Notice when the recessions were more frequent and more severe.  During the gold standard.

Since we left that behind and went to fiat money, recessions have been MUCH less frequent and less severe.

Hmmmm....




Forget the evil hockey stick,  not related to this thread's issue it is being dicussed elsewhere.

I always wondered what would happen if the price of gold wasn't arbitrarily fixed, like it was under the "gold standard". It seemed like we were doing it half assed.

More frequent, perhaps. But I question the "more severe" claim. Any metrics on his? If it turns out that the recessions were more frequent and less severe it would appear that the gold standard simply was more stable over time, with smaller ups and downs.

More regulation of financial institutions were implemented in the same time frame

With a gold standard there are only two ways to grow significantly.  Conquest and slave labor.  Fiat money based systems can only grow through inflation.  With gold the economy and the government had to stay in check.  With fiat the government has grown a thousand fold because there is nothing to keep it in check.

You act as if there is something wrong with that.  Money is just a TEMPORARY store of value.  Also as the population grows the money supply needs to grow with the increase demand for money.

No metrics, but go read about a few and see what you think.

The difference in length is obvious, they are shorter with fiat money.

You forgot gold mining.




 

Nope.  I said grow significantly (say > 2% per year).  Mining falls within that.

This happened:

http://i709.photobucket.com/albums/ww91/flindelaaf/AMBSL_Max_630_378.png?t=1232778149

The geometric increase in the adjusted monetary base facilitated the creation of credit in the economy.  The resulting expansion in credit lead to the so-called "Great Moderation" and the economic "growth" that we experienced over the last decade or so.  One attribute of the Great Moderation is the declining frequency of recessions.  It was a mirage.

The massive borrowings illustrated in your chart are the direct result of the great credit expansion.  It is most certainly related to this thread's issue.

A mirage that lasted over 70 years?

Of course in 70 more you all will still be saying   "YES, it is a 140 year mirage, collapse is just around the corner."

The current problem is in large part to a Carter law that was made worse by a Clinton law and ignored by Bush and Congress a few years ago.  Well some of the Rs tried to do something, but the weak Rs and Ds stuck their head in the sand.

Fiat money is NOT the problem.  .gov interventionism is.

Infinite growth?  Exponential growth?  Growth of money supply that has to equal interest on debts?  

Tell me, when a monetary system is designed around the assumption of constant growth, what happens when growth stops?  *Points at European  countries and their declining birthrates and aging populations.*

Also, when value goes up, so does purchasing power...  And coinage can vary in purity to alter value.

We went off the gold standard in 1971 when Nixon closed the gold window, not 1933 when FDR banned the private possession of monetary gold.

The Bretton Woods agreement of 1944 established an international gold standard.  It provided for the convertibility of U.S. dollars into gold by foreign central banks.  The actions of the Federal Reserve were still constrained by the gold supplies of the United States.  

Nixon severed the convertibility of U.S. dollars to gold in 1971 with the closing of the gold window.  We have only been off the gold standard for 38 years.  The massive credit expansion and the resulting Great Moderation followed the closing of the gold window.

That assumes that the change to fiat money is the *only* difference in the financial history during the length of time shown in your chart. It is like comparing the earth's temperature with the number of pirates; the two lines may appear to correlate but are in reality unrelated. No causuality.

Welcome to the site Flindelaaf.

And this would also be a golden opportunity for a tag

Thanks, ultramagbrion.  

I'll pick up in the morning.

no matter what you say, pirates likes shiny gold coins, so, neeeeener!  

If growth stops, your society is DONE anyways...

It doesn't matter what your money is doing if you are reproducing below replacement.

In a society based on credit, purchasing power going up kills the economy...

We are and will remain a society based on credit.

There are two ways to go. One is a fixed price enforced with government coercion. The other is market forces calling shots and dealing with the variability of the price of the commodity.



When you set any standard, the standard has to be defended vigorously. Everything and everyone must conform. This produces a very rigid system that does not deal well with problems. The more static the system is, the more stable the system is. Any dynamic changes will only cause instability; then the system will collapse, and you'll have to start over.



On the other hand with market forces setting prices, your system has the ability to deal with slow-downs and speed-ups. It will always lag, though.



So you can have a dynamic system with gold. However, the US has a 13 Trillion dollar economy (or did until this Summer.) How much gold do you think that would be? What about the industrial uses of gold? We'd have to stop that. Or the non-productive uses of gold such as jewellery? There would be no more of that as well. These other uses of gold cause a country's supply of gold to be unstable. Unstable elements in a system cause the system to collapse. International Trade is another cause of changes in a gold supply. This is ultimately what makes a system crash. When you import, gold is exported. When you export, gold is imported. For those of you that think being a big exporter is great, Japan has been a net exporter for decades. They were mighty rich in the 80s––-until their real estate market collapsed.



Then there's this point. How do you practice fractional reserve banking on a gold standard? Only by diluting the standard, can you practice fractional reserve banking. The simple fact of diluting the standard will in time cause the need for more dilution etc until the system collapses.

And the reason Nixon closed the gold window was because a number of countries (let's call France the leader) were getting US gold at $35 an ounce here and selling it at the then market price of $110.



The big question is would it have been a smart move if the US unilaterally valued US gold at $110 an ounce?

No, the big question is what would have happened if the US had exercised the restraint necessary to maintain the peg, the problem wasn't  the dirty French, it was guns and butter that undermined the system, it'd been spinning out of control for a decade when Nixon closed the window, it wasn't  something that just happened overnight.

I would think it would be obvious to everyone the advantages of being able to simply cut rates and goose the economy whenever there was a slowdown and why it would show up on a chart like that, the resulting malinvestment compounding upon itself over time is much harder to quantify, and given the scale of a superpowers economy and the endowment of unexploited natural resources our young nation was blessed with it isn't unexpected that it would take several generations to fully capitalize (borrow against) all that wealth.

I look around and I see massive, systemic malinvestment due to artificial credit supplies everywhere, it's very plain to me that debt instruments as legal tender in payment of debts are a major contributing factor in the way we have collectively squandered so much, but I suppose the course of development over many decades is too abstract a concept for many to grasp.

I'm not a big fan of the gold standard as such but the current system is mathematically certain to fail at some point (continuously increasing input requirements in a finite environment), the only question is how big the population will be, and how little freedom they will retain when it finally does.

Yea monetary inflation is great; any fool can see that it is the solution to all economic problems.
Just ask anyone in Zimbabwe.
~

The second part of your statement remains to be seen.

The problem is that a potentially temporary and correctable period of stagnant growth to be exacerbated into a more severe societal decline spurred by economic instability/collapse.

Obviously dictating prices contrary to the market causes problems.

Hammer meet nail.

Zimbabwe-style inflation is a symptom of total governmental failure.

Not the cause.

You will never see ZIM style inflation without a similar political failure (ex: The defeat of Germany in WWI & subsequent liquidation of the German economy for war reparations created the Wiemar Republic's inflation problem)

The gold standard was more certain to fail, due to a finite supply of money against ever-increasing demand... And the result of monetary collapse is the same regardless of the nature (inflationary or deflationary) of said collapse.

A 'hard' gold standard, by it's nature, requires that you dictate prices contrary to the market (fixing the price of gold to currency-units)

Not in the slightest.

Modern economics is and will remain credit based.

The level of information processing & storage available ensures it, as it makes systemic credit posssible: Now that you can mathematically record, evaluate and track a person's creditworthiness, their *ability to pay* and the *probability that they will pay* is worth more than the actual money said person has on them at any given time...

The concept of credit, and it's position as the cornerstone of a modern economy, isn't going anywhere, absent a total loss of computer technology (which isn't happening)...

Going away from the Gold standard is what helped us to defeat the USSR. Once we were allowed to spend on credit everything went through the roof, and the USSR tried to keep up. Which is impossible for a Communist country to do, and it exhausted them.

I like the idea of haveing something tangible for my earnings. I am not fully convinced it is a good idea though.

ETA:



True, but the credit reporting system needs to be seriously reconstructed. The current system of reporting is corrupt.

You win stupid question for the day.

No, then they would buy it at $110 and resell it at $300 or whatever the current price will be.

Think about it.  Gold is a finite resource, as the population goes up the demand will go up AND thus the price.  If you try to keep the price at a certain level you are breaking the law of basic economics.  When you try to break that law economics fucks you.

The ONLY way to enforce a gold standard and NOT fuck it up is to maintain human global population at a specific level.

My first two replies were not models of clarity.  I'll try better here.

The point I was trying to make was essentially this: The reduction in the frequency of recessions in modern times is the direct result of the massive credit expansion overseen by the Federal Reserve.  How did the Fed. do it?

The root of our monetary system is measured in the adjusted monetary base (the first graph that I presented, reproduced below).  It is measured as the sum of (1) cash outside the banking system and the Treasury and (2) reserves of banks on deposit and the Fed.  Click here for the definition at the St. Louis Federal Reserve's website.

http://i709.photobucket.com/albums/ww91/flindelaaf/AMBSL_Max_630_378.png?t=1232820834

The Fed. controls credit expansion via increases in the adjusted monetary base.  Please click here for an explanation of how the Fed. manipulates the adjusted monetary base, via changes in reserves on deposit at the Fed., to control credit expansion.

As you can see in the chart above, the Fed. has been busy expanding the monetary base to provide for the credit expansion that we have witnessed.  How does the fiat vs. gold debate fit into this?

Physical gold supplies cannot be manipulated by the Federal Reserve.  Thus, because the Treasury must have enough gold to back all money, a gold standard limits how much the Fed. can increase the monetary base.  Fiat dollars place no such contraint on the Fed.  It can create money, via permanent open market operations, with no constraint to increase the monetary base.  The expansion in the monetary base fuels credit creation.  Thus, fiat money has allowed the Fed. to blow a massive credit bubble which caused the Great Moderation, thereby resulting in the decrease in the frequency of recessions indicated in the chart that sherrick posted in his first post.

As I mentioned, the U.S. went off the gold standard in 1971 when Nixon severered the dollar's convertibility to gold.  Why did he do this?  During the 1960s, the Federal Reserve expanded the monetary base (dollars) beyond what was supported by the amount of gold held by the Treasury.  This abrupt change in the monetary base can bee seen in this chart, which is illustrates the data of the first chart above from 1944 to 1974:

http://i709.photobucket.com/albums/ww91/flindelaaf/AMBSL_1944_to_1974.png?t=1232821575

The Fed. did this to help the U.S. government pay for the Vietnam War.  The problem was that foreign central banks sniffed out that the Fed. was expanding the monetary base beyond the expansion in the supply of gold held by the Treasury.  In essence, the Fed. was creating dollars not backed by gold.  The result was that foreign central banks began to redeem their U.S. dollars for gold held by the Treasury.  This caused a massive outflow of gold from the U.S. Treasury.  It got so bad that Nixon was forced to severe the convertibility of dollars to gold.  Without that convertibility, the Fed. has been free to expand the monetary base without constraint.  

Hence, the credit bubble and attendant Great Moderation we have witnessed:

http://i709.photobucket.com/albums/ww91/flindelaaf/CreditMarketDebt.png?t=1232822305

That was the point of the question: what good is a standard if it needs to be changed. Also, since I'm sure they don't cover this kind of stuff at strip clubs or while getting a $20 blow job from some oddly effiminate crack addict boy, asking questions to illicit answers is called the "Socratic Method." Here's where you can learn more about the Socratic Method: http://en.wikipedia.org/wiki/Socratic_method



As for the rest of your post, I agree with it. If you had read my post in response to subnet's post above it, you might have noticed that. Or maybe not.

I'm not worried about the credit scores for individuals.  I'm more worried about the scores for countries.  

Artificial money supplies are just that - artificial.  They will work as long as everyone is willing to pretend that fake money has value.  The more that value lie is stretched the less people will be willing to believe it (this is where we are at now).  Now most know the Big Lie theory.  If caught in a Big Lie the only answer is tell a BIGGER LIE (this is the bailouts and the Obama trillion dollar plan). Eventually, the truth will catch up to the big lie.  That will be the moment the S will H The F.  

The first sentence of your post posits restraint by the US. How likely as that ever been? Pres. Johnson increased the commitment in Viet Nam and pushed through the "Great Society" all without raising revenues. There was no political choice other than to do what government did. Most politicians are not economists. They attend briefings by economists for the purposes of learning what they can either manipulate or learn what kind of decisions come crashing down quickly or what Clinton learned what kind of decisions will crash after you're out of office.



On the other hand, if the world was run by economists, I don't believe our freedom would be any greater. Individuals would be told to sacrifice for the betterment of society as a whole. We would probably have more efficient distribution systems which would allow for lower costs, but our freedom would still be inhibited. This is what any form of government does, inhibits freedom of the ruled to make it easier to rule over them. A gold standard will not make us free from government tyranny.



As for the gold standard or any gold standard, I don't get the love affair with it. As a bit of history, the Gold standard barely made it for 30 years. A number of countries suspended it during World War 1 because they were going to run out of money to buy food, munitions and pay soldiers. What good is an economic standard that needs to be suspended so people can be fed and paid?

Good stuff.





 

And yet with the FED's ability to create money at will, it hasn't created money at will. It's only been in response to economic pressures––unless you can find the historical instance where the FED just decided to increase the Money Supply for no reason!––that threatened the stability of the economic system. That's the big job of the FED: keep things stable; don't let it go too far too fast in either direction. And when it fails, as it did in 1930-31 and again 1936, that was because of political considerations, not economic.



Again, a gold standard does not stop or prevent government tyranny. It does inhibit economic thought and economic freedom though.

No matter what you say, this...






will always be worth more than this...

And this will always trump both....

GOOOOOOOLD, I love goooooooold!

What are the units on the y axis?



 

Yes, steady, stable economic growth IS great.

Really?

So will you give me 200 $100 bills for 1 oz of gold?

Hell I'll take 20 $100 bills.

We can do the deal this week. We both send our exchange to a trusted agreed on person.  DK prof?  I have a maple leaf sitting in my bank box.

I apologize, I didn't realize your question was rhetorical.

I will give you 200 $100 bills for 200 1 oz gold bullion coins.



(I think you are taking my "always" statement a bit too literally.)





 

Backing up, huh?

Always means Always.

If you don't believe the words, then don't say them.