4T? What 4T?

[Kinser79]

(05-22-2016, 10:32 AM)Mikebert Wrote: There is a reason why there is no longer a gold standard.  The supply of gold is limited.  It expands at a slow rate.  The world output of goods and services (GDP) grows at a much faster rate than the supply of gold (S).  If gold was used as money, its value would be directly related to the ratio of GDP to S.  This means gold sitting in a safe draws a return and anyone would has more gold than they need to pay for living expenses would hang on it to.  This would reduce S and increase the value of gold further.  Thus by not using gold for purposes other than paying for consumption (i.e. investing) owners of gold would maximize their returns.

The economy would be in a permanent depression, which would eventually force world growth to slow down to match the rate of gold increase.  It would not take long for someone to propose an alternative and you would be back to fiat currency in short order.

Benjamin Graham proposed an alternative to the gold standard.  A "commodity standard" composed of a fixed basket of industrially-important commodities.  The inflation indices are a version of this kind of idea, but use a much bigger basket which is not fixed.  Central banks have moved towards targeting an inflation rate rather that a fixed level.  The reason for preferring a positive rate was to provide an incentive for holders of surplus money to invest it.

All of that assumes that representational money is an impossibility, which just by the mere existence of silver certificates we know is not the case. Remember I do have a collection of paper currency which includes things from Soviet Rubles to Rentenmarks to MPCs from the Vietnam Era.

Even if we say used a basket of commodities (I'd recommend only the ones most vital to the modern economy) we'd end up with a representational currency anyway. Furthermore it would be far more difficult for banks to hold in reserve tons of steel or coal or pounds copper.

That being said by using sound money based on specie yes there would be deflation but there is likely not going to be a depression. Rather a gold dollar or won or yen would have substantially more purchasing power than they do currently.

There is such a thing as fractional banking. If I deposit 1000 gold dollars into my bank then the bank should in theory be able to issue up to 5000 dollars in gold certificates because except where there is a run on the bank not everyone is going to demand their gold all at once. It isn't perfect but it is less prone to failure than fiat currency which is doomed to failure. If money is created by adding some zeros to an account book or turning on a rotary press the powers that be have no problem with using that to pay the bills. The only problem is that without the force of the state as a factor, those outside of the country are under no obligation to accept that paper for payment of anything.

I know this will as the other day I just received in the mail a 50 million rentenmark note, it was from the hyperinflation in 1923 in Weimar Germany. Getting it in good condition was difficult because by that time Germans were just burning their money cause it was cheaper then trying to buy coal.