[Ghostavo]

... Our money was (until the 1950s) always backed by gold.  Never silver.

Huh. I could've sworn someone's money was backed by silver. Oh well...

http://en.wikipedia.org/wiki/Silver_standard

[Kosh]

Backing a modern currency with precious metals would be a horrible idea. There's not enough gold in the world to account for anything more than a small fraction of the American money supply--the amount of wealth that exists in the form of dollars is several times the value of all the gold ever refined on Earth.

The American money supply has been majorly inflated. Right now the dollar is only worth about 1% of what it was 100 years ago.

I don't remember my econ well enough, but basically, a large part of economic policy concerns managing the money supply. It's important that new money can be created or restricted as needed.

It can still be done, before the federal reserve that duty was done by congress, and they did expand and contract the money supply as needed in order to keep inflation away, even while the dollar was pegged to gold.

EDIT: I'll also throw in there is a very real chance the dollar may end up self dustructing in the next few years because of the debt monotization that's happening, unless major changes happen to get our fiscal house basck in order.

[Woolie Wool]

Backing a modern currency with precious metals would be a horrible idea. There's not enough gold in the world to account for anything more than a small fraction of the American money supply--the amount of wealth that exists in the form of dollars is several times the value of all the gold ever refined on Earth. Furthermore, unlike in years past, precious materials have uses other than as money or treasure--gold is far too useful for a variety of electrical applications for all of it to be locked up in vaults to back currency. Even diamonds, perhaps the greatest symbol of vanity and materialistic pettiness in all of Western civilization, can be used for all sorts of industrial purposes--drill bits, reinforcing glass, abrasives, etc.

Fiat money is the only feasible solution for large economies. The risk of a fiat currency collapsing is something we just have to deal with and reduce through sound economic management.

The value of fiat money is entirely adjustable.  There is absolutely nothing that prevents there from being enough precious metals to account for it all.  The metals would just be rather expensive.  As a minor correction, I am as firmly opposed to using gold as said metal as you are.  I would vastly prefer it to be silver, which has much less practical uses, but still has that "ooooh, pretty" effect that is practically demanded by anything of value.  Another bonus is that silver is orders of magnitude more plentiful.

The problem is that this would devalue the currency so much it is worthless, destroying most of the wealth in the First World and thus destroying the world economy. You can adjust the value of money, but you cannot adjust the value of precious materials by fiat (heh), so there's just not going to be enough of it. Gold really isn't a great way to store huge amounts of value; it is good for private individuals to store value in a semipermanent manner, but not on a massive scale.

Backing a modern currency with precious metals would be a horrible idea. There's not enough gold in the world to account for anything more than a small fraction of the American money supply--the amount of wealth that exists in the form of dollars is several times the value of all the gold ever refined on Earth.

The American money supply has been majorly inflated. Right now the dollar is only worth about 1% of what it was 100 years ago.

So what? There are certainly way more than 100 times more dollars in the economy than in 1900. The real value of the American money supply right now exceeds the amount of refined gold in existence several times over. This basically leaves three choices: you mine several times more gold than has ever been mined in human history (but that will lead to diminishing returns as the value of gold crashes), you shrink the US economy by around 90%, or you stay with fiat money and live with the risks. Those are the only real options.

[Kosh]

The problem is that this would devalue the currency so much it is worthless,

Inflation devalues money, which is not what he is saying at all.

[Woolie Wool]

No, I mean to match the currency with the value of gold reserves to create a gold-backed currency, you would have to destroy most of the currency's value (or to be really precise, the money supply's value) because the gold isn't worth enough to back the currency right now.

[Scotty]

I'll put it out again, since you seem to be missing it in every post.  Gold would be a bad idea.  I'm not saying anything about using gold.  Using silver would be a much better idea, since gold has way too many commercial applications.

At any rate, backing a currency with a precious metal does not equate to artificially inflating the currency to match the current market value of said metal.  It amounts to linking the worth of the currency to the metal in a set ratio.  For example, after WWII, the American dollar was set to be worth 1/35th an ounce of gold.  Granted, that has since changed, but the precedent has been set.

[General Battuta]

I don't understand why this is necessary or a good idea.

[Kosh]

To get rid of inflation.

[The E]

* The E starts giggling madly

Right. So, back when currencies were backed by precious metals, we didn't have inflation? I'm not an expert in economics, but that statement sounds very, very wrong indeed.

[General Battuta]

You can't get rid of inflation. You either have inflation or unemployment; the two are intrinsically tied. Reducing one increases the other.

Inflation on its own isn't even a bad thing. Purchasing power is what you have to worry about.

I only vaguely remember my macroeconomics, but I took a course from Alan Sanderson, who is one of those Chicago School bigshots. Inflation is quite a bit more nuanced than it seems.

[The E]

Indeed. Inflation only gets bad when it goes out of control, if it is kept in check at a low rate (like 1 or 2 percent per year), it actually has a net positive influence.

[General Battuta]

Quite so. Deflation is considerably more dangerous (for reasons I again can't fully recall). I remember a story about the Japanese economy being hobbled by incredible deflation; exasperated economists suggested using helicopters to drop bundles of money all over Tokyo to jumpstart some spending and inflation.

[Kosh]

* The E starts giggling madly

Right. So, back when currencies were backed by precious metals, we didn't have inflation? I'm not an expert in economics, but that statement sounds very, very wrong indeed.

From 1784-1913, do you know how much net inflation the United States had? Zero. Everytime there was inflation, it was always accompanied by deflation to balance it out. And now? Now the US dollar is worth only 1% of what it was 100 years ago. Our economy certainly has grown of course, but not nearly as much as it appears.

You can't get rid of inflation. You either have inflation or unemployment; the two are intrinsically tied. Reducing one increases the other.

That's the keynesian view. How do you explain the period from 2003-2007? We certainly had plenty of inflation but not so much in the way of job growth. Right now inflation is starting to come back but unemployment is still high. Stagflation anyone? According to Keynes that situation is impossible, yet it is happening. Others disagree

exasperated economists suggested using helicopters to drop bundles of money all over Tokyo to jumpstart some spending and inflation.

Nope, that was Bernanke in 2002. What he actually said was if he had to in order to avoid a recession in the US he would drop money from a helicopter. This led to his nickname "Helicopter Ben".


EDIT: I'll also add that I'm not an expert in economics either.

[General Battuta]

It's not the Keynesian view - I was taught by Chicago neoclassicists.

exasperated economists suggested using helicopters to drop bundles of money all over Tokyo to jumpstart some spending and inflation.

Nope, that was Bernanke in 2002. What he actually said was if he had to in order to avoid a recession in the US he would drop money from a helicopter. This led to his nickname "Helicopter Ben".

Please do your research before saying things like this. The Helicopter Drop anecdote originated with Milton Friedman a long time ago and could easily have been applied to the Japanese economy.

The inflation of US currency is not anything to be concerned about unless some reason can be presented to be concerned about it. What matters is the purchasing power of the dollar.

[Kosh]

Please do your research before saying things like this. The Helicopter Drop anecdote originated with Milton Friedman a long time ago and could easily have been applied to the Japanese economy.

Good point, however Bernanke did invoke it.

The inflation of US currency is not anything to be concerned about unless some reason can be presented to be concerned about it. What matters is the purchasing power of the dollar.

Inflation fundementally causes the dollar (or any currency) to lose value. Right now because of the obscene levels of debt and deficits, the way they are looking to continue financing it is monitization, which will cause the inflation rate to go up even more. Gold is at over $1,000 now for a reason.

It's not the Keynesian view - I was taught by Chicago neoclassicists.

Which was partly influenced by Keynes.

[General Battuta]

Inflation does not fundamentally cause money to 'lose value'. I don't remember the technical definitions but the fact that the dollar has inflated does not mean a drop in purchasing power. Inflation is a necessary and even beneficial side effect of economic growth, so inflation on its own is not worth panicking over. Rampant inflation is where it gets dangerous.

Neoclassicism may have been influenced by Keynesian views, but largely in the sense that the Jedi influence the Sith: it is a reaction to and counterattack upon Keynesianism.

[Kosh]

Inflation does not fundamentally cause money to 'lose value'. I don't remember the technical definitions but the fact that the dollar has inflated does not mean a drop in purchasing power.

Here's part of the wiki entry on inflation

When the price level rises, each unit of currency buys fewer goods and services; consequently, inflation is also an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy.[2][3]

An erosion in the purchasing power of money.....sounds like the loss of value to me.

so inflation on its own is not worth panicking over.

The problem is that it compounds upon itself. If the inflation rate is steady at 5%, it means your paycheck and savings become worth that much less every year.

As a thought experiment, what was our GDP in 2000?

Neoclassicism may have been influenced by Keynesian views, but largely in the sense that the Jedi influence the Sith: it is a reaction to and counterattack upon Keynesianism.

It's an attack on large parts of the central planning aspects of Keynesianism. However, other aspects such as having a central bank.