Assignment: Standards of Gold (Updated)

EconTalk is a weekly podcast in which Prof. Russ Roberts of George Mason University interviews various economists on a myriad of issues. A couple of weeks ago, he had Prof. Tyler Cowen also from GMU, and the co-author of Marginal Revolution – one of the more popular blogs of the econo-blogosphere. They were talking about the same thing we’re talking about in class: Monetary Policy.

The perma-link to the podcast is:
http://www.econtalk.org/archives/2008/03/cowen_on_moneta.html

For this assignment, I want you to listen to the podcast. Specifically, at around 44:15 or so, the conversation turns to the gold standard.

Because the currency value is not kept up with a regimented amount of gold, some argue that the whole thing is a house of cards. No backing. … Gold standard argument: some psychological. Some believe price level will be more stable and there would be fewer business cycles because the supply of gold is pretty stable. Slower to mine it than to print paper money. But look at the price of gold–it’s very volatile. On a gold standard, the price level would thus be volatile.

Listen to the entire conversation on the gold standard (not just the above excerpt). After that, write fifty words or so as a comment on this post, about what you think would be advantages and disadvantages of adopting a gold standard.

The link above will take you to the podcast, a transcript of the highlights and some interesting links. Feel free to research as many websites and articles as you want. This exercise is as much about getting you to think about the gold standard, as it is about motivating you to learn about it on your own.

Update A few details on this assignment:

  1. It’s worth two points because it’s outside of your curriculum.
  2. It’s due on Friday, April 18th (midnight-ish) Tuesday, April 22nd before class.
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58 comments for “Assignment: Standards of Gold (Updated)

  1. Michelle Bennett
    April 22, 2008 at 10:04 am

    Going back on the gold standard might seem like a good idea, but in reality it would be ridiculous. Fixing our money to a finite, controllable source would send us backwards into imperialism. In order to remain powerful we would resort to taking over the resources (read: GOLD) of other countries. China is the up and coming leader in gold mining and that would give them even more economic clout in the world.

  2. Lorena Rossel
    April 22, 2008 at 10:50 am

    Despite some potential advantages in terms of perceived stability, I believe that returning to a gold standard would be inherently problematic. First of all, gold prices are very volatile and that would create problems for the international monetary system. Moreover, I think that gold mining countries would have increased power in the control of world prices by controlling supply (similar to the way that OPEC countries control oil prices) and that could also be complicated. Returning to the gold standard would also decrease central banks’ ability to respond to crises, as changes in gold supply cannot be as easily manipulated.

  3. Antoinnae Comeaux
    April 22, 2008 at 10:58 am

    According to the podcast, ff we were on the gold standard, one significant “advantage” is that people would feel better about how their money is backed (by gold). For historical and psychological reasons, we as humans are conditioned to think that if something goes wrong (a war, crisis) then gold will still have a high value as opposed to our dollar that is mysteriously backed by faith that people will continue to accept it. Going back to the gold standard in a way confirms our distrust in the Fed’s system of the money supply. Also if we were on the gold standard, supposedly the price level would be more stable, and there would be fewer business cycles. Supply of gold is stable, but in terms of disadvantages, Price of gold is volatile, so would Price level too. The Price of gold is volatile because of speculation of other price levels (including the dollar) so maybe somehow that volatility would end if all prices are pegged to gold. but another disadvantage to the gold standard is the actual process of switching to it. We would not know what rate to peg gold to (and for some reason the podcast said we can’t use current market prices) and one wrong move could lead to serious inflation/deflation. All in all, the podcast said that as long our economy is relatively stable without 10+percent/year of inflation in the future, then there is no point in returning to the gold standard. It could work, but for me I worry about the deflation that occur in the transition process and while we’re on it. I don’t think we can easily allow people’s wages to go down and have the government say that their purchasing power is the same. We should stay off the gold standard, but also look for alternative ways so that the Fed is held more accountable and possibly find a more secure way to keep the economy running and growing.

  4. Esther Hsu
    April 22, 2008 at 11:02 am

    In the discussion between Russ Roberts and Tyler Cowen, the argument is made that a return to the Gold Standard would provide stability of currency as well as cutting down the number of business cycles. Because the quantity of gold is relatively stable, it is believed that prices backed by gold would therefore also be relatively stable.

    However, the price of gold, I believe is extremely volatile. The regulation of the amount of currency in circulation depends on a supply and demand model. Gold, however, unlike paper currency, cannot be regulated in that manner because it cannot be produced. Therefore, its more or less fixed amount allows less flexibility and thus less control on a government’s part to regulate.

    A reversion back to the Gold Standard would bind countries to a restrictive inefficient system of monetary regulation. Although, application of a gold standard may have made sense and worked in the 19th century, the effects of the Great Depression showed that it has become an outdated system. The move away from the Gold Standard was with good reason, and the current monetary systems are stable enough to work in tandem with modern economic conditions. A move back to the Gold Standard is unnecessary and might actually have more disadvantages than advantages.

  5. Caitlin Bigham
    April 22, 2008 at 11:03 am

    Russ Roberts and Tyler Cowen present an interesting conversation on the pros and cons of returning to a gold standard. Some believe that because the US currency is not backed by anything of value, such as gold, that we are constantly at risk of a financial collapse. However, the US economy has been very stable since the end of the gold standard, and stock prices have remained high. Despite this assurance, many still feel that our currency is a sham when not backed by gold.

    Those in favor of the gold standard argue that it would lead to stable price levels and fewer business cycles. They argue that stable price levels will occur because the supply of gold is fairly stable; it is not easy to dig large quantities of it out of the ground and we already have a pretty large quantity in existence. However, the price of gold is not stable, it is actually quite volatile. The price of gold in the past year, for example, has skyrocketed. Therefore, if the price of gold is volatile, price levels will also be volatile. The price of gold fluctuates in reaction to speculation of other price levels, such as the dollar. It is clear that a nation switching to the gold standard could be disastrous. If the entire world were to do so it could work, but if only the US decided to do so, it would put our economy in danger. Monetary transitions are hard on governments and the gold standard could easily result in erratic price levels. Even more, sudden inflation or deflation would immediately prove this experiment a failure.

    The conversation on the gold standard ends with Roberts and Cowen examining why gold is used as a hedge against crises, terrorist attacks, nuclear holocausts, etc. Why do people but so much economic faith in a substance that comes from the earth? They say it is mostly because of human psychology, and the belief that gold will maintain a certain level of wealth. However, this belief no longer applies today as much as it has in the past. People no longer feel economically secure by carrying around a pouch of gold. This I think adds to the above argument that a gold standard would not prove beneficial to our economy.

  6. Roberto Rivera
    April 22, 2008 at 11:09 am

    The discussion about returning to the gold standard between Professor Roberts and Professor Cowen both argue against returning to the gold standard for various reasons. While they describe that those in favor of returning to the gold standard cite price stability as one of their main arguments, Roberts and Cowen both discuss the fact that people have given gold an intrinsic value throughout history that in reality is quite subjective. The professors discuss how gold is often considered the hedge against global disasters and seen stable asset, yet one must consider how valuable is gold really going to be during a nuclear war or a pandemic? The argument against returning to the gold standard that I found to be most convincing was Professor Cowen’s argument that there is no NEED to convert to the gold standard at this time. Currently, we enjoy relative price stability, and a conversion to the gold standard would require us to address many unknowns; the largest unknown is what the value of a dollar would be in terms of gold. While, I’m certain a numerical value can be assigned to address this problem, how arbitrary will the value be, and why take such a risk when it is not necessary? Gold is not a magic metal that will alleviate the monetary problems of the world, and I believe that educated fiscal and monetary policy can go a long way in avoiding disasters, and mitigating risks.

  7. Josie Alvarez
    April 22, 2008 at 11:19 am

    Russ Roberts and Tyler Cowen present a number of arguments that enables us to think about the possibility of implementing a gold standard. This conversation essentially acknowledges that establishing a gold standard will not only bring more stable price levels and decrease business cycles, but also provide predictable measures within business frameworks and create trust in the currency. However, the reality is that the price of gold today is very volatile especially within international markets. This is true not only because of the numerous currencies we have worldwide, but also because it a raises an important question about the worth of our current money in comparison to the gold standard.

    History has shown us that times of trouble and crisis can happen regardless of anything. In the long run, and particularly in times of economic disparity, having a gold standard can make it harder to deal with money supply. This essentially has the power to affect international economies.

    The reality is that it would be incredibly difficult to implement this since we’ve moved so far way from it. Internationally we have so many currencies that in order for this to even be plausible, all currencies would have to change and that would be incredibly difficult. Sure, it can be argued that the euro is a great example of having multiple countries under the same currency, but there are still various European countries that do fall under the euro. Returning to a gold standard would be old-fashioned solution for modern situations that would not help in the long run. I agree with the comment, “if it isn’t broke, don’t fix it.”

  8. Margarett Ly
    April 22, 2008 at 11:31 am

    For the United States to switch to the gold standard now would be harmful for many reasons. As the podcast lecture pointed out, the price of gold is volatile and depends on speculation. The supply of gold also has to be mined compared to paper money which is just printed, and this can cause problems in inflation and available currency because gold is mined very slowly. Moreover, with globalization today and many of the United State’s companies are active in the global market, switching to the gold standard will cause problems because not all of the countries that do business with the U.S. or will do business with the U.S. in the future use the gold standard. The United States went off the gold standard in the 20th century partly because of OPEC and increases in the price of oil. With oil prices in the U.S. now skyrocketing , switching to the gold standard now may only exacerbate the problems that we had in the 1960s.

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