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:
- It’s worth two points because it’s outside of your curriculum.
- It’s due on Friday, April 18th (midnight-ish) Tuesday, April 22nd before class.
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It is argued that there are two important benefits to adopting a gold standard. One is the stability that arises from having a currency fixed to gold, which leads to less vulnerability to shocks of the monetary system. Second is that there would be less business cycles due to the adoption of a gold standard. This logic is likely due to the relative success of the gold standard that existed during the 19th c. However, both of these arguments in favor of a gold standard do not hold up under close scrutiny.
Among the problems of a gold standard are the constraints that it imposes on a nation’s monetary and fiscal policy. It has been argued by reputable economists, such as Barry Eichengreen in Viewpoint: Understanding the Great Depression, that the Great Depression could have been avoided if the Federal Reserve was not constrained by the U.S. commitment to the gold standard. The loss in autonomy in a nation’s decision making can cause an economic downturn to become more sever than would otherwise be the case. An important example of this is New Zealand, which used its autonomy to form monetary policies that rid the country of inflation. However, this would not have been likely under a gold standard system.
Additionally, there are problems that arise when there is a coexistence of a gold standard and alternative monetary systems among trading partners. This can potentially lead to instability within a country that is unable to adjust their currency as needed due to its commitment to a gold standard.
One more important point, the idea that there is less business cycles due to the adoption of a gold standard is wrong. This is evident by the fact that the majority of business cycles occured during the mid to late 19th c, which had an international monetary system characterized by the gold standard (though it was de-facto for many countries.) Go to http://www.nber.org/cycles.html to see the data on economic contractions and expansion from 1854 to 2001.
Should we return to the gold standard?
The discussion between Russ Roberts and Tyler Cowen presents a number of pro and con arguments about returning to the gold standard. Those in favor believe that the gold standard would result in more stable price levels because the supply of gold is relatively stable. They also believe that there would be fewer business cycles, and that the long-term equilibrium path would be more healthy. It would also take some power away from the Fed, whose motivations are suspicious to some.
On the other side, opponents argue that prices would not necessarily be more stable because the price of gold is so volatile. The current monetary system is realively stable and seems to be working well, so why change it?
I agree with the arguments against the gold standard because of the risk of inflationary shocks resulting from the switch. The experiences of countries in Latin America that tied their currency to the US Dollar, and of European countries that dropped their currencies for the Euro, provide ample proof. In all cases, the price of the new currency was higher than the old, and more stable. The result of the switch was immediate inflation, as prices for every good had to be recalibrated to match those of foreign markets also using the same currency. At the same time, prices of certain things (such as labor) are sticky, and can’t adjust as quickly to maintain the same level of consumption. The resulting multiplier effect of the reduction in consumption would ultimately reduce GDP, placing the whole economy in jeopardy until all prices are able to adjust. The same would happen here – the success of the gold standard hinges on which price you peg the dollar to. If it creates a similar exchange rate differential, there is high risk of high rates of inflation.
From EconTalk with Russ Roberts and Tyler Cowen, we learn that both are in agreement that (1) the current monetary system is stable, (2)the gold standard may eventually offer the same stability as the fiat currency system and (3) that a switch to the gold system may not offer any extra benefits to the economy.
They argue that the price of gold is very volatile on international markets, because of speculation, our current trading system and the use of gold as a hedge. They also pointed out something very interesting about gold- it is used as a hedge during times of political and economic strife as a store of value. Cowen argues that even if all countries adopted the gold standard, and thus the price of gold would normalize, we could not assure that gold would still not be used as a hedge.
Cowen also argues that the a return to the gold standard would result in more swings in the downward direction, and higher chances of stock deflation.
Furthermore, Cowen argues that the transition to a gold standard poses more disadvantages than benefits. Central governments are pretty lousy on managing transitions. Transitions could lead to disruptions that would force policy-makers to stop their experiment and go back to the fiat system.
Here at Berkeley in Pearson’s international economic history course, we learn that there are two main sides to the gold standard debate. The gold standard was good in that is provided a certain level of predictability for investors. It also provided a psychological benefit to consumers, investors and debtors that their currency was backed by reserves of gold. Trust in the currency can lead to increased savings and economic activity. The negative consequences of the gold standard were that it did not allow politicians and economists the flexibility to deal with the money supply in times of trouble. The gold standard also reinforced and exacerbated the business cycles. I am in agreement here with Breana that the “Panics” of the 19th century were attributed to the gold standard. Here is a paper on the gold standard from a Berkeley professor a few of us know. http://www.j-bradford-delong.net/Politics/whynotthegoldstandard.html
So basically I am in agreement here with Cowen that if it is not broken, don’t fix it. I trust that we went off the gold standard for good reason.
Without recapitulating what has already been posted, I thought I’d comment on the psychological aspect of a gold standard. Earlier in their recorded conversation, Russ Roberts and Tyler Cowen discuss inflation with respect to individual expectations. Cowen remarks that he prefers to see moderate levels of inflation, even as opposed to strict price stability. His reason is that people would rather see a nominal increase in their annual income as opposed to a nominal decrease (but potential real increase). Linking this psychological observation with the question of the gold standard, it seems dangerous to implement the gold standard given that the gold standard induces a deflationary bias upon economies whose currencies are suffering. The government no longer determines the inflation rate and addresses its excesses in contracting the economy through raising interest rates. Consequently, it has much less of a say in keeping positive domestic expectations towards the economy and is, on the contrary, beholden to an exogenous force. Just doesn’t sound good for my psychological concerns!
There are pros and cons to returning to the Gold Standard. As was discussed in the conversation between Roberts and Cowen, the Gold Standard is an option some people believe will lead to greater price stability and less business cycles. However, this thinking is flawed in a couple of ways. First, the price of gold, as Roberts discussed, is volatile. If the price of gold can change easily, then the price level is bound to be more destabilizing. Second, the Gold Standard worked in the 19c. due to the fact that the entire world was also on the Gold Standard and gold was not readily available, thus increasing its value. Because gold was not found as often, the price level remained stable. This, however, is not the case today.
Third, in order for the Gold Standard to be effective, it needs to be implemented by all the countries in the world. In addition, the central banks all needed to follow the guidelines. If there is a need for gold, the central banks are supposed to decrease the discount rate until things were back to normal. For example, if a country has a deficit in the balance of payments, the central banks were supposed to decrease their rates until the country’s balance of payments are back on track.
Realistically looking at this, central banks will do what is in their best interest; just as in the 19c France and Belgium did not adhere to the guidelines/rules. There is no guarantee that countries today will adhere to the rules.
Last but not least, with the Gold Standard, governments do not have the ability to create monetary policies to avoid shocks. Because of the lack of being able to control monetary policies, unemployment could potentially increase. Thus causing a problem for the economy as a whole.
The advantages of having a gold standard are that price levels will be backed by gold. Another advantage is that all of the countries will be moving together, changes in one country will affect all countries. Nonetheless, the disadvantages are far greater than are the advantages of having a gold standard again.
In their discussion Russ Roberts and Tyler Cowen present a number of positive and negative effects of returning to the Gold Standard. They discuss an opinion that Gold Standard will lead to greater price stability and less business cycles. But from their discussion it becomes clear that the price of gold today is volatile. And, gold is valuable in case if it is in a small supply. But what if we discover a huge amount of gold in some newly discovered region? Than we will have a price shock, and since or currency ill be backed by gold, there will be no way to reduce or smooth out the effect of this price shock. Even though Fed does make mistake sometimes and push the economy I the wrong direction, as we know most of the time they are able to control it, so why make it more risky, if everything seems to work fine now. Also, I agree with the point mad in the conversation that there is no guarantee of the stability of price of gold, because of the wars and terrorism. And, even though there might be less business cycles, there is no guarantee that this by itself will somehow positively effect our economy. And, really, as was mentioned in the comment above, we moved away from the Gold Standard for a reason, and it must be a good one.
The idea of having the U.S. currency being hedged by gold, and going back to the gold standard is absurd. I understand there are advantages and disadvantages, however, in this modern world where money the velocity and money is greater than the past and seems to just be getting faster, the advantages of a gold standard wanes in this light. To give the gold standard this much, the advantages are that in the long run, after a mostly problematic transition, the gold standard will offer stability. Also, a point to worry about is that will the stability that the U.S. has experienced for the past decades persist? For those that doubt the U.S. economy, the gold standard is much more appealing I suppose, since there is just a historical factor to how gold is accepted by different cultures, groups, and country. There is also the idea that in the long term, it will be a much more healthy path for the economy.
However, I feel that the argument against the gold standard is much stronger. The speaker makes a good point, governments print money in the past, but when their governmental system fails, the money becomes worthless! The disadvantages of the gold standard is that Gold is just a piece of metal, at the moment, the price of gold is extremely volatile, and even though some argue that the U.S.’s transition to a gold standard will help stable the price of gold, it is just ridiculous to transition to the gold standard now. I think it is more important to hedge the value of money to the value of the object. There is also the great problem of transitioning to the Gold standard, the U.S. has been functioning well in the face of the current global economic downturn. Just because the U.S. doesn’t feel STRONG at the moment, doesn’t mean that people should fret and worry, every country is experiencing certain instabilities, not just the U.S. The U.S. dollar is still very strong and still acknowledged worldwide. Banks are at fault to have caused this current economy problem, however, learning from this problem, the speaker explains that banks will become much more monitored now, and overtime, a new equilibrium will be reached. However, to transition to a gold standard, this may cause the problem of inflation or deflation and the economy must suffer a horrible change. The Gold Standard is a thing of the past, economists should look into the future with new ideas, there IS reason why the gold standard was abandoned, lets not revert back to the old, but look to the new!
One advantage of pegging your currency to gold is having a more stable economy. Since the supply of gold is stable, price levels would be stable as well. The economy is less affected by the shocks of the monetary policy. Another advantage is having less business cycles.
The disadvantage of returning to the Gold Standard is deciding how much gold $1 is worth and vice versa. Governments have proved to be very bad at this type of transition. Furthermore, although the supply of gold is stable, its price is not. Returning to the Gold Standard would lead to unstable price levels and an unstable economic situation overall. Adopting the Gold Standard is a bad idea since doing so carries a risk of inflation. Inflation creates uncertainty in the market and, in the long-run, slows down the economic growth. Example of depreciation of the Russian Ruble is brought up in the conversation. After the October Revolution, Russians were using their rubles as wallpaper.
I generally feel that a gold standard would be a step backwards, especially for the united states. I think that the stability-backed dollars are a self-supporting mechanism. The Dollar is valued as it is because of the relative stability of the American economy, and because the dollar is stable, and valued, it is for that reason sheltered from external forces of devaluation. A gold standard is precarious, and the adjustment to it would be arbitrary–the status quo of the global economy would be determined by the instantaneous supply of gold in each country at the moment of transition. As a final point, because gold is fetishized as a protection against market shocks, and the demand for gold pinned to expecations and instability, then a shock would cause potentially more harm to an economy than a fiat standard, because in that time of uncertainty gold would have a higher percieved value than at stable times.
The reasons for having a gold standard is to keep stability in terms of price levels. In the United States or in any country, it is good to have consistency, and gold is that consistent value that has intrinsic stable value. When there is a crisis, people buy gold for a reason. Furthermore, when the system is on a gold standard, it makes it much harder for there to be an inflation tax, where central banks print money for the sake of generating cash. Gold is much harder to produce and there is such a large amount of it in the world, that holding more of it will not have an effect on prices.
However, the reality is that since the Bretton Woods system and the breaking from the Gold Standard in the early 1970s, the American dollar has replaced gold as a safe currency to hold wealth in. Countries no longer need gold because they can hold reserves in dollars. The US no longer needs gold, because it can make more dollars. There is more of a risk of inflation because of this, however the Fed generally practices responsible monetary policy and does not let inflation get out of control. Also, the price of gold changes too, so it’s dubious whether this would be more stable than the dollar as is.
As Professors Russ Roberts and Tyler Cowen of George Mason University evoked in their discussion on the Gold Standard, there are both benefits and problems with such a monetary structure. Its supporters argue that the current floating-currency system is “a house of cards” and can collapse at any time. They believe that a return to the Gold Standard system would lead to a more stable economy by reducing the size and impact of business cycles, as the discovery of more gold will have a negligible effect. Furthermore, they argue that linking the currency to a precious metal has a psychological effect: the magnitude of crises will be reduced since individuals will have more faith in their currency.
However, many economists disagree with the aforementioned statements. While it is true that the quantity of gold is relatively stable, its value is actually very volatile due to speculation. There is no proof that reverting back to the Gold Standard will actually enhance the stability of the economy. Quite the opposite, actually. As was seen during the Great Depression, governments were unable to regulate their economies through monetary strategies because they were all tied to and constrained by this inefficient system. One of the major causes of today’s housing crisis is the lack of regulation (or at least the lack of enforcement of financial policies) by the Fed, and reverting back to the Gold Standard will further diminish the Fed’s ability to intervene. In addition, the previously stated psychological effect would be insignificant, seeing as most people today already have strong faith in the dollar.
Therefore, I conclude that a return to the Gold Standard would be foolish.
After listening to the conversation between Russ Roberts and Tyler Cowen on EconTalk, it is certain that their viewpoint (as well as mine) is against a reversion to the gold standard. There are a few benefits to adopting the gold standard. For one, those supporting the gold standard note the stability of prices that comes with having a gold standard, as the supply of gold is stable. They also note a decrease in the frequency and severity of business cycles, thus improving long term economic health. Lastly, there is a positive psychological aspect in that consumers will have more optimistic expectations if they know there is a steady supply. However those against the gold standard underscore the volatility of the price of gold on the international market, which does not lend well to domestic maintenance of price stability.
The argument that the gold standard worked in the 19th century and thus will work today is marginally applicable. Back then, countries were just beginning to industrialize and trade internationally. Therefore the success of the gold standard was more easily feasible when economic activities were relatively less complicated. It is silly and potentially dangerous to apply a principle that worked two centuries ago to the contemporary economic context, as economic and political conditions have changed drastically since then.
Gold is simply a commodity with no value other than the imaginary and arbitrary value that society places on it. If we compare a bar of solid gold with an 8oz bottle of tap water then, depending on the circumstances, the value of the gold is considerably greater or considerably less than the ordinary water. Its use-value is directly proportional to its exchange value. In times of great hardship (like the post-apocalyptic setting Roberts mentioned) the exchange-value of the gold could easily be zero. On the other hand, the use-value of the water remains constant in that it will satisfy a person’s biological need to the same degree regardless of the circumstances surrounding its consumption. The exchange-value of the water could exceed its use-value by quite a lot but even in times of stability when society agrees that gold has a high exchange-value and water has only a little, the use-value of water will never go to zero.
Insisting that one commodity with no real use-value should be “backed” by another commodity with no real use-value is pointless. If people feel that the amount of currency in circulation should be an accurate reflection of the amount of real wealth that exists in the economy then perhaps we should back our currency with grain or water.
There are many ways we can hold and control money: private money, gold, shells, and US bank notes. The only difference between a US dollar and a shell is the difference in the perception of value. We assume that the paper bills we keep in their wallet are worth the printed value.
Human psychology explains why people trust their monetary system, even though it has no tactile equivalent to back it up. But as Roberts points out, if one person becomes skeptical about their money, they can easily find somebody else who is willing to exchange goods or services for the bills.
A gold backed dollar would create much more transparency, but would not be helpful in the short run. What price do you set the gold? How do you know how many bills are out there? There is no reason to answer these questions because we already have a stable, working system and change would only create unnecessary problems. The lessons learned from the Bretton Woods systems must not be forgotten, especially because the US cannot force a fixed exchange rate between currencies.
Also, the price of gold like any commodity determined by supply and demand, and is therefore extremely variable. Maybe it could reduce the number business cycles, but it would also leave the dollar open to sudden market shocks and leave less room for monetary policy to do its mysterious magic.
Tyler Cowen logically states that any sort of return to a gold standard does not make much sense. People ultimately exchange “Uncle Sam Greenbacks” due to reinforced expectations that others will continue to accept dollars as a stable medium exchange. One of the few advantages of the gold standard is that this system automatically limits the extent to which central banks can cause increases in national price levels through expansionary monetary policies. These regulations can make the real value of currencies more stable and predictable.
The drawbacks to the gold standard certainly outnumber the alleged advantages. First, pricing how much an ounce of gold is worth in dollars is very arbitrary, and thus can result in volatile prices. According to Paul Krugman, “The gold standard places undesirable constraints on the use of monetary policy to fight unemploymet.” If there was a worlwide recession, it might be preferable for all countries to expand their money supplies in order to lessen the negative effects. Also, central banks cannot increase their holdings of international reserves unless there are continual gold discoveries. Worldwide unemployment might occur if central banks compete for reserves by selling domestic assets, thus shrinking money supplies. Lastly, the gold standard can unfairly give countries with potentially large gold production (like Russia and South Africa) the ability to influence macroeconomic conditions worldwide through sales of gold. Therefore, both Krugman and Cowen make valid arguments against a possible return to the gold standard.
There is no reason for the United States to return to the gold standard as it already has a working monetary system. There is a reason we came off the gold standard 30+ years ago and there is a reason we should not return to that system. People believe that gold holds an exchange value that will always remain constant and hold a significant amount of value – regardless of the economy’s status. However, in the recent financial crisis, gold has not been a very constant standard as seen in this chart, http://finance.yahoo.com/q/bc?s=IAU&t=3m. Cowen argues that transitioning back to a gold standard has much more disadvantages than benefits. The transition would require the government to decide the cost of gold, which could definitely disrupt the economy. “If it isn’t broken, don’t fix it.”
Reverting back to the gold standard may sound like a good idea in times of an economic downturn (as we are experiencing now) but fixing a single currency to the price of gold, as most of the previous bloggers have mentioned, will cause more headaches than it will anything else. We have to remember that the bretton-woods system which was implemented after WWII when most of the world’s largest economies were in shambles and America was seen as the economic poster child, was effective only because it was pegged to a dominant single currency. It collapsed because it could not cope with the new dynamics of a changing global economy (higher commodity prices, volatility, inflation scares). World economic relations are much more sophisticated now than they were 30 years ago and as was stated on the podcast the gold standard is a system “that would work best if the whole world were on it, but just 1 currency is nonsense.”
The advantages to the gold standard are that it would lead to price stabilization because of its high supply in being able to better manage price shocks if money stock increases. This would lead to stable and fewer business cycles, and thus would be better overall for the economy. The disadvantage in pegging a single currency to the price of gold is that as economists we forfeit the right to control what is happening and cannot adjust effectively to the various and frequent changing dynamics of the global economy. Cowen argues that the gold standard, if implemented now, would lead to more erratic downshifts in the price level, and quite frankly is too simple of a system to deal with the complexities of modern economics. The gold standard (bretton-woods) is simply a product of its time, and until we are in dire need of a much more simplified method of handling price level volatility, the good old green back will be just fine.
Seeing that I am still undecided about the gold standard. I feel that there are psychological advantages and disadvantages to both systems (Central banks vs. gold standard). Like the speakers said only in recent history have central banks been reliable and before that for hundreds of years a gold standard (or similar commodity like salt in Ancient N. Africa) were used reliably. My conclusion is that for modern, developed economies that have the necessary technological systems for finance firms and markets to monitor/interact with the Fed– they should have that responsibility of a central bank system. However, with more developing countries I feel that there should be some kind of insurance (possibly a higher percentage requirement of their money stock to back up their currency). Its good in general that states keep bullion for emergencies but stable, insured growth I feel is better for developing states as it allows for the necessary socio-economic, secure investment environment to grow. In the end because both are social constructs I feel that there are so many factors exogenous to the monetary model that are key. However, by reducing volatility in the business cycle, allowing for flexible inflation, and giving more options to states in times of dealing with real shocks a central system is what most states should aim for. (sorry this is like an essay =P lol)
Returning to the Gold Standard is a step backwards; there is a reason why we got rid of the system during the Nixon Administration. Especially now with the United States running a massive trade deficit, it would not be possible to back all our currency with gold, because we would not be able to account for the debt we have incurred. That is probably the biggest flaw of the gold standard: backing all currency to the point that we cannot have flexible monetary policies.
In the discussion between Russ Roberts and Tyler Cowen, the possible values and risks of readopting the gold standard were debated. What was very clear from this discussion is that maco-economic issues have political and psychological components. Looking at the Gold Standard as a psychological “ hedge” in times of poor economic performance, the co-hosters discussed whether backing ones personal (or the entire economy’s) wealth with gold would or would not lead to less risk and more stability. The consensus of the debate was that in reality, while the quantity of gold is relatively fixed, the price is not. This would suggest that for psychological reasons the demand of gold must grow (to boost the price), and this change is demand has the potential of being far more unstable and risky.
What I found most interesting was the idea that the gold standard would only be able to function if the entire world pegged their currencies. Gold has become something that represents value all over the world, however, finding a price for gold that would in some way correctly represent the wealth of a country seems like an impossible task.
Nobody knows exactly what would happen if the standard was reimplementation, however there are some likely consequences. According to Delong, governments would lose control over domestic policy. More importantly, in the long run, gold price would become the result of a politically contingent gold mining pace( based on the geographical location) balanced with “ growing world production”. The Feds are allotted the power to influence the liquidity of money and without that adjustment mechanism; it is more likely to create volatile domestic economies. He also claims that regimes that implement this standard might see a higher rate of unemployment as the burden of the standard falls of receding economies.
I agree with the Cowen that although gold has a reputation as a reliable form of currency due to the psychological value that people put on it, it is hardly more useful than fiat money. Fiat money’s value depends on people’s faith in it, but so does gold–it is merely a shiny metal found in the earth. Cowen and Roberts only mentioned dentistry as a venue where gold has applicable worth. I fear that a switch to the gold standard may lead people to realize that gold has no inherent worth (perhaps other than its aesthetic value). This wouldn’t be a huge disaster because people are wise enough to know that paper money has no inherent worth either, but it would debunk the notion that gold is more reliable than paper money.
Another knock on the gold standard is that the total value of all the gold in the world is far less than the total value of all fiat value in the world. This means that a switch to the gold standard would necessitate a substantial increase in gold’s value. Cowen was quick to point out that signficant inflation or deflation of gold’s value would have massive ramifications to an economy based on the gold standard.
Reverting back to a monetary system pegged to gold is simply illogical. The only reason it worked up until the collapse of the Bretton Woods system post WWII was because the dollar was so strong and influential in the stability of the market. With the emergence of other dominant currencies such as the Euro, a pegged system simply makes no sense! It would limit the growth potential of the global market and effectively remove all power from the Federal Reserve or World Bank to influence monetary policy. Also, how would we account for the massive debt that we and other countries have accumulated through their growth models? Under the Gold Standard, the system wouldn’t allow for more currency than the value of the amount of gold physically obtained – debts would literally have to be erased or factored in as real currency. Furthermore, the notion that pegging prices to gold would increase price stability seems far-fetched, since the price of gold itself fluctuates relatively often. I do feel that giving value to fiat currency is fundamentally illogical, however, the system has been working for a long time and barring a nuclear holocaust, should continue to work so long as there is confidence in America.
The conversation between Russ Roberts and Tyler Cowen makes clear their position on the gold standard. They make clear that no matter the psychological evaluation of gold as a trusted stock of value, when disaster strikes what value, in logical terms, does gold really hold. There appears to be an invested psychology of gold’s value, of which the speakers compare to the imagined value of diamonds. Those in favor of the gold standard foresee slower increases in money supply and therefore less shock, however only if all economies of the world jumped on the wagon; the leveraging of one economy on the gold standard while other’s opted out of latching to the gold standard would make the economy with the gold standard even more unstable and intertrade more difficult. The other suggested advantages of the gold standard are more relatively stable price levels, fewer business cycles, and a stable supply, however in our modern world it is apparent that these advantages are outweighed by the disadvantages of diminished velocity and limited supply. The limited supply is the main contributing force to the inherent instability of economies maintaining the gold standard. Although there is stability in the fixed nature of gold, there is zero control over its market price, and if demand grows for this scarce resource, control is at risk and economic choices, and opportunity costs are less explicit and more risky. If the entire world were to revert to the gold standard, (this in and of itself raising issues because it has been attempted in fledgling economies such as in Latin America in the past and failed.. miserably) Cowen suggested that since the value of all the gold in the world is less than the value of all fiat value in the world, the transition to the gold standard would be ripe with potential inflation and deflation (not very stable situations) as the gold standard leveraged itself, increasing its value to that of the former methods of account.
I don’t see how going back to a Gold Standard is even possible . Russ Roberts and Tyler Cowen of George suggested in their discussion on the Gold Standard, there are both benefits and problems with such a monetary structure. Those in favor believe that a return to the Gold Standard system would lead to a more stable economy . because this will reduce the size of business cycles, as the discovery of more gold will have a insignificant effect. Therefore , connecting the currency to a precious metal will be reduced because individuals will have more faith in their currency. Although is true that the quantity of gold is relatively stable, its value is actually very volatile due to speculation. There is no proof that reverting back to the Gold Standard will actually enhance the stability of the economy. The disadvantages of the gold standard is that Gold is just a piece of metal, at the moment, the price of gold is extremely volatile, and even though some argue that the U.S.’s transition to a gold standard will help stable the price of gold, it is just ridiculous to transition to the gold standard now. The biggest example is the great depression : during the Great Depression, governments were unable to regulate their economies through monetary strategies because they were all tied to and controlled by this inefficient system. So in order to make the economy healthy is to create more effective financial policies by the Fed . I don’t support Paul because of his gold standard views, I support him because of his political philosophy. Small, limited government, free market solutions to modern “problems,” drastic reduction in taxation and spending, and a diminished role in instigating foreign wars.
I believe, in line with Cowen and Roberts, that reverting to the gold standard is a fairly absurd idea. First of all, it has been repeatedly tried and has repeatedly failed. Many scholars blame the collapse of the international monetary system of the 1920s on the inability of countries under the gold standard to effectively regulate their economies. Moreover, the 1971 decision to un-peg the dollar from gold was made because that system was failing as foreign countries depleted US gold reserves in a conscious attempt to challenge US economic and political power (Heath Pearson, History 120). Finally, the notion that a gold standard is good for the economic psyche assumes, I believe incorrectly, that gold has some intrinsic value that should inspire confidence in fiat money. Gold has no greater intrinsic value or value in use than fiat money. Unfortunately, both are shams.
I feel similar to Mr. Cowen that a gold standard today would only make things more complicated, especially if the value of gold changes that could cause panic and lead to worse things. I do not particularly know if the switching to a gold standard would be more advantageous than what we have right now. my personal thought is that it would not makes things significantly better and the chances of it being worse are high. because of that i think it is best to stay with what we have especially because the switch over as Mr. Cowen says would be where we could potentially see problems.
the argument for the gold standard is that the price level would be more stable and there would be fewer business cycles. However, Cowen dismisses these arguments saying that the price of gold is volatile and we have a stable supply of it, it is hard to mine, so backing money with gold in light of these arguments just may not be worth it. The bottom line is that it really is no more reliable of a source than what we have now and enforcing it can only cause problems why do it? Even if the long term effects may be positive whose to say that in the future the system in place wont get better and the value of currency stronger.
There are many advantages and disadvantages to adopting the gold standard. In the discussion on Econtalk with participants Tyler Cowen and Russ Roberts, Cowen comes to the conclusion that the disadvantages far outweigh the advantages and the US should keep to its current monetary system. The Gold Standard is a simple monetary system at face level: gold backs the value of paper money. Those in support of the gold standard argue that (a) there would be more relatively stable price levels, (b) fewer business cycles, (c) a stable supply of gold, and (d) less shock and dramatic fluctuations in th economy due to very slow increases in money supply (there is only so much gold that can be discovered/entered into the system at a time). Taking a deeper look at the significance of the gold standard, Cowen basically derides all these “advantages” proselytized by devotees of the gold standard. Cowen points out that the price of gold is currently so volatile that, in fact, the money tied to gold would be just as volatile and have tremendous downward ramifications for the economy and its health. Most interestingly, Cowen makes the point that gold, just as paper money or even diamonds, is a commodity with no real value beyond what humans place upon it. If a nuclear holocaust were to occur, gold would be just as useless as paper money. Therefore, it is irrational for people to hedge against bad times with the gold standard when we already have a relatively stable system in place. Beyond the Econtalk discussion and Cowen and Roberts, the gold standard is an antiquated system that cannot hold up to the global demands of 21st century monetary policy. The re-adoption of the gold standard would have tremendous repercussions for both developed and developing nations and further widen the gap between poor and rich countries.
It is clear in the podcast and from other blog posts that the overall consensus about the gold standard is that it most likely would not make a big difference to improve the monetary policy that we have currently. Although it makes sense intuitively that having something to back up our currency is a better and more stable way of dealing with monetary policy, several points were made in the presentation that would suggest otherwise. While we may not have a flawless plan for our current monetary policy, a change to the gold standard could cause inflation or deflation at first when deciding where to peg one’s currency price. The transition could cause a lot of problems and in the long run, it is not clear that the change would be entirely helpful. Russ Roberts and Tyler Cowen both agreed that using gold as a way of creating stability is very much connected to the physiological feelings that humans have towards gold, and that ultimately it is no different that currency. From the different points in the podcast as well as in the other posts, I think that there are many pros and cons on either side of the argument, and that ultimately any monetary policy will depend on how well people work within the system and the faith that people have in it. Therefore, although it may not be a good idea to change back to the gold standard because it is not as risk-free as many people may think, the pure fact that people have faith in the power of backing up one’s currency with gold could change create a positive outlook on the economy and thus a more stable monetary policy.
In the pod cast both Professor Russ Roberts and Professor Tyler Cowen discuss the Gold Standard and the possible benefits and problems with such a monetary structure.
A possible advantage by adopting the Gold Standard once again is that price levels would be more stable because the supply of gold is rather stable and consistent. As a result, the economy would be less affected by any possible “shocks” in fiscal and monetary policies. It seems these arguments for the Gold Standards are being made because present day prices are inconsistent and a recession is on our doorsteps. However, the Gold Standard was dismissed in the US before due to its underlying dilemmas. The price of gold itself is constantly fluctuating (very high today) and it is rather difficult in pegging gold to various market economies. A risk that arises here is that inflation can set in causing a hindrance in economic growth and productivity. As a result, I would have to strongly agree that adopting the Gold Standard once again would not be a wise and optimal decision.
In today’s highly complex and rapidly operating financial world, the gold standard would be too outdated to work smoother than the paper currency we are currently using. Attaching value to a metal object versus a paper object does not change the dynamic, except that paper money can be reproduced at a faster pace than extra gold can be produced/extracted. From an economic point of view, reinstating the gold standard would mean that all of the actors involved in today’s financial world, including state and private banks, private investors, and the whole array of small and large businesses, would have to be tied down to gold. In fact, though Cowen and Roberts talk about the condition that ALL countries would have to adopt the gold standard for it to work, one must keep in mind that the actors in today’s financial markets are no longer countries alone.
Also, when Roberts asked Cowen what he thought the actual implications of switching back to the gold standard would be in terms of real, observable stability, Cowen could not answer the question in a reliable way, because, according to him, you can’t know these ahead of time. It could or it could not – once again speaking to the lack of consensus typical of many economic statements. So why bother to switch if the uncertainty of switching is so high?
Based on the conversations between Russ Roberts and Tyler Cowen, there seem to be some advantages and disadvantages to the gold standard. Many claim that money is worthless and without the gold standard, it has no backing, making the economy always at risk for an economic crisis. The claim is that with gold backing money, prices will be more stable and there will be fewer business cycles. A gold standard is seen by many, as a better alternative to the fiat money we use now, because the supply of gold is stable and can provide the backing our economy needs
Cowen essentially states that the gold standard has a mythological appeal and is in fact a psychological way of thinking taken by those who are pessimistic about the Fed and its monetary policies. He admits that no one can truly predict what would happen if we were to adopt the gold standard again, but he along with other opponents, believe that the risk of changing an already stable economic system could prove disastrous. So while a gold standard could produce the same results as our present system, the risk of change is not worth it. Not to mention that the price of gold is continuously fluctuating, which could lead to fluctuation of price levels and inflation under a gold standard. While the claim that the supply of gold is stable holds true, the counterargument is that it is harder to go digging for more gold than to print more money when the money stock needs expanding. It is also relevant to note that future fluctuations in the availability of gold, could lead to inflation or deflation.
While many of the disadvantages and advantages to the gold standard are valid, in the end the issue centers on if the change is worth the risk and if the gold standard can really improve our situation and not just match it. I think it is important to look at our recent technological improvements and look at how the velocity of money is growing. Although there is an enormous gold stock, it would be difficult to use gold with all of the numerous and international transactions that take place on a daily basis. It not only would be hard to measure a dollar’s worth in gold, but it would also be complicated when calculating the conversion with foreign currencies. While I see why many pessimists would turn to the gold standard as a hopeful alternative, I believe that our economy has for the most part been stable and corrected its mistakes under the use of fiat money. Business cycles and instability are a part of any economic environment and any system that promises otherwise, is clearly mythical and used as a psychological defense mechanism against economic downfalls.
In the interview, it was mentioned that some people believe that money is not backed by anything. However, I would argue that this is not the case especially when it comes to the dollar. The U.S. dollar is backed but not by gold or any other tangible good but rather is backed by a dominating world leader that is the United States itself. As mentioned in the interview, the dollar “holds up because it is US currency and not Zimbabwe’s currency. The fact that the dollar is US currency gives it value and validity given that the US is the world leading dominating power. Therefore, I believe that this is enough, for the time being to back the US dollar and therefore the gold standard is not needed. I agree with Cowen when he insinuates that the gold standard would bring very little advantages for the US. Money is only valuable because we have been brainwashed in thinking that infect a piece of paper has a numerical value and the same goes for gold. Gold is only valuable because people have lead us to believe that a piece of metal does indeed have value and worth. However, we cannot forget that money is just paper and gold is just metal.
Roberts and Cowen explored a few pros and cons of readopting the gold standard. A lot of the reasons that they open up are more a matter of generating some psychological closure. For example, the pod cast renders that for those people whom find the Federal Reserve sinister and untrustworthy; the gold standard brings with it a more concrete gauge of wealth. Also, it’s provided that there is a measurable supply of gold, and thus there will be more stable prices. However, the price of gold it self is quite fluctuating. More than anything, the conversation seems to hint at the futility of adopting such a standard. The speakers remind us that gold will not actually protect you from a nuclear holocaust, but rather is almost as arbitrary as paper bills in the larger scheme of things. At the same time, they notion that the transition from the current system back to the gold standard is a barrier in itself. They proposed that the link from dollars to gold is difficult and one that governments tend to be bad at, meaning the pegging would likely cause heavy inflation and in turn, an abandonment soon after its inception.
Mostly, it seems that the primary advantage of the gold standard is to somehow mitigate government regulation over commerce. Though, it seems at this point in time that some government regulation is critical. Also there are some inherent problems like the fact that there is more money in circulation than there is gold valued at the current price. All together, the current US anchor currency system seems to be the most plausible policy.
I found Cowen’s arguments against adopting a gold standard fairly convincing, particularly when he refers to the relative stability of the American economy in the last 20 to 30 years or so. The disadvantages of adopting a gold standard lie in large part in the transition itself because, as noted by Cowen, we would have to link the dollar to gold and the government has not fared well in the past in making these types of monetary transitions. The main advantage in adopting the gold standard would be psychological because people would believe that the price level would be more stable since the supply of gold is fairly stable. According to this argument the erratic price of gold is due to responses to other price levels and thus if the US were constrained by the supply of gold the price of gold would not be as erratic. Towards the end of the pod-cast they point out that some people believe that there is something sinister about what the Fed is doing right now, accentuating the human psychology aspect/advantage of adopting a gold standard. Perhaps if we were able to smoothly transition into a gold standard in conjunction with the rest of the world it may be a good idea, however, I must agree with Cowen when he questions the reasonability in taking that chance since the plausibility of those two things happening simultaneously are so small. The risk for a sudden deflation or inflation upon adopting the gold standard is too high and would thus defeat the purpose of adopting the gold standard in the first place.
I think Roberts and Cowen bring up some very compelling points in regards to the imposition of the gold standard. The primary argument for creating a gold standard would be that it supposedly leads to a more stable price cycle and less business cycles due to the relatively stable supply levels of gold. Cowen, in particular, argues against the imposition of a gold standard primarily due to its unpredictability: the supposed positive effects of using gold are mostly psychological and there are not necessary reason to believe why the relative value of gold will remain stable in the event of shocks or major disruptions. Gold is, afterall, a piece of metal without a great deal of practical use.
A major requirement for the gold standard to be successful to begin with is that the international community as a whole would have to implement it in order to achieve some level of stability. Afterall, otherwise the price levels of gold- and hence our currency, were it gold based, and price level would experience further instability in an increasingly globalized economy. Intrinsically, I think imposing a good standard could potentially decreasing the velocity of money flow through restricting the ability of a responsible fed to to respond to economic developments and crisis and further exacerate our expectations of inflation.
The primary arguments that I have heard in support of a gold standard are political (with Ron Paul and Alan Greenspan- ironically enough being the most vocal of the recent advocates)as a means of keeping inflation in check by limiting the amount of paper money (the liquidity) the Fed can produce. Alan Greenspan (http://youtube.com/watch?v=7I0WOhxS7UE) and http://eldoradogold.net/pdf/greenspan_economic_freedom.pdf has argued that a gold standard is needed as a check for the power of the state. But through the course of watching Greenspan’s interview and reading his arguments, I think once the political arguments are taken out… then there appears to be little intrinsic value to a gold standard itself.
And that is why, I think (taking political developments out of the picture) I would actually support Cowen and Roberts arguments in this case and argue againist a gold standard.
Pegging currency to gold seems to be an antiquated notion that is still discussed as an option to relive historical economic systems. In reality, going back is not really feasible in the current global context. The podcast starts out discussing how business cycles are less variable now, which is attributed to the efficient, smoothing hand of the Fed on the money supply that provides the liquidity the economy needs while controlling inflation. With all of this analysis on the Fed, it should be clear that the Fed is a powerful entity that could have its processes realistically reversed. Therefore, when we discuss the viability of the gold standard, it is predominantly in a historical context (with no real standing in the current market).
While fear of financial collapse because our currency is just based on pieces of paper that are not backed by anything is not completely crazy, Tyler Cowen refutes this fear by putting forward that people should just believe and have faith in the US and the security of the dollar (whereas this would apparently be a problem in Zimbabwe). This argument seems flawed, because it assumes that America is not subject to any of the forces that other countries are subject to due to its 1st world status. The idea that Cowen argues that makes sense is that gold is just a piece of metal too. It is no more reliable than any other form of currency. It doesn’t even really preserve wealth, although there is an assumption that gold will always fetch a price, which is not necessarily true.
While, in the talk, they discuss pros and cons of the gold standard, it seems that gold is just another version of our paper money. Cowen does argue that the gold standard is not more stable, since the price fluctuates (and would possible cause “more swings in the downward direction”), but Cowen and Roberts really touch on an interesting point when they discuss money (exchange/usage) as inherited psychology. The forms of currency we use have meaning and value because we assign them that value. In the end, since we have accepted our paper dollars and since future generations will too, then the most functional and stable option at the moment is our system of paper money not pegged to gold.
correction in the first paragraph: the Fed is a powerful entity that could NOT have its processes realistically reversed.
There were certain advantages and disadvantages to basing monetary policy on a gold standard. The gold standard offered low annual inflation and long term price stability at the expense of short-term price instability and a more volatile real output level. Because the supply of gold was limited, it made sense to use it as a ‘real’ asset to back paper currency against, but it also limited growth. In the abstract sense however, any scarce resource could be used to back a given currency: silver, shells, diamonds, even faith in a particular political or governmental entity as exists now with our current system. Ultimately, the given medium of exchange that is chosen to trade non-equivalent goods could be anything that people collectively agreed on; it is more a matter of psychology than economic policy. In their discussion, the speakers offer a hypothetical example of a scenario where a nuclear holocaust has taken place and gold could be viewed as completely worthless. The current system is more preferable to the gold standard in the sense that it offers greater power to governments (or semi-government entities like the Fed) to exert more control over monetary policy than could be done if the dollar was on the gold standard. This is arguably more important (especially in democracies) since it affects unemployment (which has been lower on average since switching off the gold-standard) and eases periods of monetary shock. Lastly, Friedman mentions that the cost of producing gold must also be considered as a very large disadvantage to being on the gold standard, which was 2.5% of GNP in 1960.
The value of gold relative to the American dollar is approximately $1000 per ounce, meaning that with all the gold in the world (approximately 142,000 tons), there would be about 4 trillion worth of wealth. Currently, there is more than 7.6 trillion dollars in circulation in the US economy alone. Clearly, gold would have to be completely revalued in order for a return to the gold standard to occur, in which case the advantages of perceived stability might be diminished, as gold would lose nearly half of its value. Otherwise, a deflating of the value of the dollar would occur which would be devastating to the economy.
I just realized that my last post didn’t really discuss the pros and cons (as was the assignment), but rather I just pointed out that one of the perceived pros, stability, might be undermined because there is not enough gold to cover all the dollars in the US economy, and if I am not mistaken, I believe that is a big reason why Nixon went off the Gold standard, as the US couldn’t afford to pay for the Vietnam war and rising oil prices (in response to the 73 oil embargo). The cons have been stated by lots of people, which would be that gold is actually quite volatile, as it has no more intrinsic worth than a green piece of paper, etc.
What is the difference between a piece of metal and a piece of paper? This is the basic question that revolves around this issue of “soft money” and “hard money.” The argument for a gold standard relates to the idea that money is just colored paper that is issued by governments, Some could also argue that national governments irresponsibly ‘tinker’ with the money supply and this has the potential to lead to economic instability and high inflation. However questions arise if one begins to seriously consider the gold standard. If the United States actually adopted this policy, would people try to mine more gold out of the Earth in an attempt to alter the nation’s monetary system? It is hard to believe that all of the gold in the world has been ‘mined out’ of the Earth? Would any private individuals actually be willing to put in the time, effort, and money (however it would be measured) to undertake such an endeavor?
There are also elements of mercantilism in the argument for a gold standard. If the US adopted a gold standard, would it increase its absolute wealth if it acquired more gold from other countries? The answer to this question is no. Gold does not equal wealth. In our modern economy, the goods and services that humans can create and provide are worth more than gold. Cars, houses, and computers are worth more than pieces of gold. In addition, why gold? Why not use some other natural resource that has more concrete value? Should the United States back its currency with Oil? Maybe each US dollar should be backed by six ounces of refined oil; oil is a natural resource that is much more valuable than gold in our current era (of course using oil to back up US currency makes no sense, but it illustrates some of the problems with using a gold standard).
Furthermore, the US economy has expanded greatly in the last fifty years, the advancement of technology and organization has created many employment opportunities and has transformed commerce in this country. The supply of money has to be sensitive to economic expansion. The money supply should grow to match the growing productivity levels that the US economy has continued to experience in the last fifty years. Adam Smith touched on this idea back in the 18th century, he understood that wealth is not simply gold, wealth as an object is much more complex. Wealth is goods, services, businesses, ideas, etc. Wealth is everything that is required for the productive growth of an economy. The money supply should be flexible, it should be able to change with economic expansions and contractions.
The interesting discussion about wages and the irrational desire to have a rise in wages but a higher rise in prices, when really we could drop wages and drop prices by even more colors the rest of the podcast as they continue to discuss the irrational fears and beliefs of the economy. The podcast keeps bringing up these psychological aspects of the economy and I believe this entire discussion about the gold standard is simply being brought up because people are so desperate and impatient to find a solution about our current economic condition. Though a gold standard may result in slower increases of money supply and perhaps less business cycles, but the world market is so integrated it would be irrational to believe that all countries would immediately adopt it. People confuse the stable supply of gold with the price of gold, which in reality is very unstable. The potential advantages of the gold standard are just that… potential and I think that changes on that scale would only make the economy more volatile.
In the podcast conversation between Russ Roberts and Tyler Cowen, a segment of their interview centers on the merits of adopting a gold standard. As the foundation for their conversation, the two conclude that monies are accepted and recognized based on legitimacy and inherited psychology. Specific to gold, the long standing perception of gold as a precious asset has led people to accept it as a valuable medium of exchange and store of value. For fiat money, the legitimacy of a countries ability to send goods and services in exchange for paper monies is the power mechanism behind this type of currency.
Comparing the use of fiat money and the gold standard in the current economy, Cowen concludes that it is not necessary to adopt the gold standard. Because using fiat money is legitimized worldwide, allows for easier corrigibility of the market by Central Banks, and keeps price levels relatively stable, the necessity of using a gold standard is downplayed. Additionally, Cowen believes that the use of gold is creates more price volatility because it is a speculative tool relative to fiat money and other monetary investments.
However, both speakers do believe that the gold standard could be used if hyperinflation were to occur and the worldwide economy still trusted that gold is highly valued.
Overall, the conversation centers on a psychological explanation for why and how monies are valued. For Professor Cowen, he looks at the use of gold as a historical unit of trade, and believes that value comes from the long-standing use of this metal as a precious unit of exchange. However, he also believes that the use of fiat money is more applicable in the current economy, because it is more easily controlled and has the same legitimacy as gold.
An important difference to note between the gold standard and fiat monies is the effect of seniorage. While the amount of gold worldwide is relatively fixed and hard to mine, fiat money is easy to print. Therefore, as an addition benefit/problem with fiat money, countries are able to extend their credit line through adding larger amounts of money into the economy. However, as aforementioned, this money must be recognized as legitimate.
I accidentally entered the previous post before I was finished. To add to the negatives of going back to the gold standard, Michael Bordo’s article highlights even more issues about how much it would even cost to have the gold standard reinstated. “In 1990 this cost would have been $137 billion”, which is too high for a system that probably won’t work. Further, the government will have less control over monetary policies if we are on the gold standard and Bordo also references a higher unemployment. As I mentioned before, I find it hard to trust a standard that is only mentioned when people are so freaked out about the economy and inflation.
Gold! Shiny and volatile….
There’s an idea! Let’s go back to the gold standard to undermine the evil money manipulators at the fed and expose currency for what it is…a sham!!!
Well why gold? It is really only another way of holding value, much like any rupee, yuan or yen. In fact, re adpoting the gold standard is pretty much tantamount to pegging the dollar to a foreign currency. The same risks are involved. We gain the possibility of stabilization at the risk of dependency. We expose ourselves to the obligation of keeping an arbitrary peg while simultaneously risking devaluations and hyper-inflation if we cannot meet that obligation. When Argentina tried this little maneuver and pegged to the dollar it ended in catastrophe, and the dollar was much more stable then, in 1991, than gold is now.
Now one might refute this comparison claiming that relying on gold does not make us dependent on a single foreign economy, merely subjecting us to their downturns and troubles. This is kind of right, except that the majority of gold now is produced in Russia and South Africa. I see no reason to risk giving these countries control over our monetary policy. What’s worse is by 2010 the largest producer of gold will be China! In times of economic instability it hardly seems expedient to hedge our currency woes with assets held by ethically questionable, highly nationalistic and historically corrupt regimes.
Besides, relying on a commodity price determined by large suppliers elsewhere takes the focus off of the prices that affect us most at home. This argument may sound a little globally ignorant but if as Econ Talk says, managing price inflation at home is the best way to diminish business cycles and stabilize the economy then why would we ignore that method to look at one price in a foreign market.
Yet even that term, “foreign market” comes into question in an increasingly global age. The truth is the global state of finance cannot be circumvented by either burying our heads in domestic price watching or seeking some untainted source of value–gold.
We need a globally viable solution that can foster sustainable international policies, so that by working together we can minimize the ripple effect of poor luck and mismanagement. One idea is to create a global commodity price index, which includes gold but does not depend on it, another is to have faith in the dollar, a third is to hoard gold like a pirate and learn Chinese.
Perceived advantages of gold standard:
Belief that price level will be more stable, so less business cycles: supply of gold is more stable than that of money (speed of mining vs printing). Slower increases in total stock equal smaller price shocks.
Protects from stealing of people’s savings through inflation/seignorage.
Possible disadvantages of gold standard:
The price of gold is volatile, so prices would be volatile; the stability of gold thus a sham. Risk of bad deflation as well as inflation. For the gold standard to really work, the whole world would have to be on it.
Gold is no more real in terms of value than a piece of paper; gold doesn’t preserve your wealth in the face of a disaster (food/supplies would). Gold’s history and human psychology are primary reasons for its perceived value.
If the world were to switch back to the gold standard, it would face the problem of transition from one monetary system to another. At what rate would we peg currencies? What if they are under/overvalued?
The history of the Gold Standard is volatile in itself, subject to decisions by world leaders rather than market forces.
The discussion between Russ Roberts and Tyler Cowen on Econtalk presents many insights on the advantages and disadvantages of returning to the gold standard. Pegging the currency to a gold standard seems like a practical choice during an economic downturn when prices become unstable. History shows that gold leads to price stability and fewer business cycles in the economy, because the supply of gold is fairly stable. On the other hand, our current monetary system is like ‘a house of cards,” and less reliable than the gold standard. The gold standard also reduces the power of the Fed and the possibility of market shocks. Mining for gold is a more tedious and time-consuming task than printing more cash. Therefore, the gold standard minimizes the possibility of an inflation tax that is generated from seniorage. Finally, returning to the gold standard would also have a psychological effect on consumers. People will have greater confidence and higher expectations with a gold standard, because it creates more stable price levels and economy. While the arguments for a gold standard are persuasive to a certain extent, I still have my doubts on returning to a gold standard. I believe that the transition from the current monetary system to the gold standard will create many complications and uncertainties. I agree with Cowen’s argument that the pegging currency to gold is volatile. The value of gold is determined by the intrinsic value that humans place on it. Finding a common standard for gold, as currency would be difficult, because the value of gold essentially varies among people, time, and place. In addition, if the monetary system were to change to a gold standard, everyone would be rushing to convert his or her cash into gold, placing greater pressure on the supply of gold. Although it appears as though the gold standard would alleviate some of problems in the economy today, converting the monetary system to gold is questionable. The gold standard generates a high risk for sudden inflation and deflation of currency. While the current monetary system carries flaws, there are too many uncertainties to adopt the gold standard. Also, returning to the gold standard undermines all the improvements and efforts that were made to sophisticate the monetary system.
After listening to Cowen’s opinions on the gold standard, I have been swayed to believe that there are more advantages in not having a gold standard than having one.
Though the advantages of a gold standard may bring out 1) a feeling of security of one’s money and 2) a prevention of overprinting money, Cowen suggests that gold is merely a commodity, comparing them to diamonds or any other product on the market. Because the price of gold is so volatile (which depends on the political situation and economic status of the world), Cowen believes that when governments start transitioning from gold to dollars, they set the wrong exchange rate. If they do that, it will set off an immediate deflation or inflation in the economy and governments will give up on the idea of a gold standard anyway. The example of the Great Depression is also very convincing in that Cowen believes that the Great Depression wouldn’t have been severe if the government had printed more money. However, the gold standard held them back from doing so. Some disadvantages of the gold standard are that in a depression or deflation of the economy many of people will convert into not having a gold standard because the value has dropped and will begin depleting national reserves. Money supply is key when having a gold standard as well, and without having growing gold stocks, it’s impossible to have a growing money supply.
So if anything, I believe that the advantages of not having a gold standard outweigh those of having one. Gold is just like any other commodity and is highly volatile in price and should be relied on as a standard use of currency. Cowen does agree however that the gold standard MAY work only if the entire world also abides by the gold standard. If only one country begins to use the gold standard, there will be negative results because shock deflation is more possible. Thus, it should be noted that though there is a possibility of the gold standard working, it requires the cooperation of all other nations as well. It is all psychological, as they said, and people have come to view money as a fetish and they just “believe” in it and trust it. The psychological aspect of the gold standard and the way consumers regard paper money vs. gold is also something to take into account, because if gold is just like any other commodity with no set exchange price…then why are we even using it. Might as well just exchange with paper money.
Adopting the gold standard for central banks today would be a return to the Bretton Woods system, the failed monetary system adopted after the second World War that collapsed in the 1970’s. The world monetary system was based on pegged exchange rates to the U.S. dollar, which was then supported by a vast store of gold reserves, the theory being that American money was completely gold convertible. However, during the late 1950’s-60’s, there was a huge upswing in the amount of world trade but only a small increase in the amount of gold reserves available on hand (not to mention the continually changing price on the world market of gold). There simply wasn’t enough gold to keep the currency liquid, and there isn’t currently. Today, gold prices per ounce continue to fluctuate largely, affecting the price level of any country whose currency was pegged to gold. Thus, though maintaining a gold standard would ensure some base value in the currency it was supporting, the value can be incurred simply by the country’s balance of payments and growth. Cowen is right that greater worries lie in the problem that the price level and exchange rate can change too quickly for comfort.
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.
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.
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.
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.
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.
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.
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.”
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.