Wednesday, October 7, 2009

The Gold Standard 2.0

For the longest time, I have disagreed with Ron Paul's call to return to the gold standard. I thought, how can this possibly work? In order for our economy to grow we must have a growing money supply, right?

Maybe. But it's impossible to accurately measure and predict economic growth, so we can't grow the money supply at exactly the same pace. So to be on the safe side we print a little extra each year, which decreases the purchasing power of each dollar already out there, and we call it inflation.

In a gold system, as the economy grows, instead of regular inflation we would have regular deflation, as the purchasing power of our gold steadily increases.

A cursory Google News search turned up some interesting analysis:

Now, a small amount of gold can go a long ways - global trade in 1913 was huge, and not matched until the mid-1990s. (I know that may seem hard to believe, but things fell a long ways down due to WWI and then the Great Depression). It was based on a 90-day instrument called a Real Bill, backed by gold held in the Bank of England. This Bills could be used to borrow against, and traded multiple times. A merchant in England contracted for cotton in the US to be shipped to a plant in China to be manufactured and shipped back to a store in London. The same, single Bill would be used at each step and often got traded or ‘discounted’ over 20 times. It all got cleared within 90 days and everyone paid off their debt - the many swaps down the chain simply paid off each other. (If you play with the math you can see it works.) As long as the balance of trade of the Bank of England was even, no net gold went in or out; it simply got shuffled in the vault from one bin to another. A small pile of gold could support a huge and growing trade system.


[Real Bills] were an emergent property of capitalism, arising early-on in the Italian city states, and hence were a very resilient system. Yet they died during WWI and have been largely lost to economic history. Instead we have commercial paper and other short-term instruments to finance trade, and are beholden to the whims and fancies of the banking sector.

The gold standard has been used for thousands of years. This recent fiat business is a scam perpetrated by governments trying to avoid their debts, and we're all paying for it.

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