Hearing a lot that infact dropping gold standard was stupid, and it matches with humanity's tradition too. Could anyone explain why gold standard was a stupid idea? Any link would be helpful. Thanks!
The problem is that you cannot really control the gold/silver supply. If your gold mines suddenly run dry (which happened to the Romans), it immediately cripples your economy (debasing the currency will create a panic, not debasing the currency leads to runoff deflation). If someone suddenly finds a massive new gold source, it will… also cripple your economy, due to runoff inflation (happened in the Spanish Price Revolution after the discovery of the New World).
Fiat money gives a much better control over the currency. Now we can argue what inflation/deflation rate a currency should have, instead of leaving that to random chance.
That would still make currencies far more stable than modern currencies. It's very unlikely that a significant source of gold will be found and even if it will be, it won't be in owner's interest to mine it very quickly.
The price revolutions were literally a one off event and while it's usually described as "rampant", the inflation rate was at most in the range of a few percent and it would be seen as moderate to low today.
> That would still make currencies far more stable than modern currencies.
Stability is not inherently good. Stable currencies that suffocate the economy because they do not allow for rapid enough expansion or reduction of the money supply are a burden. Another example would be the interwar years and great depression, were virtually all countries suspended the gold standard because it was simply impossible to uphold, and the economy recovered from it.
It shows much fewer crises before and virtually zero during the Bretton woods. If you click to some of them, you will see that most of them happened when the exchange to gold/silver was limited and people believed there isn't enough precious metals to back all the money, or the gold or silver standard was actually abandoned by some country.
> That would still make currencies far more stable than modern currencies.
Not really. Let's say we're on the gold standard, and now the computer revolution happens, and the internet revolution, and so on. We've created a bunch of new businesses, which are worth a bunch of money, but the amount of gold didn't change. So the value of money had to change, because the size of the economy changed, and the amount of gold didn't.
For that matter: Which is growing faster, the population, or the amount of gold? That affects the value of money if we're on the gold standard.
I'd say it's a matter of debate how good that control is when who's controlling it is either incompetent or has it's own interests -- or worst, both. I'm not saying we should go back to the gold standard, but alternatives such as Bitcoin become increasingly interesting in countries plagued by hyperinflation.
> I'd say it's a matter of debate how good that control is when who's controlling it is either incompetent or has it's own interests -- or worst, both.
The problem is that, in the example quoted, no one had that control. Gold mines run dry and you're fucked. Not because some incompetent banker is controlling the gold supply, but because there is no more damn gold. The most competent financial advisor of Rome -- a figure so gargantuan in the field of finance that, if transplanted to the modern world, would not only win that fake Nobel prize for economics, but would cause every other economist to retire out of shame -- would have been powerless. Because there was literally no more gold.
Obviously, it wasn't the end of all things -- new mining facilities would be open, sometimes processes would be optimized in older ones, wars would be waged, but these things took time and needed money.
Their trade balance was massively negative – it's called the "silk road" and not the "Roman wine and glass ware road" for a reason. Gold and silver left Europe and perishable goods were bought for it. It was initially offset by spoils of war and massive mining operations (some of the Roman mines in Spain are still visible today).
Apart from that, there was also normal economic and population growth – even without trade, if your population and economy grows, you'll need more money if you want to keep prices and wages stable.
So, they had several options:
• Conquer places that have gold! That went well for a few centuries, until it didn't any more.
• Debase the currency to make more of the money still here. That was, unsurprisingly, massively unpopular. And because monetary value was still tied to precious metals, people just started to hoard old money to melt it in later (something you still occasionally see with e.g. copper pennies), which led to all sorts of economic problems (occasionally crashing all the way down to barter trade).
> I'd say it's a matter of debate how good that control is
It's just that having this debate is pure luxury already. Otherwise it'd be "where the hell do we get the gold we need to fuel our economy?" or "what do we do with all the surplus gold that's ruining our economy?".
> but alternatives such as Bitcoin become increasingly interesting in countries plagued by hyperinflation.
Bitcoin, really? Private currencies where inflation is at the mercy of random developers who may or may not control significant currency reserves as well?
Using foreign currencies to supplant or replace a failed domestic currency isn't a new phenomenon, nor limited to "crypto""currencies" (the Balkans used the German Mark extensively in the late 90s, and US Dollars get you far in a lot of places).
I suppose you mean with the traditional way money is explained, that is very probably wrong.
The idea that first was barter and then people started to use precious metals doesn't match the historical evidence.
There is strong evidence that money is invented in the first states in parallel with writing and numbers in order to register debts. (see https://en.wikipedia.org/wiki/Sumer :
"Several centuries after the invention of cuneiform, the use of writing expanded beyond debt/payment certificates and inventory lists to be applied for the first time, about 2600 BC, to messages and mail delivery, history, legend, mathematics, astronomical records, and other pursuits.")
> So, the gold thing doesn't match humanity's tradition until very recently.
Ish. There's no unified "human tradition" anyway. Mediterranean societies have used gold- and other metal-based tallies for thousands of years, until they eventually settled on (gold, silver) coins as a standard. Greek/Roman conquests and trade then spread the idea.
But my point was that there is an, admittedly polemic, abstraction that match all the human tradition: money is a token of debt.
In this view, one important consequence, is that the material of the token is not relevant. The use of precious metals is just an added security measure against counterfeit, but not the thing that make it valuable (that would be the debt that represent).
If this is true, part of the debate about strong money vs. fiat money just become pointless.
The short answer is a run on safe assets like gold creates a positive feedback loop. A demand short fall causes people to try to acquire safe assets like gold. Spending 'money' on gold means money not spent on real goods and services. Which results in a demand shortfall. And people wanting safe assets to park their wealth.
Rinse lather repeat till 1/4 of workforce is unemployed. A central bank can print or lend out any amount of paper money to satisfy investors craving for safe assets. It can't make more gold.
Why not have both? Problem: Trying to peg the money supply to the price of gold hamstrings the central banks ability to supply paper. Lesson learned 1929-1939. And learned again by Argentina in 2000 with a US dollar peg serving as a de facto gold standard.
The problem is as soon as you throw debt and rents into the mix it all blows up, because debt and rents are 'paper'
If I loan creshal $5000 at %5 interest, I have basically a note on $500 worth of income a year. I can turn around an use that note to buy something. Now someone else owns the debt worth $500/yr. Until the crisis hits, creshal loses his job and flees to Argentina and now that note isn't worth diddly.
Short: Modern economies are rife with way to turn physical assets and rent streams into something akin to cash. So even if you think you're on a gold standard, you aren't really. Your on a gold + this bond entitles the holder to £500 per annum from the Village of Shlopshire. (Because in 1804 the village borrowed money to replace a bridge)
Even with a gold standard, you're usually not using gold coins directly (if only because it's hard to make coins for smaller denominations with it), but rather bank notes that are guaranteed to be redeemable for gold (as long as you don't try it out).
Indeed, but they are still representations of gold and are for all legal purposes equivalent to gold. When you convert them to gold, you don't spend money on gold, since they are one and the same and you can convert the gold back at any time. It's technically not different from changing banknotes to coins or wwithdrawing cash from your bank account.
I don't see why you think that the link is relevant. It would apply if there were gold and silver standards simultaneously, for example, but that's not what is being discussed.
For most of history, economic growth was minimal. Growth we expect in a year would not be seen across a lifetime. A fixed supply of money worked for a fixed-size economy.
In the 1800s, the economy grew on gold due to the coincidence of gold mine output roughly matching economic growth. The moment that link broke, calls for bi-metallism grew. Within a generation, the world was forced off gold.
Fiat money gives a much better control over the currency. Now we can argue what inflation/deflation rate a currency should have, instead of leaving that to random chance.