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PaperclipPerfector  1yr ago (text post)   26101 thread views

Culture War Roundup for the week of December 25, 2023

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I do not understand the obsession with using precious metals as currency. Why is it better for the value of your currency to be at the whims of a commodity market as compared to managed by a central bank?

Are you talking about state voluntary currencies specifically or about the gold standard in general?

I'll try to steelman a gold standard.

  1. Most currencies collapse. Governments (either elected or autocratic) tend to spend too much money which requires money printing. The dollar has declined by 98% vs gold since the U.S. went off the gold standard in 1971. This is a success story. Within the last 100 years, most other currencies have succumbed to hyperinflation and collapse.

  2. The widely touted boom and bust cycles of the 19th century led to higher growth. Keynesian economics has mostly solved the business cycle post WWII. Recessions have been few, far between, and extremely mild. But the elimination of the business cycle has stalled capitalism's engine of creative destruction. Governments and unprofitable companies lock up a greater share of capital. They need to be rooted out by bankruptcy and replaced. Low interest rates and money printing allow the can to be kicked down the road forever, allowing inefficient uses of capital to persist. The bust cycles caused by hard money limits are a good thing. Growth was much higher before 1971.

  3. For hundreds of years in the Common Law system, the elected representatives of the people have controlled the purse strings. Unelected bureaucrats in the Federal Reserve printing money to buy trillions in mortgages or government debt is tyranny.

  4. A gold standard makes it difficult for the government to spend more money that it can collect. It also allows the government to go bankrupt which can prevent the cancerous growth of bureaucracy.

Let me know if you'd like my case AGAINST precious metals as currency!

Inflation helps debtors and hurts savers and therefore you’d kind of suspect a country that money isn’t sound to become less interested in investing long term or perhaps more likely to invest in more volatile assets.

Also, you’d suspect bankers to become worth more as the Cantillion effects run rampant encouraging the financialization of the economy.

Maybe these things are good but seems like those could be side effects of depreciation

hurts savers

Yes. If your savings are literally a pile of bills under your mattress. But if your savings are invested in some non-cash manner, let's say an index fund for example, then you aren't hurt as a saver.

  1. If invested in equities, then yes the nominal price will adjust for inflation. However, that means you will have taxable income on nominal but not real gain leaving you worse off.

  2. If you invested in a fixed return (eg bonds) you are screwed.

Agreed with the broader point re gold standard. I’m making the more narrow point about whether depreciating dollar is good or bad.

As for volatility and pricing, sure academically. But I’m not sure people actual use models like that to invest — especially when it comes to highly uncertain returns. That is, venture capital is so uncertain trying to figure out expected return is a bit of a fools errand.

That’s the benefit but I’m pointing out costs (or potential costs)

This is a fully general argument in favor of greater economic volatility. If you believe that, you shouldn't just be arguing for a gold standard - you should be arguing for the government to artificially create recessions.

That would be the same mistake but in the opposite direction. The argument isn't in favor of economic volatility for volatility's sake, it's in favor of natural volatility. Creating volatility artificially would be as foolish as breaking windows for the purpose of generating demand for glass.

Markets have proven to be very robust decentralized systems for allocating resources: if it is true that growth was higher before central banks started recession proofing, then there's an argument to be made that natural volatility is more optimal then our current level of volatility.

I think there are great arguments against the gold standard, but I disagree with these.

There's virtually no actual cost in having money depreciate slowly over time.

Perhaps. But that's not what tends to happen to fiat currencies. Most decline precipitously or fail entirely. The USD is the exception not the rule.

This is a fully general argument in favor of greater economic volatility. If you believe that, you shouldn't just be arguing for a gold standard - you should be arguing for the government to artificially create recessions.

The government shouldn't artificially create recessions but they should allow them to happen. I think the same thing about forest fires, BTW.

If this is tyranny, sign me up for another!

I will admit that the Federal Reserve has, to date, consisted of people doing their best in a mostly apolitical way. But just because today's king is good doesn't mean tomorrow's king will be.

Plenty of governments had no issue borrowing enormous amounts during WWII, so I have a hard time viewing a gold standard as much of an impediment to that.

I think this is somewhat contradicted by the evidence. The U.S. government actually received large amounts of gold from the debtor countries as collateral. By the end of the war, the US owned 75% of the world's gold reserves.

1,4

It's not clear to me how much a commodity standard actually constrains government spending. Presumably the redemption ratio between paper currency and the commodity is fixed by law and therefore can be changed. It's somewhat more explicit than the process today but it's not obvious to me how strong a check it would be substantively.

2

Its not clear to me how much of that economic growth is attributable to our particular currency scheme. Lots of things were different pre-1971 (including some pretty large technological developments) compared to what came after.

It's not clear to me how much a commodity standard actually constrains government spending. Presumably the redemption ratio between paper currency and the commodity is fixed by law and therefore can be changed.

Sure. And the government can go just go off the gold standard like they did during the Civil War: https://en.wikipedia.org/wiki/Greenback_(1860s_money)

But this at least requires a vote of congress unlike now where the Fed can just print money out of thin air.

Its not clear to me how much of that economic growth is attributable to our particular currency scheme. Lots of things were different pre-1971 (including some pretty large technological developments) compared to what came after.

Its not clear to me either and I would be skeptical of anyone expressing certainty. Nevertheless, productivity growth was higher back then so clearly the gold standard was not a huge impediment to long-term growth.

I would be very interested to read that case. My understanding was that you get a problem where the amount of precious metals stays constant while your economy grows, leading to either re-evaluation of all currency or a lack of money. More rarely the opposite can happen, as in the case wheee the Spanish discovered a silver mine and suddenly had a mass inflation of their silver currency.

It looks like others beat me to it, but IMO the gold standard wouldn't work today because there isn't a sufficient amount of bullion in the world.

There are only about 200,000 tons of gold that have ever been mined. This increases by less than 2% per year. Already by the Middle Ages in Europe there was a shortage of monetary metals due to a trade deficit with China and India. Since Roman times, Europe had shipped gold and silver eastward in exchange for luxury goods. By the 1400s, this led to the so-called Great Bullion Famine in which gold was nearly impossible to come by.

https://en.wikipedia.org/wiki/Great_Bullion_Famine

Without a means of exchange, commerce suffered greatly as people were forced to barter and use other commodities like pepper as currency.

The Great Bullion Famine only came to and end with the discovery of the New World, its plundered gold, and a literal mountain of silver at Potosi which even today accounts for half the silver ever mined.

There are no more Potosi's to be found. As the economy grows faster than the supply of monetary metals, the value of gold and silver would need to grow apace. Already, 1 ounce of gold is worth $2,000 and is completely impractical to spend. How much worse if it was worth $100,000?

There is 10 times as much silver as gold (God's ratio) but even the smaller silver coins would likely be too valuable to spend. Of course, we could create paper substitutes like we used to do. But the increased demand for gold (with built-in deflation) would lead to hoarding and the need for ever larger reserves. And how can we be sure that the gold is really in the government vaults?

The hoarding of monetary metals would crowd out valuable industrial uses. And the high prices would lead to wasteful mining that would destroy the environment and incentivize slave labor (as it did in Soviet Russia).

In a way, the Earth is fortunate. Gold is something that is rare, impossible to create, difficult to extract, perceived as uniquely valuable by nearly all cultures, and otherwise mostly useless. It's the perfect medium of exchange and store of value. Without it, trade might have been nearly impossible in ancient times. And without a store of value, capitalism might have never got off the ground.

But modernity caught up. There just isn't enough gold. WWI saw the end of the gold standard in Europe. Much of Europe's gold ended up in the United States, but even so the U.S. government couldn't keep up the show for long. In 1933, The U.S. government seized all the privately held bullion and didn't let private individuals hold it again until we went off the gold standard.

TLDR; We tried it before and didn't work.

There is 10 times as much silver as gold (God's ratio) but even the smaller silver coins would likely be too valuable to spend.

That isn’t true- you can buy 1/10 Oz silver coins pretty easily, which would be worth $2.40, a completely practical amount to spend. And anyways this is about transferable certificates of deposit, aka paper money, which could be issued in denominations of 1/500 Oz or whatever as needed.

Obviously there’s no good answer to the inherent deflationary effect, but in a double(or realistically triple) currency system deflation is probably not the evil it is in a single currency system.

Already, 1 ounce of silver is worth $2,000

No it's not. It's $24

Yes, gold not silver. Fixed the oopsy.

If the economy grows but the supply of precious metal doesn't grow at the same rate, the result is monetary deflation, which is generally undesirable for currency for a variety of reasons having mostly to do with discouraging investment.

That's price deflation. Monetary deflation is an actual contraction of the money supply. A lot of arguments against deflationary currencies rely on conflating the two.

Price deflation is still pretty bad because it shifts gains towards capital and away from workers. Actual contraction of the money supply is even worse, partly because it necessarily causes price deflation.

Price deflation is still pretty bad because it shifts gains towards capital and away from workers.

While economists seem pretty convinced that modest inflation is preferable to modest deflation, I'm personally unconvinced that for modest, predictable rates (which plausibly excludes Gold or Bitcoin) it matters much either direction. There are examples of specific commodities deflating (specifically, "for the same price in dollars next year I can get more/better product": computers, flat-panel TVs, cell phones, even cars) and none of the promised miserly spending habits have really appeared that I can tell. Apple didn't become a trillion dollar company because everyone is patiently waiting to get a better iPhone next year rather than this year.

Modest deflation means that you can earn a low-risk positive real return by hodling currency. Hodled currency doesn't circulate, reducing the effective money supply and causing further deflation, making it even more attractive to hodl. This makes the whole system unstable.

Wealth accumulation by hodling fixed-supply currency makes workers and entrepreneurs poorer. (It makes other hodlers richer, which is why Bitcoin culture is the way it is). Wealth accumulation by investing in new productive assets makes the entrepreneurs whose business you invest in and the workers they employ richer.

I don't buy that. Workers are the last to see their salaries increase in an inflationary environment, while capital tends to be the first that has it's value increased, so I think it's the opposite of what you're saying.

Also contraction of the monetary supply is way worse than anything that come out of it's effects on prices.

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