Should We Go Back To The Gold Standard?First, watch this short video, What is the gold standard? https://www.youtube.com/watch?v=LdyHso5iSZI … From article: Fiat Currency, What It Is and Why It's Better Than a Gold Standard, January 2017 – Motley Fool website The most important thing about money is this: People need to be able to count on its value, and that value needs to be stable over time. For that stated reason over the past century countries have shifted from a gold-backed to a fiat currency. …. What is fiat currency and what makes it the chosen alternative? Fiat currency is money whose value is backed by the government that issued it. The U.S. dollar is fiat money, as are the euro and many other major world currencies. This differs from money whose value is underpinned by some physical good such as gold or silver, these are called commodity money. The United States used a gold standard for most of the late 19th and early 20th century. A person could exchange U.S. currency, as well as many public and even some private debts, for gold as late as 1971. A fiat currency's value is supported by the strength of the government that issues it, not its worth in gold or silver. …. Figure 1 shows the U.S. inflation rate since the beginning of the 20th century.
The most important aspect of a currency is the relative stability of its value.
The U.S. dollar was tied to the value of gold until the early 1970s, when President Nixon severed the relationship between the U.S. dollar and gold.
With the exception of the late 1970s and early 1980s oil crisis and recession, inflation has become much less volatile, and deflation hasn't been an issue.
A key reason is U.S. monetary policy.
…
Since the Federal Reserve has more flexibility to control supply and demand of currency, it is more able to limit the impact of major economic shocks, such as the financial crisis of 2008-2009.
Many economists agree the government's ability to control the supply of money played a major role in keeping the crisis, the worst since the Great Depression of the 1930s, from causing even greater harm to the American and global economy.
….
Those who advocate for a gold or similar standard often use the argument fiat currencies aren't really "worth" anything, since there isn't anything tangible that underpins its value.
That's not an accurate description of a fiat currency versus a gold standard.
Simply, the value of any currency, whether a commodity or a fiat currency, is only relative to what people think it's worth.
…
Per Figure 2 gold hasn't exactly been stable or reliable in recent years.
What does Figure 2 tell us?
In times of uncertainty, people buy and hoard gold.
You can see it in the early 1980s oil crisis and recession and the most recent financial crisis, when gold prices soared.
Gold prices then fell sharply once the overall economic environment improved.
This situation is largely what led Franklin D. Roosevelt to sever the convertibility of U.S. currency and debt into gold during the Great Depression.
Under the gold standard hoarding gold had a direct impact on monetary flow, hurting commerce and exacerbating recessions.
By severing the link between gold reserves and currency, the Federal Reserve is better able to combat major economic shocks to the economy.
…
Think gold is a great investment?
Per Figure 3 historically it hasn't been.
The U.S. stock market has been a far superior long-term investment since Nixon severed the relationship between gold and the dollar in the 1970s.
Since September 2012, gold has fallen 30%, while the S&P 500 has seen total returns of more than 77%.
….
It's fair to argue the Federal Reserve's efforts to limit the impact of economic crisis could have unforeseen long-term effects, based on the additional money put into circulation, versus a gold or silver standard that limits how much money circulates.
The problem gets back to times of major economic crisis.
When governments need tools to stop or reduce the harm, a gold standard has historically increased the harm as people hoard gold.
By severing the tie between a commodity people tend to hoard in times of crisis and the value and supply of money, a fiat currency is a better alternative.
But this is only so long as those pulling the levers of monetary supply keep the balance between money supply and demand stable.
…
Here's the bottom line: Currency is a tool of trade.
People tend to hoard gold and silver when things are uncertain, and that's harmful because it limits currency flows on a large scale.
Removing the relationship between a currency and commodity doesn't create "worthless money."
It simply keeps panic from causing greater economic harm in times of crisis when people hoard the commodity currency, in effect hoard gold and silver, and stop the wheels of commerce.
And that alone makes a fiat currency far better than a gold-backed currency.
…
Switzerland was the last country to have gold-backed currency.
It changed to fiat currency in 2000 after a voter referendum approval.
… …
Comments
Post a Comment