Wednesday, 17 February 2010

A curious assertion about the Gold Standard

I don't have any particular reason to disagree with John Redwood when it comes to rigged exchange mechanisms, but I found part of this curious:

History shows that rigged exchange rates do not work. The Gold Standard…bankrupted many businesses and created mass unemployment.The snake in the 1970s failed to keep the pound at a constant value against the Continental currencies. The Exchange Rate Mechanism caused a bad recession, and then collapsed.

Since there is a wing of the LPUK that wants us to go back to a gold-based currency, I wondered if they would comment on this and point out why he might be right or wrong. Or if I'm just misunderstanding what he's saying.


Ray said...

I thought the problem was when Britain (in about 1925) tried to rejoin the gold standard it pegged sterling's rate against the dollar at the pre-war level which was way too high - and it is *that* which caused all the problems as our exports etc. were incredibly expensive.

With a truly free money system (free as in liberty not free as in giving it away) different media of exchange would float against each other - so if a gold backed sterling did collapse in a fiscal heap then something else would be used instead. The nominal value of the medium of exchange (gold coins, silver coins, gold backed paper, fiat paper etc. ad nauseam) shouldn't matter until someone tries to fix the value of those things against the 'market value'. Then things go wrong.

This is my personal probably dumb view of things, nothing to do with the LPUK, and I will probably get ripped a new one by people who know more about such things than I do.

Ray said...

Wow I used the word 'things' a lot in that comment, probably proves I don't know what I am talking about.

Obnoxio The Clown said...

Thanks Ray, I suspected I'd been misunderstanding what he was referring to.

Tourist said...

Yeah he probably just means that we were in at the wrong rate, as we were in the ERM.

The only "real" gold standard is the use of gold itself as currency, or private storage and receipts representing it.

Any state-created "gold standard" will be essentially fake, because they have always, without exception, sought to manipulate and debase the currency for their own ends (mostly to finance war, but also to extort for themselves). They may say, for example, that they will bring out a note which is redeemable for a certain amount of gold. And perhaps at first this works - this would nearly be a real gold standard. But it is inevitable as gravity that eventually they will impose restrictions on the exchange of notes into gold, through fees and taxes and increased red tape, forms to fill out, etc. These will pile up until the redeemability is all but gone - and they will then do away with it entirely. As they have done. Bastards.

Devil's Kitchen said...

That is why the Gold Standard is not LPUK policy.

Not that the Gold Standard actually even stopped inflation. Or bubbles.


Ἕκτωρ said...

This is interesting:

bella gerens said...

This is really asking the wrong question. Ultimately it makes little difference what is used as currency, as long as the market determines its value.

The main objection to fiat money is that its value fluctuates according to government diktat. The idea of money is that it represents some value - it is exchangable for some asset. When the government prints more notes, it doesn't create new assets to back those notes. The market rearranges itself accordingly, so that all the notes are restributed proportionally to the existing assets - this is why we get inflation.

On the other end of the scale, if there are more assets than notes, we get deflation.

Eliminate government control of the money supply, and it will not matter much whether the money is gold, or notes, or whatever, as the market will continually rearrange according to the ratio between assets and money.

Allow the government to control the money supply, however, and you introduce distortions, regardless of what the money is made out of.

Krauser said...

Read Murray Rothbards "What has government done to our money" for a history of how we've never had a legit gold standard.

What we had was better than the pure fiat of today, but it didn't have the true discipline of gold.

Stable currency never EVER causes bankruptcies. It's just a convenient scapegoat - like blaming the bailiffs for you being repossessed.

actommen said...

I think the crux of Mr Redwoods article is not about the Gold Standard per say. He is arguing that it is not possible to enter into a currency union where all parties have different economic conditions, taxation systems, public sectors, etc. The comment about the gold standard is illustrative of such a union.

The "what rate" argument is spurious because ultimately the lack of common fiscal and economic control will doom the project as different economies perform differently over time.

The market mechanism of pricing floating currencies allows revaluation and devaluation of economies. The EU is clearly not a single economy - interest rate policy for Greece and Eire is perhaps not ideal for Germany. In the gold standard era the economies of the British Empire and the USA were diverging.

The whole piece by Mr Redwood is very good, but is alas too hard for the average couch potato to grasp. But the guy is consistent. I used to buy into the lefty propaganda about him when I was younger, but now I'd be more than happy for him to be Chancellor.

David Davis (Libertarian Alliance) said...

How about silver? There's a lot more of it for a start, and it's more convertible into industrial commodity-stuff more quickly and over a lot of industries.

Real Estate Values said...

The gold standard would be the TNM system after surgical resection. T for tumor; how deep it invades into the colon wall and if there is extension to adjacent structures.

James Tyler said...

A silly error, from a usually erudite and clever commentator. He conflates the mistakes politicians make with the function of money.

Money was Gold until politicians severed the link for various illiberal exploitative reasons (try for how politicians use money now).

Money evolved from the free market, and the free market chose GOLD. It sprung from the need to facilitate trade away from barter by providing a commonly accepted good that was valuable, portable, uniform, desirable and respected by all. Gold fitted the bill.

Criticisms of gold are generally either criticisms of political intervention (UK 1925) or fractional reserve banking (every boom bust you can name).

In 1844, the Peel act tried to stop the process of money counterfeiting by preventing banks from over issuing bank notes (that were all deliverable into gold at the time), but failed to anticipate the importance of banks' accounting practices. This oversight spawned fractional reserve banking, which (as London was the world centre of finance at the time) infected the whole world and lingers on wreaking havoc via manic/depressive boom bust cycles.

Time to put an end to it all;

James Tyler said...


It is precisely because Gold has NO industrial use that makes it desirable as money. You do not want the purchasing power of your money determined by the economic cycle of a specific industry that may bear no relation to you.

Anyway, it should not be a matter of choosing a currency type, it should be a decision of how we can get back to situation where spontaneous order can be allowed to choose what money mechanism to use (which was Gold until it was rudely interrupted).

James Tyler said...

DK. Read and understand Rothbard before binning the Gold standard. LPUK monetary policy is badly thought out, not particularly liberal and certainly not viable.