If you’ve followed Ron Paul and his supporters, you know that they want to abolish the Federal Reserve. This is a very important topic that I think too many people easily fall into without understanding how it all works and the moving parts that must be maintained. Often you get a very specific narrative that supports the view of abolishing it, but often left with a false impression.
Another item of interest regarding the Federal Reserve is the conspiracies associated with it. Often arguments will fall into the category of economics, but that often can be a more mainstream talking point. Conspiracies such as cartels, international bankers, the New World Order and the hatched plan at Jekyll Island.
The Federal Reserve certainly isn’t perfect, but it’s better than the alternatives out there. I think that this is the point I want to get across on this page. It’s not without its flaws, but it’s the best we have right now. Despite hearing all the great things about the Gold Standard, negatives exist and often the same negatives that are used to criticize the Federal Reserve.
I need more time to prepare a proper response to this. The reason is that there is so much on the subject, but it’s all pretty much half truths or outright lies.
The gold standard is something that is the alternative solution that Ron Paul and his supporters offer as the better solution to the Federal Reserve. As above you have the explanation based on economics and the other based on Armageddon.
The gold standard is really simple to understand. You either have literal gold coins or you have paper money backed by gold. This means that you could take a dollar bill and exchange it for a sum of gold from the Treasury.
Economically, applying this isn’t so simple. Inflation and deflation is a concept of economic growth/decline where the money supply doesn’t follow. For example, if the money supply grows faster than the economy you get inflation. If the supply of money shrinks faster than the economy, we get deflation.
Gold provides an interesting problem as there just isn’t much of it. In the history of man we’ve only extracted 20 cubed meters of it. Think of that for it. All the invested time, money and all the mines around the world have come up with a mere 20 cubed meters. This means that the money supply will not keep up with the economy by a lot. This creates deflation and economics teaches deflation is the most destructive.
If you’re having a hard time wrapping your mind around deflation, here is a better way of thinking it: your money grows in value for holding it. This is often marketed as a positive by Ron Paul. Try to put some critical thought into that. This actually encourages hoarding. Why invest? Why lend? Why do anything other than hoarding? It’s a pipe dream to think that doing absolutely nothing, but hoarding would make you richer. The economy would truly collapse.
These type of people suffer from what I feel is a delusion. There’s one thing about liking your politics and there’s another where you believe if your politics aren’t implemented completely everything is going down the tubes. This is what you run in with Ron Paul and his supporters. They’re literally waiting for the economy to collapse and they’re prepping with gold bars. The only thing that matters in this case is weaponry and gold.
I find this sort of ironic. In an economic collapse gold won’t matter really, unless everyone else has it. Either people will just brutally kill each other or they’ll find something else. For example, after the collapse of Germany post WW1, they had a non-government “free market” currency. Was it gold? No. It was cigarettes.
The Counter Argument
Why gold? Gold can’t grow with the economy. Its value comes from what people will value it as (exactly the same as paper money). It’s just a shiny rock. Why not a bottle of beer? Or housing? Or televisions?
All these items will work. Why use gold when it will create nothing, but inflation? Supporters of this standard know this fact and ignore it. The question becomes why gold? The only thing I can think of is that they’re all heavily invested in such things, but really I couldn’t tell you why.
A big argument for Ending the Federal Reserve is that it creates inflation. The only time the statement is true is when you have the concept of quantitative easing. The problem with a lot of Ron Paul supporters is that they don’t even understand the positions they support when it comes to the Federal Reserve. They will often rattle on about how the government deficit is just printing money causing inflation and so on/so forth.
If I buy a bond for $1, this means I have one less dollar and the government has one more dollar. Net: zero change. There is no inflation caused by running a deficit. It’s when quantitative easing (QE) is put into place that causes this problem. QE is when the Federal Reserve (because lack of market interest) has to buy these bonds in order to fund the deficit. These are extreme circumstances and QE isn’t something that happens that often. I will agree that it is inflationary in a sense and it’s the big reasons why deficit spending can’t be out of control.
I’m trying to point out the misinformation that happens to fly around when you get in a discussion about this.
The fact of the matter is that inflation and deflation are caused by market discrepancies with the supply and demand of the market place. It is true that our current system of paper money is more inflationary because that is really the goal it has for itself. The target is about 2-3% a year. If you’re wondering why this is the number aimed for it is just due to history. Our economies have been the most stable with a slight inflationary monetary policy. In the past we’ve had very bad economic times before the Federal Reserve and with gold backed currencies that couldn’t do it right.
The gold standard isn’t going to stop the boom and bust because these things do happen. Ron Paul and his crew have this notion that the economy is driven by sound money. Sound money is something that allows the economy to flow properly, but it isn’t a driver. The driver is making money. Booms and busts tend to be the results of speculative ventures. People throwing money into things because the money is so easy, but the fundamentals don’t justify it. This is why there has been plenty of booms and busts with gold backed money. Remember, it wasn’t until the 1971 that the US currency become fiat. Just think of all the booms and busts before that point. Just look at the booms and busts before the Federal Reserve was even created. End the Fed’ers will try to tell you that booms are caused by the expansion of the money supply and busts are caused by the reduction of the money supply. Not true. The money supply adapts to the market. Booms require more money and busts require less. Not following the economic movements creates much more extreme inflation/deflation.
The reality is that the gold standard would create a deflationary trend. Like I mentioned before, there isn’t a lot of gold. In the entire history of man we’ve only been able to get our hands on about 20 cubed meters. If the economy grows by 3% a year, then the money supply needs to grow 3% a year to balance it out. That’s how the market will try to work, but there simply isn’t enough. At a 3% yearly growth, after 15 years we’d need over 10 cubed meters more just to balance it out. It’s not going to happen.
This means that the demand for gold will increase while the supply can’t keep pace. If you can earn 5-10% a year by simply holding onto your gold, then why would you invest it? Why would you spend it? The economy would turn into nothing more than hoarding because that’s where you can make the best return. The economy would collapse on a hoarding orgy and eventually turn into anarchy as jobs would be far and few in between. This is the economy that Ron Paul is talking about. One where people hoard because the system is built so poorly.
The fact is that this is the best we’ve come up with so far. It presents the best incentives to prosperity and economic growth. It’s not perfect, but neither is the alternative to gold back currency. The reason we ended up with fiat is that we’ve had issues in the past with gold and it didn’t work for us. It created economic disasters and we didn’t want to repeat them. End the Fed’ers will talk of conspiracies of rich bankers looking to make money by getting rid of gold and so forth. They’re conspiracies. They’re not important. They have no evidence or facts. They require revisionist history books to get their facts.
Fiat is definitely not perfect, but it is better than the gold standard.
One of the most common things you’ll hear from gold standard supporters is that paper money is worth the value of paper. That isn’t true. The paper is worth pennies and I can buy things more than pennies. Their idea of value only comes from the physical characteristics of it. I guess this is probably the big reason why they don’t believe in intellectual property rights. The value of paper money comes from the same place the value of gold comes from. Whether you’re trading pieces of paper (dollar bills) or shinny rocks (gold) the value comes from the same place.
I don’t know if you’ve ever argued about the economy with a Ron Paul supporters or gold standard supporters, but you’ll probably learn quickly that they have warped views of inflation. They’ll often say that Gold is a hedge against inflation. That gold is REAL money and its value stays the same no matter what and it’s really the dollar that is getting weaker. I had one blatantly tell me that in today’s economy where we have very low inflation and a little deflationary trend that gold was going up, so there is inflation. 10 years ago an ounce of gold was worth around $300 and today it is roughly $1700. Anyone thinks that $300 10 years ago will buy the same amount of stuff at $1700 obviously has a warped view of reality.
Gold has nothing to do with inflation. It’s just a convenient talking point because of the economy. They often quote long hundred year graphs to show their point. In the year 1800, if you bought $1 worth of gold you’d have $80 today. If you put $1 into the stock market, you’d have well over a million today. It simply isn’t an inflation hedge. If you look at 1975 we had inflation of 10%, so we would expect a 10% jump in Gold. Nah, it lost 22%. Through 1980-82 there was 10% annual inflation, and gold lost 33%.
The fact of the matter is that gold is in such a speculative bubble right now, and really doesn’t have an easy to determine value. Gold certainly doesn’t follow inflation (hedge).
UPDATE March 15 2014
Well, I thought I should update this a little bit based on some of the comments I’ve been getting from Ron Paul people. I’m sure it won’t matter though because it’s not like they read the actual article. The same consistent points keep being brought up that have been fully addressed in the article. But there is one point I want to make that seems to be a repeated talking point without any real substance.
This is a nice sounding snippet, but it simply isn’t true. The only aspect of it that is real is that paper currency is printed. Doesn’t matter if the paper currency is backed by gold or the good graces of the government. That’s about as real as that statement can get.
The problem with the statement is that it implies that the money is injected. The act of printing money really doesn’t mean anything. It’s how the money is pushed into the economy. The “thin air” comment makes it sound like the “federal reserve” drops money from the sky. That’s truly where the thin air would make sense.
The entire money system that most countries in the world have is a credit based influx of money. There are two specific things that come with this, there is an economic demand for this credit and that consenting players must accept the debt. In the purest sense, the Federal Reserve doesn’t have the power to inflate the money supply. A transaction must take place first. I think this is a point that many people miss out on.
If you’re a person that thinks this is a problem, that’s fine. This is an actual item to discuss. Sound bites like money is created out of thin air is just flat out lies.
I find this one comical because it’s simply isn’t true. I feel like people who have made this statement know very little of how the government works, but also haven’t matured to the point of simply saving for retirement. Assumption is that people who make this statement still live with their parents. Let’s focus on each of the points separately.
This one I can’t exactly figure out the reasoning too. I’ve honestly never have seen the premises that lead to this type of conclusion. If you have some of them, please leave a comment and let me know. I’d love to hear them. This type of statement is accepted as an axiom, rather than a position to be argued and reasoned. There seems to be this huge misconception by the Paul ideologues that debt is somehow impossible with a gold or silver standard. Where this thought comes from is beyond me.
How does the government get into debt? They sell bonds on the open market. I own bonds. Guess what, that’s government debt. I lent the money to the government and they have to pay it back. This is all that needs to be said to show the first point is absolutely false. There’s nothing forcing the government to balance the budget. There’s nothing more than the same forces that exist today to prevent the government from going into debt or not.
**Aside: Quantitative easing is a means to violate this. With the credit crunch that occurred in 2009 the Federal Reserve has purchased government bonds because the private sector wouldn’t buy all that were being sold. It’s fair to point this out as an argument against government intervention in the economy. Some, like myself, would say this is the market place voting against the amount of government debt. But my argument is against the statements above. For most of history, and most debt serviced by government in this country and many countries around the world, it is done completely by the market place and that’s only evidence required to debunk the first statement.
Well, plenty of countries have been going to war (including the United States) during times of the gold standard. Again, that’s really all that has to be said. Maybe if isolationist libertarians were in control of the government war would stop, but this is a basis of political ideology – not how the currency of a nation is backed. As long as bonds are being purchased, deficits will exist.