Gold Standard

[DarkNation]

Exactly what is the gold standard? I've seen many libertarians and such advocating it, but I'm not exactly sure what it entails and what they see as the benefits of it. Also, what's bad about it?

[Dimentio]

Exactly what is the gold standard? I've seen many libertarians and such advocating it, but I'm not exactly sure what it entails and what they see as the benefits of it. Also, what's bad about it?

The currency has a fixed value in relation to gold.

[Demogorgon]

It means that money is tied to gold. That is to say that if you have a hundred dollars it gives you the right to take the note along to the bank of issue and get a hundred dollars worth of gold in return. When you spend money, you are in fact exchanging the right to the gold and it is the value of the gold that is giving the money its value. All goods and services have their value determined in gold.

There are two broad forms of it, the version where money is "representative money" that is to say every bank note in existence has the exact amount of gold there to back it up. This obviously greatly limits the money available. The other kind is "fiduciary money" where the money doesn't necessarily have actual gold behind it, only the promise to provide it if necessary, this means that more banknotes can be printed than gold available because most people never actually claim the gold anyway, this works the same way as what we see today with banks issuing loans that they do not have the cash to back, thus bringing new money into the world and relying on people not all wanting to withdraw their money. This is called the "fractional reserve" system. The fiduciary system is the version of the gold standard that existed in modern times.

As for why the Gold Standard doesn't work, well mainly it is disastrous in practice, boom and bust cycles were much worse in the days of the gold standard than they are today and more specifically it is highly deflationary. That is to say the value of gold rises faster than the rest of the economy grows because it is of central economic importance as well as having plenty of other uses in jewelry and the like (and of course these days there is the fact that there is great demand for it due to its use in electronics), this means one bit of gold should be able to buy you more and more of everything else. According to classical economic theory, this should cause both wages and prices to fall, but fall at the same rate so that nobody is any worse off in real terms. In practice the wages and prices "stick" leading to unemployment and overpriced goods.

As for why Libertarians advocate a return to it. There are a number of reasons, some are just being reactionary for the sake of it and have a nostalgia for an idealised version of the nineteenth century. Others have an understandable moral aversion to fractional reserve banking and don't realise that it also exists under practical versions of the gold standard and that banning fiduciary money and enforcing representative money would be enormous Government regulation. The main objection though is that "fiat money" (the thing that replaced the gold standard) allegedly gives too much power to the Government. They believe that a return to the gold standard would return more power to the private sector where they feel it belongs. They also think as an aside that new money is coming into existence by the Government printing it and this is both fraudulent and economically dangerous. Not only is that nonsensical but in fact most new money comes from their beloved private sector anyway through banks and credit institutions lending new money into existence.

Hope that helped.

[Apoi_Viitor]

Exactly what is the gold standard? I've seen many libertarians and such advocating it, but I'm not exactly sure what it entails and what they see as the benefits of it. Also, what's bad about it?

I'll also add - those who favor a return to the gold standard are the libertarians who adhere to Austrian economists. While this group is a small minority of actual/mainstream libertarians (most mainstream libertarians favor policies advocated by Friedman, etc.), the Austrians seem to dominate the Internet community.

I'll add another reason people support the gold standard:

It significantly limits government spending, particularly in a recession. This way, companies that are inefficient within the current market will fail, and only the 'fittest' survive. Austrian economists believe that all boom-bust cycles are caused by the government when it interferes in the market, because this distorts the market and leads to unnatural and unsustainable growth, which will inevitably lead to a collapse. By forcing the government to adhere to a gold standard, it significantly limits the state's ability to do such, because running a large deficit on a gold standard leads to hyperinflation.