>.<
As an economist it is just scary to read some of these responses.
Oh sure, let's kill the banking system. Wonderful. (Thankfully, that won't happen).
If we do away with the banking system, your money will sit in the bank. And nothing will happen.
In fact, it will lose value as the bank charges you for holding on to it.
Then hold on to your money. And hope it doesn't burn down in a fire, or anything. Your call. But paying say, a dollar a month to protect a thousand dollars, well, I personally think that'd be a great idea.
Also, businesses won't be able to get funding because only the really rich will be willing to lend and invest the type of money that businesses will need to start up.
Woohoo, medieval economy!
What kind of economist thinks that the only way to get funding is to borrow? Under a gold standard, SAVING MEANS something. It always amazes me that so called economists are worried about the low or non-existent savings rates of Americans. Why would they save when the dollar they save today won't be nearly the same dollar tomorrow? Why save and get a low interest rate when it's not even going to keep up with inflation?
The power of the banking system is it allows the pooling of RISK as well as the pooling of RESOURCES.
It is a good business model, when you can privatize profits and socialize losses. In fact, it's a very good model, if you happen to be in the business.
Secondly, the gold standard is not the cure-all that is suggested. It does prevent inflation, true.
It is subject to DEFLATION, though.
Well, suffice to say that gold stores just disappearing or sinking to the bottom of the ocean at an unrecoverable depth would be pretty rare. So, yes, gold is subject to deflation, IF that gold store is destroyed or otherwise lost. Which isn't exactly the most common occurrence around.
So let's say you're a farmer. You have purchased $1000 of seed with gold at the beginning of the season. You work all season and harvest your crops at the end of the season to discover that your crops are now worth... $1000!!! How WONDERFUL! Now your money is even more valuable! Too bad your product is only the same value as your investment.
Suppose I start a candle business with a $1000 loan, and I only make $500. Surprise! I go out of business (and bankrupt). A gold standard doesn't mean that making bad business decisions will have no consequence. Just like the the modern system, if your business doesn't make a profit, you fail. The only difference is you won't owe everything else to the banks.
Deflation is as dangerous as inflation. Please don't just look at benefits and ignore costs. This is what bad economists (politicians) do.
Of course, to an economist like you, falling prices is probably equivalent to deflation, which is probably equivalent to something like the Great Depression. That sound about right?
However, here's the problem with that thinking. The farmer invests $1000 in gold. He gets, at the end of his investment, $1000 in gold.
All his work and toil got him the same amount if he had just sat on it.
So some people lose money, some people don't make the best decisions, some people miscalculate, some businesses fail, what's your point? That's all normal economic behavior. You seem to think the economy is simple enough so that you can make up a scenario like this and say the gold standard won't work.
I can do that too, you know, but the economy is not that simple.
Now, let's say, there are a number of hard years and the farmer had to BORROW $1000 in gold at the beginning of the season. At the end of the season he gets... $1000!!!! Now all he gets to do is pay back the money he borrowed.
And the interest.
Why do I choose this example? Because this is exactly what happened during periods of significant deflation in the 1800's under the gold standard. Farmers took out loans to cover investment and then could not repay them because the value (in terms of gold) of their crops had dropped.
The gold standard has benefits, but also costs.
We had a fractional reserve banking system then, and we still have one now. And every major economic disaster that involved your so called "deflation" happened because of a massive contraction in the money supply. Which you should recognize, is different from increased productivity (both of which result in a fall in prices, but don't otherwise result in the same economic conditions overall).
Now, is the gold standard perfect (multi metal, I should say, as silver and platinum should probably be included)? Probably not. But I hope that's not the only criticism that can be leveraged against it.
