IRC log started Fri Apr 26 21:55
<Subetai> Welcome to #GeekSpeak. Before we begin tonight's discussion, I'd
<Subetai> like to remind you that all transcripts from this channel are the
<Subetai> copyright of the channel owners - Tom Wright and myself. Channel
<Subetai> logs may not be copied or redistributed in any form whatsoever
<Subetai>  
<Subetai> Tonight's topic is "The Gold Standard". Ayn Rand recommended the
<Subetai> Gold Standard for the economy, since it anchors the money supply
<Subetai> to a tangible commodity and therefore prevents arbitrary
<Subetai> interference in the economy from any source, including the
<Subetai> government. I'd like to discuss the nature of a gold-based
<Subetai> economy, focussing on how it's different from today's economy. 
<Subetai> Also, I'd like to consider the contribution of the paper economy

<Subetai> Incomplete sentence there ...
<Subetai>  
<Subetai> Anyway ...

<Subetai> I'll start by asking the question: what is the gold standard? Why
<Subetai> is it called a "standard"?

<Subetai> anyone?
<Wright> The gold standard simply means that gold is used as a meduim of 
   exchange, or any other forms of money are backed by gold
<Fredrik2> Sub: The goldstandard is the unit of valuemeasurment.
<Subetai> Wright: Okay, so gold is used as the medium of exchange. Why is a 
   "standard"?
<Subetai> is *it* a
<MiDaS> Subetai: because it is the unit of monetary value. x kgs of gold.
<Wright> It is a standard of value.. a measure
<Subetai> More specifically?
<MiDaS> an absolute, objective measurement.
<Subetai> anyone?
<Wright> a measurement of the value of man's productive effort
<Subetai> It
<Subetai> It
<Subetai> sorry
<Fredrik2> Gold is almost indestructible, a luxury commoditie and can be 
   divided in very small parts.
<Subetai> It's the standard against which the value of all other marketable 
   items is judged. Prices of everything are defined in terms of how much gold 
   would buy them. That's why it's called a "standard".
<Yael> night
<Subetai> Kind of obvious, but I wanted that stated specifically.
<Freeman-1> Gold also has a relatively stable supply.
<MiDaS> Freeman: that is not true.
<Subetai> Fredrik, Freeman: We'll get to those points in a while.
<MiDaS> the fact that the supply curve slope changes over time is a 
   goodthing.
<Subetai> Okay, next question ...
<Subetai> Is there room for paper money under a gold standard? What are the
<Subetai> Sorry.
<Kpart> no
<Subetai> My browser is truncating. I'll type that.
<Wright> Yes
<HardCandy> Yes
<MiDaS> Subetai: sure, why not? as long as it is absolutely exchangable at 
   any time for a certain quantity of gold.
<Kpart> are you refering to money that is not "backed" by gold?
<Subetai> What are the advantages, if any, of paper? Who issues it?
<Bob_N> yes, as long as paper notes are redeemable in gold
<HardCandy> Only a to the extent it is backed up by equal amounts of gold
<Wright> There are many advantages.. the main one being that it is easier 
   to carry and store than gold is
<MiDaS> Subetai: bank or private mints should issue it. the advantage is 
   that it is light.
<BetsyS> Subetai:  People can use paper, plastic, or ANYTHING they want to 
   use as money if it is by mutual uncoerced consent.
<Subetai> Kpart: Why not?
<Kpart> I think bob answered that one... I presumed we weren't talking 
   about gold back money
<Wright> Any depository that holds gold may issue certifcates for ti
<HardCandy> Paper is easier (lighter) to carry. Issue by Dept. of Treasury.
<Wright> it
<Subetai> Betsy: I'm saying that in a gold-based economy (gold standard), 
   is there room for paper? Why? Who isssues it?
<Wright> Why involve the government in it?
<Subetai> Okay. So paper's okay so long as it's backed by gold. What 
   advantages does it have over gold?
<Wright> You take your gold to the bank, the bank issues you gold 
   certificates
<BetsyS> Subetai:  Anybody who wants to issue paper "notes" or "checks" can 
   issue it and anybody who wants to accept them can accept them.
<Subetai> As a medium of exchange, of course, being backed by gold.
<HardCandy> Paper fits in wallets....gold is heavy...
<Wright> Subetai:  The same idea applies to "electronic" funds
<Bob_N> A paper bill is easier to verify as valid.
<Subetai> Okay. So gold is heavy. You can't carry a testing kit with you 
   every time you accept a gold coin. It wears down and is lost. Hence paper.
<BetsyS> Subetai:  The difference between that and what we have now is that 
   the government _forces_ people to accept its notes as "legal tender".
<Subetai> Betsy: So paper is okay so long as it's voluntary.
<BetsyS> Subetai:  Sure
<Wright> And, why have the gov't issue money in the first place?
<Subetai> Should the government be allowed to issue paper currency, if they 
   back it up with gold? Or is that the function of commercial banks and/or 
   individuals?
<MiDaS> Subetai: the gov't should be able to do it if they need to pay 
   people. but they cant make a monetary supply
<Wright> well, I suppose they could give them out as payment, to police 
   officers, etc
<BetsyS> Subetai:  The government can write checks -- the original "paper 
   money" -- just like anybody else can.
<Wright> but no "official money"  
<Subetai> What's the difference, Tom?
<BetsyS> The govt may not force people to accept its paper or its credit.
<Subetai> Meaning that their money cannot be forced into circulation at the 
   expense of all other kinds?
<Subetai> ok
<Wright> The difference is that the gov't does not force everyone to use 
   it's paper, and does not forbit others from issuing it
<Wright> forbid
<MiDaS> Subetai: the difference is (other than coercian) that the only 
   paper it gives out is payment. it isnt 'official' as in a universal 
   standard in that sense.
<Subetai> Okay, next question. Has any country ever has a gold standard? As 
   we just defined it a few minutes ago?
<MiDaS> subetai: pre 1900 america
<Wright> Midas: It was close, not quite there though
<Subetai> Midas: I don't think so.
<MiDaS> i think england had a gold standard too for a while.
<Fredrik2> Subetai: I think scotland in 19th century.
<Wright> Lincoln issued the "greenbacks"  for example
<MiDaS> Subetai: why not?
<BetsyS> We've almost always had fiat money, but sometimes it was backed by 
   gold and sometimes not and sometimes partially.
<MiDaS> Wright: but he didnt coerce people into using them.
<Wright> there was official money, though it was backed by gold
<Subetai> Midas: There was no gold "standard" in the US before the 1870's. 
   There were many exchange medias before then, including silver, paper and 
   barter.
<Subetai> -s
<BetsyS> Prior to 1933 there was no law preventing people from specifying 
   "payment in gold" in their contracts.
<MiDaS> subetai: but the gold standard  doesnt have to be the only standard 
   to exist.
<Wright> Sube: Well, gold was dominent, if not a standard
<LurchGS> Sube - and ... never forget land
<Subetai> Midas: yes it does.
<MiDaS> subetai: why?
<LurchGS> Sube why does it HAVE to be gold
<Wright> You can only have one standard, that's what makes it the standard
<Subetai> Midas: Unless everything's translatable to *one* exchange medium, 
   it's not a standard.
<LurchGS> why can't it be any physical object
<Subetai> Lurch: It doesn't have to be gold. It could be anything.
<Wright> no, not anything
<Wright> couldn't be water, for example  
<Subetai> Anything will do. Some are better than others.
<LurchGS> Just wanted that cleared up, thanks, Sube
<Wright> or dirt, etc
<ClayH> Wright, why not?
<MiDaS> wright: it could be dirt. and water.
<Subetai> Wright: Why not? 
<BetsyS> Gold tends to _become_ the standard when people are left free to 
   choose because it is such a good commodity for the purpose.
<LurchGS> Wright - not dirt, but a specific parcel of land would work
<Fredrik2> Sub: As long as there are no law fixing the rate of exchange 
   between gold and other things e.g. silver. People willl use gold as a 
   standard and it will therrefore serve the porpose of a standard.
<Wright> hmm, how could you use anyting that is available to everyone in 
   virtually unlimited quantities?
<Subetai> The exchange medium doesn't need to be useful for any specific 
   purpose. It just has to be something that people agree to.
<MiDaS> wright: you could. it just wouldnt be smart, because it'd be a ton 
   of dirt to buy a coke.
<LurchGS> Wright - you could to it, but it would be worth less than a 
   current penny
<Wright> that's silly
<BetsyS> People agree to gold because it is scarce, durable, divisible, 
   portable, etc.
<Wright> Dirt can not be an exchange medium, any any meaningful sense
<Subetai> Okay. So a standard is better if it's (1) not very common, (2) 
   homogenous, (3) divisible (from C-TUI).
<ClayH> Wright, no one said it was a good idea, just that those things 
   could be standards if people were so inclined
<LurchGS> but you COULD have land based money, or even a money based on a 
   manufactured product
<MiDaS> Subetai: there's one more thing-- the commodities manufacturing our 
   mining or output should match the demand for it.
<MiDaS> our=or
<BetsyS> Gold has a _identity_ that makes it _good_ as a medium of 
   exchange.
<Wright> well, one COULD declare that the Hope diamond is the medium of 
   excahange, if you left all rationality out of it
<Subetai> Back to the question - did any country ever have a gold standard? 
   Meaning that paper was backed by gold, gold itself could be used in 
   transactions, individuals could issue currency/paper if anyone was willing 
   to accept it?
<BetsyS> Subetai:  We had a _de_facto_ gold standard -- with govt fiat 
   money too -- prior to 1933.
<Subetai> According to what I've read, pretty much the entire western world 
   was on the gold standard as we defined it from the late 1870's up till the 
   beginning of WWI.
<LurchGS> no, all you need to be able to do is redeem paper script for the 
   physical item
<LurchGS> something like that, it's patently not feasible
<Subetai> All government money during that period had to be backed by gold. 
   Individual banks could issue their own currency (and did), if it was backed 
   by gold.
<Subetai> What changed in WWI?
<LurchGS> Sube - not that I'm aware of - maybe ancient Rome/Athens/etc
<JonG> Hang on.  Think about what money has to be for it conveniently to be 
   exchangable.  How much sand would you have to exchange for a computer?  Is 
   that a practical solution?
<Subetai> Lurch: I just answered that question.
<Wright> in this country,  the creation of the Fed 
<Wright> that was the beginning of the end
<Subetai> Jon: Not all materials are suitable as a medium of exchange in 
   all stages of economic development.
<Subetai> Okay. The Fed was created in 1913. What did it do?
<Wright> brief or long version? :)
<Subetai> Brief :)
<Subetai> How did it destroy the gold standard, if it did.
<Wright> the Fed is a central bank... it was given control of the banking 
   system as well as the currency
<BetsyS> The Fed made gov't manipoulation of the oney supply -- by means of 
   credit inflation -- a tool of govt policy.
<BetsyS> oney=money
<Wright> this occured in stages.. now.. the fed has control over the money 
   supply
<Subetai> Was there something that happened to derail the gold standard 
   *before* the fed did all that?
<Fredrik2> night
<Subetai> When the US joined WWI, they placed an embargo on gold shipments.
<BetsyS> Subetai:  We had fiat money "not worth a Continental (dollar)" in 
   the Revolutionary War.  
<BetsyS> Subetai:  We had "greenbacks" with no gold backing during the 
   Civil War.
<Subetai> Betsy: right. During periods of war prior to WWI, the government 
   at several times prohibited people from asking for the gold their money was 
   supposedly worth.
<Bob_N> seized gold from the banks and melted into boulian.
<Subetai> The Civil War was one such period. The only true gold standard 
   was between 1879 and WWI.
<Subetai> Okay, moving on ....
<Subetai> What is the current monetary system? What are Federal Bank Notes 
   backed by?
<Wright> Not a damn thing
<BetsyS> Subetai:  A gun.
<Wright> "The full faith and credit of the U.S. gov't"
<Subetai> Yeah! :)
<paulf> the ability of the government to tax
<Wright> The current system  is based on fiat money
<BetsyS> Subetai:  Accept a Federal Reserve Note as "legal tender" -- or 
   else!
<JonG> Subetai: What are they backed by? Read them. "In God We Trust." I 
   think that about says it all. :-/
<Wright> I can give a lesson on the workings of the Fed later  :)
<Subetai> So paper currency is exchangeable for more paper.
<Wright> Sube: exactly.  
<Subetai> Okay. What were the reasons given for the abolishment of the gold 
   standard?
<Wright> but, the gov'ts guns force everyone to treat it as real money
<Subetai> What are some current arguments against it?
<Wright> Well..  it was  "too rigid"
<Subetai> meaning?
<Wright> that is the money supply was usually faily stable
<Wright> fairly
<Wright> and the gov't could not issue more money than it had in gold
<LurchGS> Sube - didn't I read someplace that they were concerned about 
   foreighn manipulation of the dollar through congtrol of the gold supply?
<GlennM> Did the US guarantee or back British currency around that time? 
   (WWI)
<BetsyS> Gold is "old-fashioned,"  there isn't enough gold any more, it 
   give countries which have gold (like South Africa) an unfair advantage.
<Subetai> Glenn: Sort of.
<Wright> next,  a sudden discovery of a new gold mine could flood the 
   market and "wreak havoc" on the ecomony
<Wright> economy
<Subetai> The gold standard didn't suddenly vanish. It was eroded 
   gradually. First, there was the embargo on international gold shipments 
   during WWI. Lots of countries moved away from the gold standard then, but 
   came back. When the US returned to it in 1934, it ...
<Wright> The main thing it doesn't allow gov'ts to tinker with their 
   economies very much
<Subetai> was a "partial" gold standard. US citizens couldn't ask for gold 
   for their banknotes, but foreign governments could.
<Wright> the "bretton-Woods system"
<Subetai> Any other arguments against it?
<Wright> oh, I'm sure I've forgotten a few.. I could grab an econ book...
<Wright> :)
<Bob_N> legal tender laws force us to use and accept fed issued fiat paper 
   money
<Subetai> The biggest, strongest argument that was made at the time, Tom. 
   It made the US and Britain abandon the gold standard.
<LurchGS> Bob - except the IRS doen't need to accept it
<Subetai> anyone?
<Wright> one min
<Subetai> Okay, it was this - when Britain reintroduced the gold standard 
   in 1925, there was a huge outflow of gold from the country. This was 
   because they had fixed the price of gold arbitrarily low. They said that 
   this decrease in money supply was okay, it would..
<GlennM> The gold standard kept the government from redistributing wealth.
<Subetai> bring down inflation. Instead, it caused massive unemployment. 
   That was the end of the Gold Standard, and the beginning of Keynesian 
   economics.
<Wright> Sube: that's really a problem with fixing exchange rates, not the 
   gold standard per se
<Subetai> Wright: Exchange rates aren't "fixed" under a gold standard.
<Subetai> All you can do is embargo gold shipments.
<Wright> This was because they had fixed 
<Wright>    the price of gold arbitrarily low.
<Wright> That is fixing the exchange rate
<Subetai> Tom: Right. That shows that it wasn't a gold standard at all.
<Subetai> It was a "partial" gold standard. The thing they blamed it for 
   was something they had added, something that should not have been there.
<Wright> That wasn't a real reason. It was at best a scapegoat
<Subetai> That's what I asked.
<Subetai> Okay ...
<Wright> and I'm sure they new it.. btw,  that isn't even listed in my 
   handy econ text as a "gold standard" problem
<Wright> knew
<Wright> the same thing occurs with a fixed rate under any other system.. 
   but that's another story  :)
<Subetai> Wright: It was what made Britain abandon the Gold Standard. It's 
   what caused the Fed to pump paper money into the US as a favor to Britain 
   (as Greenspan's article mentions) and start to ruin the US economy.
<Subetai> We'll get back to this later, if you want.
<Wright> True, but it is one of the more obviously phony problems
<Wright> that's all I was saying
<Subetai> Finally, what are the advantages of the gold standard? Would 
   there be inflation under a gold standard? Would there be cycles in the 
   economy?
<Wright> well, inflation is possible... if say a lot of new gold is found
<Wright> but that will be temporary, not the norm
<Wright> with a stable gold supply deflation would be the norm 
<ClayH> the problem with the idea of finding *alot* of new gold is this, 
   and I think this is very relevant, the more gold that is found over time, 
   the more gold you have to find for it to be *alot*
<BetsyS> There can also be inflation of the money supply through normal 
   credit expansion when business is good.
<Wright> Betsy: but that's not the same as the devaluation of money  
   (current inflation)
<Subetai> Betsy: I meant "inflation" in terms of rising prices. Would that 
   happen?
<BetsyS> Clay:  The Spaniards found "a lot" of gold in the New World, but 
   without productive capacity in Spain, all the gold ended up with the 
   British, the Dutch, etc. and the Spaniards were broke in a few decades.
<Wright> Betsy: of course.. it was like winning the lottery
<BetsyS> You wouldn't have inflation in that sense, since production of 
   gold (or credit) is in response to a rise in the value of gold because of a 
   rise in the amount of wealth.
<Wright> price increases are not the same as inflation
<Wright> perhaps we should define the term
<Subetai> Devaluation of currency. Your gold buys less than it used to.
<Wright> inflation= reduction in the purchasing power of money
<Wright> that can occur.. when the amount of money increases or
<Subetai> How about if there were severe droughts? A war in the middle east 
   leading to a drastic reduction in the supply of oil?
<Wright> when the amount of available goods decreases
<Subetai> So there can be inflations in a gold-standard economy?
<Wright> The goods become more valuable
<Wright> Sube:  yes
<Subetai> Anyone disagree with Wright?
<Wright> but...they would be relatively rare events
<Wright> ex, the gold mine
<Subetai> How about business cycles? Would there be booms and recessions?
<Wright> it increases the amount of money w/o increasing the amount of 
   goods
<Wright> as long as the government kept out of the economy, no
<Subetai> Wright: The market self-corrects instantaneously?
<Wright> corrects for what?
<MiDaS> Subetai: of course there are. but not severe at all.
<BetsyS> Subetai:  The really awful bvooms and busts have always been 
   caused by govt manipulation of the money supply.  Business in a free 
   economy would have its ups and downs -- but never anything like 1929 or 
   even 1980.
<Wright> what knocks it out of equlibrium on a regular basis?
<LurchGS> Sube - I'd venture to say that you'd have some fluctuation,but 
   boom/bust would be a local event, less and less likely, in the "information 
   age"
<Subetai> I agree with Betsy and Lurch. There would be some, but less 
   severe and less frequent than today.
<Wright> you didn't say fluctuation, you said "business cyle" of recessions 
   and booms
<Subetai> But that doesn't answer Wright's question. Why?
<Wright> that's not the same
<Subetai> Wright: Same thing. If it's noticeable, it's a boom or recession.
<Subetai> "mild recession", maybe.
<Wright> recession=  reduction in real GDP
<Subetai> yeah
<Wright> there might be fluctuations in the growth rate
<Wright> I think a true recession would have to have a cause
<BetsyS> GDP is a meaningless concept with a built-in Keynesian bias.  Ask 
   Richard Salsman.
<Wright> okay... forget GDP
<ClayH> Betsy, abso-fraggin-lutely... GDP doesn't measure anything relevant 
   to economics
<Wright> the economy produces less on the whole than the previos year
<Wright> negative growth
<BetsyS> You could have local recessions in one geographical area or one 
   industry, but no _general_ recession.  That's what Say's Law says.
<Subetai> How do eeconomists define "recession"?
<Subetai> -e
<Wright> That's what I was sating
<Wright> Sube: Like I said earlier
<Wright> at least in modern terms
<Subetai> Could that geographical area be as large as a country? The US?
<Wright> Sube: only with some big disaster
<Wright> a BIG one
<BetsyS> Wright:  Like a war -- or Jimmy Carter -- or Bill Clinton?
<Wright> use of the term GDP was for ease, not to support keynes, or the 
   way it is calculated
<Subetai> Recession = decline in real per-capita income, decline in 
   production, increase in unemployment (Encyclopedia Brittanica).
<Wright> That's gov't intervention, or the threat.. I said that before
<LurchGS> Betsy - if we were on a gold standard, politicos would have very 
   little influence on it - somethign like a war might, though
<Wright> and you are right, of course, the very defintion of GDP makes 
   Keynes's theory work
<khronos> Hey, Paul. Ping seems sort of normal now :)
<BetsyS> Lurch:  Even on a gold standard, high taxes and overregulation can 
   wreck an economy.
<khronos> Will wreck.
<Wright> like considering government spending as part of the U.S. output
<<Action>> khronos comes in late....
<Subetai> Okay. The scheduled discussion is over. Anyone want to raise any 
   questions about what we've said?
<LurchGS> Betsy - hmm.. good poitnt
<Wright> using the current GDP measure... the economy actually comes out 
   ahead when the gov't raises taxes and spending by equal levels   
   (supposedly)
   IRC log ended Fri Apr 26 23:11