neither the current gold standard group or the current fiat people do this. Both are flawed.
Larry:
"The statistics have always sought a plausible ruse to justify their actions. Their typical argument, very much like yours, is to blur the distinction between normal and emergency situations, to assert that somehow the fact that one can't do 'business as usual' during an emergency somehow justifies using means suitable for an emergency all of the time."
JJ:
This is not like my argument. I do not support massive overspending in normal times and do not blur the distinction between normal and emergency situations.
Larry:
"Perhaps we should call it the 'Visa Standard' argument?"
JJ:
Do you not use a VISA then? VISAs used responsibly are a good thing. Some economists are saying that the reason the common people in the Middle East cannot get their economies off the ground even though they have the gift of many billions of oil dollars dumped in their laps is their religious refusal of loans and the lack of use of charge cards. Because the common people cannot get even the financing of a low level VISA they remain in abject poverty despite the wealth possessed by the few.
Larry quoting JJ wrote:
"If we would have went back on a gold standard during the war we would have lost it to Hitler who was also on a fiat system that was alarmingly successful."
Larry then writes:
"That is just another variation of the 'Visa Standard' argument. Hitler was certainly not responsible for the end of hyperinflation in Germany. That happened when Germany introduced a new currency in 1923, long before Hitler came to power."
JJ:
Why do you keep arguing with what I do not say? Neither I or any historian I know connects Hitler with ending hyperinflation. Hitler was not in power to deal with that problem in 1923. After the hyperinflation fiasco Germany used a combination of gold and fiat money to recover. The gold was borrowed from the United States, but when the crash came in 1929 we demanded the gold back and this caused a great depression in Germany also as well as paving the way for the rise of Hitler. The people were so dissatisfied with the system as it was that they acquiesced to putting Hitler in power.
When Hitler came to power in 1933 he was against using gold as a standard and issued fiat money, but a different fiat money than we have today under the control of the whims of the bankers. He issued fiat money that was not under the control of the bankers, but under control of the state and this turned out to be wildly successful - much more than any gold backed money in history. The little nation of Germany with few resources and scarce gold challenged the whole world and all its gold with fiat money backed by labor, divorced from the worlds bankers. He turned the German economy around in two years whereas our depression lasted for 10 years.
Think of it. How did a small country with only 80 million people challenge the entire world of billions with all their gold and orthodox money? They did it with fiat money. Hitler was evil but he was very smart and was cunning enough to issue the amount of money he saw necessary to create the growth he desired. And unlike the Communists 5 year plan he had a four year plan that created the products and services he wanted. He didn't throw enough money into the system to cause undue inflation and neither did he deny his citizens the money they needed to expand. He outsmarted all the bankers and politicians of the world and made enemies of all the bankers which sealed his doom. Ironically, this was one time in history where we can be glad the bankers won.
Larry:
"FDR [USA President Franklin D. Roosevelt] in the 1930s was acting to deal with an emergency. Many reputable economists believe that the crisis was in fact caused initially by government actions, and that FDR did many things that in fact made the crisis worse and tragically extended the crisis far longer than it needed to be."
JJ:
I agree with these economists.
Larry:
"[In the USA} The Great Depression is not an indictment of the gold standard. It is in indictment of criminally irresponsible government actions if one actually knows something of the facts."
JJ:
And these criminal acts follows gold like the plague. As long as there is gold in a vault somewhere there will surface those who will misuse it, seek to possess it, sell it or transfer it out of the vault leaving the trusting people holding the bag.
Larry quoting JJ writes:
"Three times our national survival was at stake and three times we were saved, not by gold, but by fiat money."
Larry then responds with:
"Three times the United States managed to survive by borrowing with the intention to repay their debt after the crisis."
JJ:
And each of these three times fiat money saved the day, not gold,
Larry again quoting JJ:
"A gold standard can work and control inflation in times of stability and modest growth, but we never have stability for long periods of time and in times of crisis the powers that be will go off the gold standard."
Larry then states:
"During the 19th century, during the height of the Industrial Revolution, the gold standard worked very, very well during times of far more than 'modest growth.'"
JJ:
Some of the greatest growth was do to Lincoln's fiat Greenbacks. The 19th century was far from smooth financially however. There were "Panics" in 1819, 1825, 1837, 1847, 1857, 1866, 1873, 1884, 1890, 1893 and 1896.
Several of these were comparable to The Great Depression in severity, but didn't last as long. The Panic of 1937 was particularly bad.
Larry:
"The 19th century, the era of the Industrial Revolution, was a time when money was primarily based on metallic standards, either gold or silver. The one reason that the stability was upset was due to government interference in the economy, principally through attempts to regulate credit and the money supply during non-war, non-emergency times. The stability was not upset due to any inherent deficiency on the gold standard."
JJ:
The same can be said of fiat money. Problems are not due to the fiat standard itself, but to interference and misuse.
Larry:
"If you read of the history the 19th century you will find that there were periodic monetary crises, periods of 'boom and bust,' and if you dig even deeper you will find that the 'smoking gun' was more often than not government attempts to interfere in the system."
JJ:
No argument here. Financial problems are always caused by government or bankers.
Larry:
"In fact, and contrary to what you said above, there is nothing in history that has proven more effective than free markets and a gold standard for guaranteeing economic productivity, stability, and the best interests of all."
JJ:
We both believe in free markets so that is not any part of the argument here.
Let's stick to where we disagree. You think the gold standard is the optimum for prosperity and I do not. It works moderately well in peaceful times when tried but when great expansion is needed or a crisis occurs it does not fill the need and governments move away from it. In the history of our country there has never been more than as few years at a time that the gold standard was able to work without some financial crisis surfacing. If it has not worked for more than a few years at time in the past why do you think it would work smoothly in the future?
Larry:
"Nothing will guarantee stability and prosperity regardless of circumstances, but nothing has proven more effective than a gold standard and free markets in providing optimal stability and growth."
JJ:
Unfortunately Hitler had a better idea and in a 12 year time period created the greatest challenge in the history of the world due to the success of his fiat money. When you figure there were only 80 million people and only a portion of them free this was an unequaled financial accomplishment. Nothing like Germany's production and expansion (in proportion to the population) was ever accomplished on the gold standard.
Larry quoting JJ writes:
"Then there is the natural tendency of government to overspend ..."
Larry then comments:
"This is precisely why a gold standard is needed during normal circumstances. It protects society from the imprudent actions of politicians more motivated with getting reelected than prudent financial policy."
JJ:
It didn't protect us from the Great Depression and then it did not stop FDR from overspending and manipulating the price of gold -- freezing it to an artificial price.
How humanity has handled itself in the past on the gold standard has to be taken into account when calculating what would happen if we returned to this standard.
Larry quoting JJ again writes:
"Even on a gold standard politicians and bankers will circulate illegal money or commit fraud."
Larry then responds with:
"Let's see, what is your argument here? Could it be that, 'Well there will always be criminals in government and business so we need a fiat money system to combat that?' Let's see, if someone circulates 'illegal money' then that is crime. What do we do with criminals when we catch them?
"How do you logically, and with a straight face, somehow claim that criminality somehow invalidates the need for a gold standard? That is ridiculous."
JJ:
Wow, you really misunderstand me here. I NEVER said that switching to the fiat system would suddenly make men honest. What I did say is that when a great surge in production is needed gold will not fit the bill because a large amount of gold can rarely be added to create the needed money. Because of this fact governments will go off the gold standard and will not adhere to it for more than a few years.
Larry quoting JJ:
"The main problem with gold as a standard for paper money was pointed out in the parable. That is it takes a tremendous amount of labor to mine and store it in vaults."
Larry then adds:
"Gold, regardless of whether or not it is used as currency, is a valuable commodity and people are going to mine it, and store it regardless. It is very valuable.
"I can't say that I was particularly impressed with this parable."
JJ:
It's too bad Hitler didn't see things the way you do. When he had no gold instead of creating a fiat money system he would have sent his Nazis mining for gold so they could create some money. Then by the time they would have had enough wealth to start a war Hitler would have been in the old folks home.
Yes, we will always mine for a certain amount of gold needed for various industries, but labor spent mining for gold to be placed in government vaults to back money is a waste that can be much better spent in sweeping streets if nothing else.
Larry quoting JJ:
"That said, I am not saying our current money is managed well for it is not."
Larry then responds with:
"At least you have enough common sense to know that it is broke, even if you really haven't got a clue on how to fix it."
JJ:
I know exactly how to fix it. I'll be writing about this in the future.
Larry quoting JJ:
"A new system needs to be created that will stabilize the money supply."
Larry then comments:
"I agree with you that a new system needs to be created. I suspect that a good one would look a lot like the gold standard, but would take into account reasonably prudent methods for dealing with emergencies.
"What we don't need, and have already tried, is the 'Visa Standard' where we buy what we want now while believing that somehow we can ultimately evade having to pay the bill."
JJ:
No one's talking about evading payment. So far I have only presented the basic principle in the parable. Most will see my plan is sound when I present it. Lincoln's greenbacks was on the right track where he issued money apart from the control of the bankers.
Susan also writes:
"From 1716 to 1945, OVER TWO HUNDRED YEARS, it took 4.15 British pounds to buy an ounce of gold. In New York from 1791 to 1932 gold fluctuated from $19.39 to $20.32 USD. Gold fluctuated from $20.32 to over $40.00 during the Civil War but self-corrected to $20.32 by 1879 and stayed at that price until 1932. Governments started messing around with the gold standard in 1913 and created the speculative bubble that led to the stock crash of 1929. How about those historical facts? Two hundred years of stability for England and 120 years for the new fledgling country of the United States."
JJ:
You do not determine the value of gold by the price set by governments. It is determined by the amount of goods and services an ounce will buy. During some of the "panics" of the 19th century you could buy much more with an ounce of gold, or $20.67, than you could in good times. In some of the gold rush areas a common laborer could make around $700 a day by today's money - just because there was a glut of gold.
Let me repeat, gold went from a low of 44.30 an ounce in 1972 to a high of $126.30 in 1973. The real purchasing power of gold more than doubled within one year. This is a statement of historical fact.
Since we have gone off an artificial price for gold we see that the amount of goods and services an ounce will buy has fluctuated over 300 percent. Sure, even at its worst gold is still valuable, but not nearly as valuable as when it is at a high point.
Susan:
"Giving me prices of gold after the government started interfering with the natural market has no bearing on this. Of course gold has fluctuated like crazy since fiat money has been in place."
JJ:
I'm talking about the real value of gold which is determined by the amount of goods and services it will buy. This is how we must judge its value.
Susan:
"The point is that gold is a luxury item that is valuable in and of itself. It is used for jewelry, ornamentation, teeth and all sorts of things. Fiat money has its costs, too, but the benefits go to the big bankers."
JJ:
Not if the government issues the money as Lincoln did. Then there is no interest to pay the banks and it avoids the debt such as we have now.
Susan:
"Did you miss my question at the end of my post? I will repeat it here in case you didn't see it. If my example of one hour of labor in my Chapter 2 of your parable is not what you are speaking about, then please explain how you use labor as a standard for a monetary supply? Do you base it on numbers of people in a country, or numbers of employable people (which could change drastically as social mores change). I mean if we are basing it on population, someone could nuke us, take out a large number of employable people and our money system is thrown in disarray. So what are the details of labor as a standard?"
JJ:
I guess I did miss it. I would approach it differently if I had to handle the current money system as opposed to creating a new one. If I were to create a new one then a dollar would be equal to the value of an average hour of labor. Right now, in the United States that is about $20. The number of people wouldn't have much bearing on the value of a dollar. I'm out of time right now but I will address this in more detail later on.
"They shall cast their silver in the streets, and their gold shall be removed: their silver and their gold shall not be able to deliver them in the day of the wrath of the LORD: they shall not satisfy their souls, neither fill their bowels: because it is the stumbling block of their iniquity." (Ezekiel 7:19)
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