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Why doesn't a gold standard work?
Topic Started: Nov 14 2010, 08:23 AM (1,488 Views)
Quizly
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I just finished watching the fabulous "Secret of Oz" documentary on YouTube. Near the end, it touched briefly on the false solution of a gold standard:

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Under [our current] system, we can never get out of debt, it is just impossible.  Nor is gold-backed money the solution - that was THE most important symbol in the Wizard of Oz.  You think international manipulation is easy NOW?  Just wait until we return to a gold-money system!  As Thomas Edison told the New York times, "Gold and money are separate things, gold is the trick mechanism by which you can control money.  That is the root of all evil."  It's not WHAT backs our money, it's WHO controls its quantity.  That's what the wizard of oz was all about.  Big bankers were controlling the quantity of money - gold money. 


Several minutes later, the credits rolled and I was still curious about the details of why a gold standard doesn't work. My hopes in making this post is to attain a comprehensive understanding of everything that is wrong with returning to a gold standard.

- What examples from history can be cited as proof that having a currency on a gold standard is no more stable than the 100% fiat currency model we're living with today?

- What are the typical talking points that gold-standard advocates preach to persuade the move to a gold standard, and why is each point wrong?

- Are the alternate ideas of tying a currency to a commodity or basket of commodities (oil being chief among them) just as unstable as a gold standard would be? Why/why not?

- Ultimately, if the government does NOT see the light and conclude that it must issue it's own currency, are there any other solutions that would restore sovereignty to America?
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Bill Still
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Hmmmm, I'm not sure how you could sincerely ask some of these questions having just watched "The Secret of Oz", but oh well.

Gold puts control of the money supply squarely into the hands of the bankers and -- combined with getting the nation to borrow from them -- gives them sufficient political leverage to control the process -- rule by banks = plutocracy. This reverses humankind's 1,000 year struggle for freedom. Ask yourself, freedom from whom?

Remember, it's not what backs the money, it's WHO controls its quantity. So gold can be stable -- but stable for whom? That's what the Presidential election of 1896 was all about -- could the people break the back of the bankers and their gold-only money system and add silver to the money supply and thereby break the 30-year post-Civil War depression.

In any case, as a gold advocate, you are now in fine company -- the chief of the World Bank no less. Please read my short article on this board -- #6 down the list at this moment -- "World Bank Proposes Gold Backed Money Solution".

As to your 3rd question, that's a bit like homework. Research it yourself.

Your 4th: Why not tie the quantity to a basket of commodities? This has been proposed, but already the CPI is being massively distorted by the selection of commodities in the basket. Please see my recent article: "QE Explained in Cartoon". It's #4 down the list at this moment. The little character brilliantly asks:

"So why do they want to print money?
Because they say we have the deflation and the deflation is very bad.
What is the deflation?
The deflation is when the prices of the things go down.
But isn't that good. Doesn't it mean that the people can buy more of the stuff?
Yes, but the Fed says this is bad, especially during the recession.
So they think that during the recession, when the people have less money to buy the stuff, it is bad that the prices go down?
Yes, the Fed would rather have the inflation.
So why does the Fed think we have the deflation?
Because the CPI says so.
But aren't the food prices higher than a year ago?
Yes
Aren't the gas prices higher than a year ago?
Yes
.... health care?
Yes
.... tuition prices?
Yes
.... taxes?
Yes
.... subway fares?
Yes
.... stock prices?
Yes
.... bond prices?
Yes
So what is deflating right now?
The only thing deflating is the Fed's credibility? [Of course, that's not entirely true. The big one -- housing prices -- is still deflating. But it's still way cute.]
Do they have a lot of credibility to start with?
No.
Why not?
Because the Fed has been wrong about every major economic development in the last 20 years...."

Your 5th. There is only one other solution -- but it is partial at best -- that is to support state-owned, state-chartered banks for each state to snatch back at least some monetary sovereignty from the beast. This would be based on the Bank of North Dakota model. For sample, easy-to-read legislation, please see my article, "Virginia Legislation to Study Bank of North Dakota", one of the "Pinned" articles at the top of the main menu.
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LarryL
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Quote:
 
Quizly wrote:

"My hopes in making this post is to attain a comprehensive understanding of everything that is wrong with returning to a gold standard."


It is always encouraging to see people viewing "The Secret of Oz" and then asking relevant questions. Bill Still has responded with some answers and rather than duplicating his efforts; instead, if you don't mind, I will ask you three questions:

1. Why would we want to back our money with something that we don't have?

At best, and this is very doubtful, the U.S. might have 8,100 metric tonnes of gold in their vaults - and if there is that much; it is doubtful that we own it all. Even if we truly hold 8,100 tonnes it would quickly disappear as the interest alone on the national debt in 2009 was around $380 billion. At 1,350 / oz., that would come to close to 8,700 tonnes of gold in one year alone.

And, currently our money supply measured as M3 is around $8.7 trillion - how does one back $8.7 trillion with less than $350 billion in gold?

These are best case scenarios, as mentioned before, it is very unlikely that the U.S. owns anywhere near 8,100 tonnes of gold, for example:

Posted Image

<a href="http://minerals.usgs.gov/minerals/pubs/commodity/gold/mis-200902-gold.pdf">Source 2008 USGS</a>

Posted Image

<a href="http://minerals.usgs.gov/minerals/pubs/commodity/gold/mis-200802-gold.pdf">Source 2007 USGS</a>

If 5,000 metric tonnes were indeed sold off, that would leave us with at most, 3,100 tonnes of gold. If we go back to the gold standard, the economy would instantly collapse - UNLESS - we borrowed or rented someone else’s gold. Why would we want to rent our currency?

2. Why would we want to artificially limit our economic growth by the scarcity of gold?

Historically, the annual gold supply has been 400 tonnes/year which includes mining and recycled scrap gold. If the gold standard were implemented, global economic growth would be limited by the small amount of new gold.

3. What about our foreign held debt?

We owe foreign nations almost $4 trillion dollars. If we use gold money to repay this debt (at $1,350 oz) that would take over 92,000 tonnes of gold to repay. How much gold do you think exists worldwide?

In closing, I suggest that the gold standard is neither doable nor desirable. You will find lots of great alternatives through this forum.

Larry
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Quizly
Newbie
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Thanks Bill and Larry, I appreciate the effort you put into your response!

I have an answer for all of your questions too, Larry, and it is the same answer for all three :)

Reprice gold once.

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how does one back $8.7 trillion with less than $350 billion in gold


Divide the amount of currency by the amount of gold. Given your equation, that would raise the price of gold to ~$30,000/oz

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If the gold standard were implemented, global economic growth would be limited by the small amount of new gold


The repricing of gold will be more than sufficient to allow for global economic expansion.

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We owe foreign nations almost $4 trillion dollars.


Assuming we have 3100 tons of gold remaining as per your example, reprice gold to $90,000/oz, give up half your gold, pay off the national debt, and now your nation has a $4 trillion dollar surplus!

There is no doubt in my mind that responsibly-controlled, government-issued currency would be ideal. I just don't see how it can be done.

The world bank wants us back on a gold standard because the banks have all the gold, therefore they'll have all the power. I can't imagine NOT returning to some form of gold standard since Bill himself states in his documentary that congress isn't responsive to the people because politicians are only responsive to those with the power and right now the banks have the power.

So why not at least hold gold in the interim so that you can copy what the banks are doing, grab some of that power for yourself, and parlay it into the fight for sovereignty down the line?
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KillTheEmpire
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Real simple. Where's the gold and silver going to come from? Even if there were enough, the government would still have to borrow it from private entities. No doubt, the same entities robbing us blind now. Therefore, your right back where you started.
killtheempire.blogspot.com
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Oak
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I'd like to see what size the gold coin would be if I had to buy a loaf of bread with it and it was worth tens of thousands of dollars (or more) an ounce.

So we'd be back to the situation of trusting someone else to hold gold while we all walk about with paper money and promises.
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KillTheEmpire
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Oak
Nov 14 2010, 11:46 PM
I'd like to see what size the gold coin would be if I had to buy a loaf of bread with it and it was worth tens of thousands of dollars (or more) an ounce.

So we'd be back to the situation of trusting someone else to hold gold while we all walk about with paper money and promises.

Yep, the gold buggery is mere myth, and religion.

What people have to understand, to make a nation wealthy, prosperous, and happy, the real key is increasing the power of the human mind. All human progress depends upon it. The means of exchange only makes exchange more convenient. It cannot produce wealth. Only by increasing the intelligence of the human mind, can the human being be more productive, more creative, more able to discover, and understand physical principles in the universe.

Gold isn't God's wealth, YOU are!
killtheempire.blogspot.com
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gidge348
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Quizly
Nov 14 2010, 10:36 PM
I have an answer for all of your questions too, Larry, and it is the same answer for all three :)

Reprice gold once.

Quote:
 
how does one back $8.7 trillion with less than $350 billion in gold


Divide the amount of currency by the amount of gold. Given your equation, that would raise the price of gold to ~$30,000/oz

Assuming we have 3100 tons of gold remaining as per your example, reprice gold to $90,000/oz, give up half your gold, pay off the national debt, and now your nation has a $4 trillion dollar surplus!



Who holds all the gold at the moment......???? :ph43r:

If you reprice gold from $1350/oz to $90,000/oz (66666% increase over night) who is going to benefit the most.....???? :ph43r:

This will make previous gold cornering schemes look nickel & dime..... :o

Gold is just a pretty metal with no intrinsic values other than a few electronic products, jewellery etc. you can't eat it, can't drink it, it is too rare to do engineering with.

It's rarity and lack of any uses (ie does not get used up/destroyed) makes it fairly useful as a "Storage" of wealth but NOT a medium of currency there is just not enough of the stuff.
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Fremen
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I suppose you could say if people only accepted payment in gold and silver, then it would be in the peoples hands for with which to trade and prevent money from thin air. Which doesn't suit the banksters, which is why they don’t use it (gold and silver) for with people to trade person to person. And just as before a loaf of bread would be a few cents and the cost of a house about 50 silver dollars by weight and volume. A dollar is a
fixed weight of silver or gold. It was never to be debased; it was never to be any weight less than 371.25 grains of pure silver. With plenty to trade with as the cost of products would cost less. 371.25 grains (1.604 gms) of gold.

*Hence "any Thing but gold and silver Coin a Tender in Payment" But they left out some very important parts by intention in the con-stitution.

http://www.constitution.org/constit_.htm
"Section. 10. No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility."


One Pound Stirling silver was - 16oz/1lb (448gms) of silver = 1oz. (28gms) of gold in value.



But the banksters have all the gold and silver. And is not the only way.



Coinage Act of 1792 *"The Act also stipulated that "the director of the mint... be authorized to contract for and purchase a quantity of copper, not exceeding one hundred and fifty tons... to be coined at the mint into cents and half-cents... and be paid into the treasury of the United States, thence to issue into circulation." Furthermore, "no copper coins or pieces whatsoever except the said cents and half-cents, shall pass current as money, or shall be paid, or offered to be paid or received in payment for any debt, demand, claims, matter or thing whatsoever."

Eagles $10 247 4/8 grain (16.0 g) pure or 270 grain (17.5 g) standard gold
Half Eagles $5 123 6/8 grain (8.02 g) pure or 135 grain (8.75 g) standard gold
Quarter Eagles $2.50 61 7/8 grain (4.01 g) pure or 67 4/8 grain (4.37 g) standard gold
Dollars or Units $1 371 4/16 grain (24.1 g) pure or 416 grain (27.0 g) standard silver
Half Dollars $0.50 185 10/16 grain (12.0 g) pure or 208 grain (13.5 g) standard silver
Quarter Dollars $0.25 92 13/16 grain (6.01 g) pure or 104 grains (6.74 g) standard silver
Dismes $0.10 37 2/16 grain (2.41 g) pure or 41 3/5 grain (2.70 g) standard silver
Half Dismes $0.05 18 9/16 grain (1.20 g) pure or 20 4/5 grain (1.35 g) standard silver
Cents $0.01 11 pennyweights (17.1 g) of copper
Half Cents $0.005 5 1/2 pennyweights (8.55 g) of copper
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h20junkie
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Why doesn't a gold standard work?

Because paper money and money-numbers in computers will constantly be in threat of redemption for gold (at a fixed price).

I agree with Karl Denniger in that credit is what is needed today, not gold-backing:


http://market-ticker.org/akcs-www?post=172205

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•We can fix things with a gold standard. No we can't.  This idiocy showed up again in the NY Times this weekend.  The problem with such a standard is that it puts your monetary policy at the mercy of international raids.  The problem is credit creation, not monetary emission.  Note that a gold standard would not have stopped the Federal Government from running a $1.6 trillion deficit - yet that sort of "response" to excessive debt is exactly why we're in the mess now.  There are in fact lots of people who want a gold standard and most of them are big banking interests!  It's a trap - the issue is credit issuance, not monetary linkage.




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Fremen
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Why doesn't a gold standard work?

The gold standard was and is the subtitution of bullion (weight and volume silver, gold) for paper and such, one form of credit for example.

But the banksters have all the gold and silver. And is not the only way.


And credit is not necessarily debt, as it can be given and nothing asked in return for it. You could even be credited with bullion.
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gidge348
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Fremen
Nov 15 2010, 04:17 AM
And credit is not necessarily debt, as it can be given and nothing asked in return for it.

If something is given and nothing returned, that is not credit but a gift.

If something is given and INTEREST is returned but the principal never is....well that is serfdom.
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Fremen
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gidge348
Nov 15 2010, 05:33 AM
Fremen
Nov 15 2010, 04:17 AM
And credit is not necessarily debt, as it can be given and nothing asked in return for it.

If something is given and nothing returned, that is not credit but a gift.

If something is given and INTEREST is returned but the principal never is....well that is serfdom.



I could credit you with some advice, or credit you for your advice. Or credit you with money as a gift. Or you/ and any number of people, could be credited with credit to spend and trade with and all from thin air.
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LarryL
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I agree with many gold bugs; our money should be backed with some real value, if for no other reason other than to be disciplined in its creation. We all fear inflation (currency devaluation) because it steals from our savings.

That said; I would urge gold bugs to consider that there are lots of other ways to endow money with value. It should not be gold versus fiat - there are many alternatives. For example, Benjamin Franklin suggested that land was a better backing in his paper entitled "A Modest Enquiry into the Nature and Necessity of a Paper Currency.”

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First, Franklin points out that gold and silver are of no permanent value and so paper monies linked to or backed by gold and silver, as with bank paper money in Europe, are of no permanent value.  Everyone knew that over the previous 100 years the labor value of gold and silver had fallen because new discoveries had expanded supplies faster than demand.  The spot value of gold and silver could fluctuate just like that of any other commodity and could be acutely affected by unexpected trade disruptions.  Franklin observes in 1729 that “we [Pennsylvanians] have already parted with our silver and gold” in trade with England, and the difference between the value of paper money and that of silver is due to “the scarcity of the latter.”

Second, Franklin notes that land is a more certain and steady asset with which to back paper money.  For a given colony, its supply will not fluctuate with trade as much as gold and silver do, nor will its supply be subject to long-run expansion as New World gold and silver had been. Finally, and most important, land cannot be exported from the province as gold and silver can.  He then points out that Pennsylvania’s paper money will be backed by land; that is, it will be issued by the legislature through a loan office, and subjects will pledge their lands as collateral for loans of paper money.

Finally, Franklin argues that “coined land” or a properly run land bank will automatically stabilize the quantity of paper money issued — never too much and never too little to carry on the province’s internal trade.  If there is too little paper money, the barter cost of trade will be high, and people will borrow more money on their landed security to reap the gains of the lowered costs that result when money is used to make transactions.  A properly run land bank will never loan more paper money than the landed security available to back it, and so the value of paper money, through this limit on its quantity, will never fall below that of land.

If, by chance, too much paper money were issued relative to what was necessary to carry on internal trade such that the paper money started to lose its value, people would snap up this depreciated paper money to pay off their mortgaged lands in order to clear away the mortgage lender’s legal claims to the land.  So people could potentially sell the land to capture its real value.  This process of paying paper money back into the government would reduce the quantity of paper money in circulation and so return paper money’s value to its former level.

Automatic stabilization or a natural equilibrium of the amount of paper money within the province results from decentralized market competition within this monetary institutional setting.


The thing that most people do not understand, and I suggest it is intentionally avoided, is that every Federal Reserve note is backed by the people - private and public property of the U.S. We no longer issue allodial titles because the privately owned federal reserve may hold a lien on all property upon a national default.

We hold precious little gold as a nation; we cannot back our currency with something we don't have.

Another important point that seems to be forgotten, we are already owe over $60 trillion in private and public debt (not including unfunded liabilities). If we were to change to a gold backed system, there is not near enough gold on the planet to repay our debt yet alone run an economy.

There will be many who say that we need not worry, after all, the price of gold would skyrocket and that is true. But remember that our existing savings would be devalued by the same amount. For example, in 1934, the dollar was devalued by over 40% in one day when the price of gold was increased.

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KillTheEmpire wrote:

Real simple. Where's the gold and silver going to come from? Even if there were enough, the government would still have to borrow it from private entities. No doubt, the same entities robbing us blind now. Therefore, your right back where you started.


Great point!

Larry
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inflationtax
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Assume we are on a silver standard. You go to work washing windows and paid $1 silver dollar to wash all the windows of a house. In town it costs a quarter for a haircut. It costs a quarter for some meat. The amount of silver per person determines the price of everything. Since the supply of silver is constant, the value of your dollar stays the same. Not over days, but decades. One century later you can still buy the same amount of meat for that quarter.

Now we have the present system it is WWII and how earn $1. You keep that money at home. At that time you can buy some meat for $1. However 50 years later, you pick go to the store and pick up some meat. However, you only get 3% of the meat that you did 50 years ago.

Where did the other 97% of the money go? To the bankers to pay off their quantitative easing from the bad loans they made through the years. To let government and the banks control the money supply, you will always bail them out first. Where can the government get the money to pay for its deficits? TAXES!

Taxpayer money is spending bailing out banks via the revolving door government - wall street -fed complex. All these guys belong in jail, they don't need to be in control of the money.
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