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How did the gold standard work?

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Re: How did the gold standard work?

#71

Post by colechristensen »

hahajk wrote: post #22
rr808 wrote: post #12

There are real practical problems with gold and changing economies. What happens when your population goes up - you need more gold. Or economic growth. Similarly if gold is discovered like Spain's Latin American winnings it causes inflation.

An increasing population wouldn’t need more gold, gold (and money backed by it) would just become more valuable, right? Or, in other words, prices would drop and there would be deflation, for better or for worse.

Uncontrolled deflation would be linked with growth and wealth concentration would be a serious problem with corresponding unwillingness to purchase anything.

need is of course a complicated word

Re: How did the gold standard work?

#72

Post by eru »

randomhodler84 wrote: post #36
i67vw3 wrote: post #26

Earlier quoted context omitted.

There are flaws in the current bitcoin/cryptocurrency mechanism that there 'probably' will never be a 'bitcoin standard'.

Could you elaborate on those flaws? Your info might not be current on the state of the art. It seems to work almost flawlessly in my opinion.

Well, there are economic flaws, I guess?

At the moment, bitcoin only supports a very small number of transactions per day. So a bitcoin standard on current technology would likely mostly happen off-chain, and use physical bitcoins to settle balances between exchanges.

(Just like historical gold standards mostly used physical gold to net-settle interbank exchanges.)

Re: How did the gold standard work?

#73

Post by paulpauper »

germinalphrase wrote: post #49
lazide wrote: post #46

Earlier quoted context omitted.

People are surprisingly motivated to try to steal generalized stores of value that are untraceable? Especially when it’s worth a lot in even small quantities. So everyone from guards to govts would love to get their hands on it. 6000 tons of gold is worth around 384 billion dollars.

If you’re able to topple governments, sure. Interesting question to consider how they might make gold more traceable. They must dope it with traceable elements, yes?

yes, but then you could still mix it with enough untainted gold to have plausible deniability. Gold is like everting bitcoin wishes it were.

Re: How did the gold standard work?

#74

Post by zarzavat »

slaymaker1907 wrote: post #52
lazide wrote: post #42

Earlier quoted context omitted.

Which means people need to work harder for every hamburger or the like and a deflationary spiral could occur which is even more terrible than an inflationary one. I think the parent was referring to ‘to keep the commodity/cash stable’

I think you could just lower the exchange rate for how much gold the central bank will give for dollars then print more money. This devalues the currency, but that's precisely what you want in the case you gave.

This is likely to lead to a run on the bank as everybody rushes to exchange their money for gold. Eventually the peg collapses and we are back to non-exchangeable currency. Gold standard only works as long as everybody believes that the exchange rate will not change.

Re: How did the gold standard work?

#75

Post by colechristensen »

yarky wrote: post #43

I don't get what's so confusing about gold. It's limited because it was created by the universe and it can be easily stored. If we had some gold-backed system, a real one, then where's the inflation ? Where's the problem for the average person ?

The amount of value exchanged in an economy changes over time, the value exchange between two separated economies trading with each other changes with trade imbalances. The inability to control this because you're pegged to the amount of gold available has significant consequences.

Growing populations and economy increases the demand for gold but there's not much that can be done to increase supply. You get deflation where people who already have money get progressively more spending power, not by investing but just by existing so there's a lot of idle capital, this trend increases hording further reducing available gold increasing deflation.

The average person would be faced with regular pay cuts to keep up with deflation and an extra source of volatility with no recourse for nations who would from time to time just go bankrupt and be overthrown because they run out of money to spend and have no out.

Re: How did the gold standard work?

#76

Post by eru »

rr808 wrote: post #63
eru wrote: post #56

Earlier quoted context omitted.

When I first read up on economics, I had similar doubts about the gold standards. It doesn't help that most modern day advocators of a gold standard have but a dim understanding of history and economics. So, first: if the population in one country goes up, they can import more gold from elsewhere. It's a commodity after all. Similar for one country digging up a lot of gold. (The global economy wasn't quite as integra…

The worlds population has quadrupled in 100 years, you can't say that "they can import from elsewhere" or each country can just dig it up. What happens if you live in a country where you can't just dig it up and people are poor.

Sorry, I wrote 'So the real concern is about global population vs global gold stocks.', but I never addressed that.

So for your first question: there was lots of global population increase during the time when many countries where on a gold standard. We can have a look at how they dealt with it.

Basically, in the long run you can dig gold out of the ground. If gold prices get too high, more mines will become profitable, so people mine more. If gold prices drop, fewer gold will be mined.

Empirically in the long run the price of gold compared to eg the price of labour had been really rather stable in the past.

It helps that the global population and the global stock of gold typically change much slower than individual countries'.

> What happens if you live in a country where you can't just dig it up and people are poor.

Almost by definition a poor country has less economic activity. So they would need less gold.

Instead of me writing a lot of hypotheticals here, have a look at how 'dollarisation' works in the real world. That's when countries abandon their own currency (either officially or de facto) and run their economy on eg the USD or the Euro or so.

See https://en.wikipedia.org/wiki/Currency_substitution

That happens mostly with poor countries, and just like they can't dig up gold in our example, they can't print new USD either. They have to get their hands on them via exporting more than they are importing. (Or in the short run they can also take out loans; but those need to be serviced eventually.)

Re: How did the gold standard work?

#77

Post by colechristensen »

anonporridge wrote: post #7

The fact that gold reserves are still a very common feature in almost every country indicates to me that our governments aren't completely committed or secure in this grand experiment of unbacked fiat currency that's been going on for 50 years. https://tradingeconomics.com/country-list/gold-reserves And since the 2008 financial crisis and recent events with Russia, it seems like that uncertainty might be justified.

Yes, the thing that ended was pegging currencies to specific amounts of gold. Central banks / nations still hold large supplies of assets to "back" their currencies. It is just quite a lot more efficient to be able to manage the money supply.

Re: How did the gold standard work?

#78

Post by seanmcdirmid »

anonporridge wrote: post #21
rr808 wrote: post #12

There are real practical problems with gold and changing economies. What happens when your population goes up - you need more gold. Or economic growth. Similarly if gold is discovered like Spain's Latin American winnings it causes inflation.

Yeah, a big thing that makes gold messy is that you can have massive supply shocks. Asteroid mining in the next few centuries are likely to make that worse. Gold being poorly divisible also makes it very impractical for day to day coinage of a growing population. Eventually, the coins start getting so tiny as to be impossible to work with. I believe that's a big reason why we started using silver and copper for small…

It doesn't even have to be asteroid mining. Simply more investment in digging out reserves in countries that have gold to be mine could create imbalances. Those reserves could be in countries that we are in conflict with (e.g. Russia, perhaps China), creating issues in power dynamics (do we want to give Putin and Xi a seat at the table in dictating US monetary policy?).

Well, going on the gold standard would also make Australia much more important, so it isn't all that bad.

Re: How did the gold standard work?

#79

Post by eloff »

bendergender wrote: post #20

Well, let's start with commodities. They have value, see, and that value contains both the exchange value (what it's worth in exchange for another commodity) and the use value (the value it provides as a commodity, like a coat keeping you warm.) But exchange value of commodity to commodity is a pain, so inevitably people tend to turn to a commodity that can be the "money commodity". A universal store of value, in thi…

> , the bulk of the excess gold in a money -> commodity -> money transaction comes from extracting value from labor

Huh? Thats just speculation, why would gains come from labor? Would losses go to labor? I dont see a connection.

Re: How did the gold standard work?

#80

Post by randomhodler84 »

eru wrote: post #72
randomhodler84 wrote: post #36

Earlier quoted context omitted.

Could you elaborate on those flaws? Your info might not be current on the state of the art. It seems to work almost flawlessly in my opinion.

Well, there are economic flaws, I guess? At the moment, bitcoin only supports a very small number of transactions per day. So a bitcoin standard on current technology would likely mostly happen off-chain, and use physical bitcoins to settle balances between exchanges. (Just like historical gold standards mostly used physical gold to net-settle interbank exchanges.)

A small number, yes. There is a block limit at layer1, for now. It is not 2017 and there is a an appetite to grow it when the need arises. It’s about precedent, and the longer we can go at 1MB with vbyte discounts for newer more efficient tx format incentives — the less centralized this will be in 10 20 50 years.

However it Hasn’t been a problem for years tho, blocks are very rarely full for long periods. And with layer2 protocols — we are just getting started!

https://lightning.network/

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