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Originally Posted by Irish Liberty Forum  I'm pretty sure he wouldn't say that gold is inherently valuable. If you agree that economic value is subjective then nothing really has inherent value. What's remarkable about gold is that it is free market money: when a monpoly on the supply of money is not enforced over an economy, it almost invariably chooses gold. This is what makes gold special. And it's easily understood why a free market would choose gold as money, since it satisfies all the properties we can think of that a money commodity should satisfy: high value to weight ratio, non-decaying, fungible, highly malleable, etc. It has all sorts of industrial and cosmetic uses. Gold is the quintessential money commodity. |
But my point is gold and paper money both have value for the same reason, because we attach it to it. I would argue that all of gold's industrial and cosmetic uses are reasons not to inflate it's value by making it currency. Gold is such a useful metal why waste it in a way that doesn't utilise it's industrial value and which doesn't maximise it's cosmetic value.
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If you compare that with fiat money, there is clearly a world of difference. We use unbacked paper money because the government monetary authorities are enforcing it as legal tender. The money is useless, can be manipulated and debased by the government for the achievement of their own political objectives, and will collapse whenever the government collapses.
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Another way of saying the money is government enforced is that it is government backed.
What's stopping people using or trying to use gold coin now? As I said above the fact that money is otherwise useless can be a positive because no other resource is being over valued.
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Without fiat money, there could be very little deflation or inflation. The money supply would grow or contract only as the supply of gold (and probably silver) grew and contraced. Much would depend on the nature of the banking system - if there was a free banking regime, then it is likely that only those banks with very high (close to 100%) gold reserves would be successful. And then the money supply would be basically constant.
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It wouldn't be constant because of two things.
The first is people losing the lower denominations just like today.
The second is gold mining and "forgeries" with gold anyone who has gold can add to the money supply because even if they're not perfect copies of bank minted coins they're still gold. Leading on from that the extraction of gold from mines would increase the money supply and I think that the amount extracted would vary from year to year which could mean deflation one year then inflation the next.
To combat this you could have a monopoly or cartel try to create coins which are very hard to forge and only these coins be acceptable but then the monopoly shouldn't be in private hands since they'd act in their own interest perhaps a government monopoly of currency...
Also I disagree that if there is a free banking regime that 100% reserves would be the norm. Some banks would have the lowest possible reserves, these banks would give depositors the highest interest rates and lend at the lowest interest rates. Other banks would have more respectable reserves but because they have to compete with these short-termist banks these respectable banks would have nothing like 100% reserves, I would be surprised if there would be any banks above 50% reserves. Just like today when things go well the short-termists would make a killing but when things go badly... oh wait you're saying things just won't go badly...
The whole reason fractional reserves exist (as you most likely know) is because people extremely rarely take all their money out at once so a 100% reserve or close to it is bad business.
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With regard to the incentive to invest, let me put it this way. Suppose I said that I was going to steal 10% of your savings every year - would this make you more or less likely to invest? And do you think that this would be good for the economy? I ask you this because, unfortunately, inflation amounts to little more than the theft of people's savings, through reductions in their purchasing power. A similar effect would be created if those people who receive the newly created money or money substitutes simply took proportional amounts out of the accounts of others.
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If there was no way of me avoiding that 10% loss of my savings then yes I would look for a way of investing my money which would be higher then that 10% loss of my savings even if that meant a risk, of course I would, I'd be a fool to just watch my money decrease in value. This is good for the economy because my money is now invested in the economy. Inflation(caused by increasing the money supply) is like a tax some people call that theft but if spent wisely or on vital services most people don't have a problem with it.
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I will concede that inflation can stimulate investment through adjustments of the prevailing interest rate. A robust business cycle theory should demonstrate to you the deleterious effects of this action though, and the credit crunch of 2008 is an excellent example. By sending entrepreneurs false signals about people's real time preferences (i.e. that the savings rate is higher than it really is), all sorts of malinvestments are inevitably produced. The massive new supplies of money are pumped into sectors of the economy (the stock market or the housing market for example) where the structure of production becomes strained and imbalanced, with an inevitable bust.
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That is bad investment, bad investment is unsurprisingly bad. Bad investment isn't in the interest of anyone(well maybe short term investors who know it's bad), it is why we need regulation to stop bad investments. Busts may not be inevitable if regulation prevents a false boom.
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In short, investment-stimulating inflation cannot be good for the overall economy. False interest rates and money pumping distort the structure of production away from that whch reflects people's true preferences. Grossly irresponsible monetary policies can eventually lead to hyperinflation and the destruction of the currency.
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Inflation incentivises all types of investment not just the bad so to just point out one type of investment then say inflation cannot be good for the overall economy because people might invest foolishly doesn't hold up as an argument. The fact that grossly irresponsible monetary polices lead to hyper-inflation and the destruction of the currency is an argument against (and a disincentive for) grossly irresponsible monetary policies.
Basically the problem with the current system is that it was under regulated and improperly audited any system that is under regulated (example for gold, impure coins going unchecked) and improperly audited (example for gold is the same as now banks saying they have more then they really do) will undergo a crisis.
So I would like you to explain:
1. Why is gold being useful for non-monetary reasons a reason for it to be used as money?
2. What's stopping people using or trying to use gold coin now?
3. How would money supply be constant if people continue to lose the smallest denominations of it?
4. How would money supply be constant when gold supply isn't?
5. If money supply is made independent from gold supply then wouldn't it just be paper money that's "printed" on gold coins?
6. Why would banks have near 100% reserves?
7. If you can't say why banks would have near 100% reserves then doesn't gold have many of the same problems as fiat?
8. Do you believe grossly irresponsible monetary policies are possible under the gold system?
9. Why do you think or act like you think inflation can only incentivise bad investment, instead of just incentivising all types investment which includes bad and good?
10. What is the difference between an under-regulated badly audited fiat system and an under-regulated badly audited gold system?