Quote:
|
Originally Posted by Jerseee
If there was lawful money he might be right.
|
ACCORDING TO HIM THERE IS. HE CLAIMS FRN'S ARE AS GOOD AS GOLD . HE STATES THAT GOLD'S VALUE IS BASED MAINLY ON FAITH. I ALWAYS THOUGHT IT WAS SO VALUABLE BECAUSE IT'S A RARE, DURABLE, PRECIOUS METAL.
CHECK OUT THIS PART OF THE ARTICLE:
THE FED AND THE GOLD STANDARD
Many people feel that the most appropriate monetary system is one in which money is backed by gold. A gold standard can mean a variety of different things. But principally, it is an arrangement in which the monetary unit (in this case, a dollar) is defined in terms of a given quantity of gold of a specified fineness. In some systems, the money issued by the government consists only of precious money in the form of coins. In others, paper money is issued that can be redeemed for gold at the option of the holder. In the post-World War II period, a quasi-gold standard existed, in which gold could be used for "official" transactions between different governments, but in which paper money was otherwise not redeemable by the public.
An exclusive gold standard in which money consists of coin and in which no paper money is issued is virtually impossible to maintain. This is because eventually some institution will issue a receipt for coin which will itself circulate as money. If the government doesn't do it, a bank will. And if not a bank, some other financial agent will. It might be an actual receipt for gold on deposit, or what is functionally equivalent, a bank note (i.e., bank-issued currency). If these are somehow prohibited, checking accounts perform the same role.
Consequently, most gold standards are those in which some kind of paper money exists that represents gold being held somewhere. This raises the analytical question: which attribute really makes it a gold standard, that the money is backed by gold, or that it is redeemable for gold? These are different arrangements.
Many people seem to think that what makes a gold standard work is that there is backing in the form of gold. The most common argument along these lines is that gold has intrinsic value. Therefore, whenever it (or a representation of it) is used in a transaction, the receiver is getting something of genuine value, not a promise to pay.
In contrast -- this line of reasoning goes -- IOU money such as Federal Reserve Notes, is not in itself worth anything. Such notes can only be passed if others have faith in their worth. If everyone lost their faith in these notes, they would cease to have value in exchange.
This intrinsic value argument, however, does not generally hold. The truth is, gold mostly holds its value based on faith as well. Gold of course does have commercial value. It has always been used for jewelry, for a time in dentistry, and more recently has had industrial uses, such as for electronics. Certain of its chemical attributes (e.g., the fact that it does not oxidize) has made it attractive for such purposes. Hence, it was a convenient commodity to use as money in transactions.
However, once its use as money became widespread, the demand for gold for monetary purposes far outstripped its demand for non-monetary uses. As a result, much more of it was mined and refined than would have been the case just to satisfy the demand for it in jewelry and electronics. If there were no demand for gold as store of wealth (i.e., potential monetary use), its value would fall precipitously. Consequently, in terms of intrinsic value, gold is remarkably like paper money: its current value much exceeds its value for non-monetary purposes; it maintains this value only because people have faith that it will continue to be useful for transferring wealth; were this faith to collapse, its value would as well.
Actually, the strength of a gold standard largely derives from the feature of "redeemability". The commitment to redeem a note for gold at the option of the holder regulates the issuance of paper currency. If an issuer injects too much paper money into the economy, such that prices begin to rise relative to gold, holders will redeem it for gold, and slow down the expansion of the money supply. Similarly, too slow a growth in the money supply can reduce prices, making it worthwhile to turn gold in for money, and to mine and refine more gold because of its increased buying power.
The problem with gold (and other commodities) as a monetary standard is that there is no guarantee that gold stocks will grow at rates necessary to keep prices stable. Historically, new discoveries of gold have generated substantial inflation. At other times, failure of the stock to grow fast enough caused prices to fall. This is compounded by various innovations that may allow the economy to get by on less base money, such as the growth of crediting and debiting accounts.
While the dollar in 1929 was very close to the same purchasing power that existed in 1800, its value fluctuated much in between, rising to twice its 1800 buying power in 1850, depreciating 12% just a few years later, falling again around the turn of the century and rising to nearly 2 1/2times its 1900 value in 1920.
The biggest problem came when the public began to have doubts about the redeemability of the currency. In those periods there was a rush to convert to gold, and a shrinkage of the total money supply was the result. The effort to stay on the gold standard during the period 1931-1933 was a big reason for the severity of the great depression. Shrinkage of the money supply was only stopped after the United States abandoned its commitment to stay on a gold standard.
The 1933 abandonment of gold marked the true end of the gold standard for the United States. What followed was only a shadow of a true gold standard. Lacking public redeemability, the biggest virtue of a gold standard -- discipline -- was lost. Redeemability in official transactions did not prove to be much a restraint on monetary policy. The United States expanded its money supply at a rate that eventually made it impossible to use gold even in international transactions. By 1968, the United States had de facto stopped using gold. Actions in 1971 and 1973 made the changeover official; all links to gold were cut.
Essentially, abandonment of gold did not lead to expansionary monetary policy and inflation, rather, expansionary policy and inflation forced the abandonment of gold. Gold convertibility does provide a discipline, at a cost. But it is a discipline that only works if a country has the will to submit to it, in which case, it may very well be able to discipline itself without gold.
