The Gold Standard

I’ve been reading Megan McArdle’s various posts about Ron Paul’s rather kooky idea about returning to the gold standard.  It seems to have brought the Ronulans out in force.  I love comments like this:

You are a clueless woman. I am just an engineer not an economist, and yet I know these things. A piece of sincere advice – you should stop posting on all matters economic. Focus on some birth control pills and stuff.

I am an engineer as well, and I also know a bit about economics, but I an also aware I know a tiny fraction of what Megan McArdle knows on the subject.   This sounds like a case of people hearing something they don’t want to believe, and attacking the messenger.  Truth hurts, I suppose.

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5 thoughts on “The Gold Standard”

  1. Gold, like any other material, has no inherent value other than what humans give it. Anything can technically be used for money (and various societies used different commodities) and gold was merely the most common in the Eastern Hemisphere.

    I suppose we could have a Cocaine Standard or a Marijuana Standard. All money will be backed by cocaine or marijuana.

  2. cheers,
    To me, a bar of gold is little more than a big sample of a heavy element, worthless to most organic processes.
    I’m a chemist, in case you’re wondering.

    In the 18th century, Aluminium was far more valuable than gold, but that value crumbeled when electrochemistry became available to the industry. Same could happen for anything: the prices of food will crumble when we discover efficient artificial carbon fixation, energy prices may plummet if a new energy source can be tapped into …

    IMO, the only thing we can apply permanent monetary value to, is service provided by a person.

  3. Neal Stephenson’s last four novels have quite a bit to do on the nature of money. While I think it’s impossible to sum up in a few sentences what he rambled on for 4000+ pages, Stephenson basically says that money’s sole purpose is to facilitate trade. It doesn’t matter what the basis is (land, gold, aluminum, corn, or government fiat), as long as everyone understands the rules and the money is traded in a free market.

    Money has been going through continuous cycles of having a basis in tangible commodities to having no “real” basis at all. But the way it behaves has been static for thousands upon thousands of years.

    I’ll leave you with an interesting exchange from Cryptonomicon. The setup: Goto Dengo, the founder of a large Japanese engineering / industrial corporation (think Honda) is talking with the main characters.

    “Gold is the corpse of value,” says Goto Dengo.
    “I don’t understand.”
    “If you want to understand, look out the Window!” says the patriarch, and sweeps his cane around in an arc that encompases half of Tokyo. “Fifty years ago, it was flames. Now it is lights! Do you understand? The leaders of Nippon were stupid. They took all the gold out of Tokyo and buried it in holes in the ground in the Phillippines! Because they thought that The General would march into Tokyo and steal it. But The General didn’t care about the gold. He understood that the real gold is here–” he points to his head “–in the intelligence of the people, and here–” he holds out his hands “–in the work that they do. Getting rid of our gold was the best thing that ever happened to Nippon. It made us rich. Receiving that gold was the worst thing that happened to the Philippines. It made them poor.”

  5. For more fun – consider the relative performance of the economies of Spain and England during the height of Spanish exploitation of the western hemisphere.

    In short, the English colonies mainly did not have gold, and while the privateers of England (Drake’s voyage around the world netted the Crown as her share a value approximately equal to the national budget) did take a fair amount of money off the Spaniards, Spain brought in a LOT more silver and gold (AKA money) from the NEw World. And it devastated the economy.

    Money backed by commodity is a recipe for economic failure, since a change in the value of that commodity will necessarily screw up the valuation of everything else…

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