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Commenters from my previous post have asked for more substantive arguments against the gold standard. As I understand it, the contention of advocates is that the gold standard is necessary because people lack confidence in the worth of fiat money. It seems to me that every single time an American accepts a US dollar as payment for goods or services rendered, he or she proves this contention wrong. The average American proves it wrong over 40,000 times per year.
Now it could be true that people have some confidence in the dollar, but more confidence in gold. If this were true, people would prefer to be paid in gold, rather than an equivalent quantity of dollars. But I certainly don’t want to be paid in gold. I don’t think anyone I know wants to be paid in gold. Gold is inconvenient to hold, exchanging it for other goods or services involves high transaction costs, and its price is volatile, much more so than currencies (especially within their own economic zones). I know I can buy a movie ticket tomorrow for $10, but I really couldn’t tell you how many grams of gold it will cost. Which is partly why I prefer to be paid in dollars or euros, as does everyone else I know, rather than the equivalent market price in gold.
And this would still be true even if the Federal Reserve mandated that each dollar was redeemable for a fixed amount of gold, unless the reserve set the amount redeemable artificially high to compensate for the transaction costs. But in that case you could arbitrage up by redeeming your dollars for gold, selling the gold for more dollars, redeeming those dollars for gold, etc. And of course such arbitrage would lead to the collapse of the gold standard as government gold supplies ran out. You could get around this by letting the amount of gold redeemable float, but that would make the idea of a “gold standard” meaningless; it would be more correct to simply say that the US government had entered the gold sales business, like anybody else who owns gold. By this standard we already have a “gold standard” today, in the sense that you can, if you wish, exchange your dollars for gold. Another solution would be for the government to set the amount of gold redeemable artificially low, to eliminate arbitrage. But this, again, would mean that people preferred to hold dollars rather than gold, which makes the point of the supposed gold anchor unclear. Or, finally, the government might prohibit people from trading privately in gold, in order to maintain the validity of the government’s gold standard price point. This did in fact take place in the 1930s when the black-market price of gold rose higher than the US government’s price point, and the resemblance to the kinds of price-setting and black-market problems faced by command economies (the USSR, etc.) is a good indication of why you don’t want to get into the whole thing.
A final way of putting this is that when you talk about a “gold standard”, you’re talking about some kind of finite supply of thing to which all other forms of currency refer back, a thing the supply of which can’t be arbitrarily increased. But we actually have such a thing. It is the cash dollar. There is a finite supply of cash dollars in the world, all notional US dollars in bank accounts, credit cards, T-bills and so forth can be redeemed for cash dollars, and no one but the US Treasury has the authority or the capability to make more of them. But the advantage of the cash dollar over gold is that you don’t have to deal with all these silly issues of how to set the price of a cash dollar in order to avoid creating black-market problems and so forth. The price of a cash dollar in dollars is always basically 1=1. (This isn’t quite true, in fact cash dollars do have some transaction costs, they’re hard to carry around, so the price of a cash dollar in notional dollars is often slightly below 1, as for example when you keep your money in a bank account even though you know the ATM may charge you a fee to withdraw cash. This could alternatively be expressed as the cash dollar having a value higher than a notional dollar when you’re walking around in the city and want to buy a hot dog from a vendor, but I think it’s clearer to think of it the other way around.)
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