Category Archives: politics

Why Gold is a Bad Idea.

And then of course, some people actually say that being rascist doesn’t mean Ron Paul a bad candidate. But his economic policy isn’t exactly cheerio, either. He wants to go back to a gold standard, see, which has been proven not to work (See: Great Depression).

And this is why.

The US converting to a gold standard would require them to re-issue all currency in circulation as a fixed amount of gold. Since the US government doesn’t have a lot of gold, it would mean a lot less currency. Thus, they would need to purchase gold — as a result, the price of gold would skyrocket. The US government would have to sell assets in order to purchase the now absurdly expensive gold, or run a deficit. Taxes would be forced to rise to finance this.

However, this would be pointless, since approximately 1 trillion dollars of goods flows out of the US economy every year. Thus, the economy would literally bled gold bullion. The only way to balance out is a recession, so deep and crippling, that it would eliminate the US trade deficit.

Okay, the regulatory mechanism for the gold standard works like this. Suppose we have two countries, A and B.

Now, for whatever reason, country A is on the gold standard. It doesn’t matter what country B is on. Now, A and B buy and sell goods to one another. In order to buy and sell goods, the people in these countries need to purchase currency from one another to buy them.

When an economy buys things from another economy, they need to purchase money from the other economy to buy goods. So, for instance, country A needs to buy country B’s currency (call it B$) to buy goods from country B. And vice versa.

Now, as they buy and sell, there usually will be an imbalance been how much people buy and sell in a given country. For instance, country A may be buying more from country B than it is selling. This leads to an imbalance in the currencies, because people in country A will be buying up B$ and selling A$. When it all comes out in the wash, there is a surplus of A$ on the market — that is, the demand for A$ is lower than the amount supplied.

Now, people will work to correct this surplus, because it’s pointless for them to have A$ sitting around no one wants to own. In a quasi-fiat system of freely traded currencies, the exchange rate does this. Bankers and financial dealers adjust the relative values of the currencies to make the “price” of A$ optimal. Currencies wax and wane in value based on their economies and variety of other complex mumbo jumbo which doesn’t really matter here.

However, in the gold standard this doesn’t happen, because A$ are linked to a fixed amount of gold — that is, a commodity. Instead, people who hold A$ start redeeming them for gold, in order to sell them as a useful commodity. As a result, Country A’s stockpile of gold, which they use to back their currency on, dwindles. In turn, the supply of money for country A falls.

Not enough money is circulation causes the economy to constrict, since doing basic business becomes increasingly difficult. It also can cause deflation, and a host of other problems. In short, the only way for A’s domestic economy to come into equillibrium is for it to crash. Businesses shut down, and domestic demand for goods slows as the economy stalls.

While this is a bad thing, it does do one very good thing. If you have no money, because the economy is in recession, you can’t very well afford to buy items from country B. Thus, the supply of A$ on the market falls, and people stop redeeming the excess for gold. The process brings the two markets into equilibrium again, and all is well in the world of international commerce.

Of course, the side effects are not exactly pleasant for people in country A.