The Federal Reserve Monopoly Over Money

when the science is fairly clear

What science? Is there any historical evidence for the superiority of fiat currency? It is frequently asserted that backed currency is "archaic," but I've never once heard a convincing argument for the rather odd notion that a centrally planned currency is vital to a market economy.

Proponents of fiat often cite the Depression as evidence for their position. Yet, we already had the Federal Reserve at that time (The Fed was founded in 1913). All the attributes of our current system were in place, except for the fact that our money still had the "redeemable in gold or silver" note on it. There simply wasn't enough gold to cover all the extra dollars the Fed created during the 20s. A currency system where government debt is recycled into bank deposits is incompatible with a gold standard.

Certainly, declaring the current American dollar to have a gold backing would be problematic and lead to a breakdown. However, from what I've read, that isn't what Paul advocates. Rather, he advocates a parallel gold backed currency, accepted for tax payments and not linked to the Fed.

(On another matter, I think Paul's stance on foreign policy merits attention from voters regardless of any other disagreements one may have with him.)

The flattening of the expansion/contraction cycles since the move from a gold-based currency system is the evidence, the science is economics.

The Great Depression was not a simple cause and effect scenario and continues to be studied by economists. It's not fair to claim it was caused by the Fed, however it is fair to say the Fed didn't help. In either case the argument here is getting mixed up, the Fed before the 1970s managed a gold based currency with all the ills attributed. There is a big difference between the introduction of the greenback and the move to a fiat currency. One of the reasons cited for the Great Depression is a worldwide shortfall of gold production, which directly impacted the growth ability of all economies as they were all gold-based. In any case I'm sure there are non-economists around that use the Great Depression as some reason for fiat currency but any economist that does so needs to review their history and theory.

Currency is a measure of value. Start with that then think through how to measure the value of everything produced using gold. Consider the effects of a new gold mine discovery, and the effects of an old mine going dry. That will start to scratch the non-hardcore economic reasons why a gold based currency would be a step back.

The flattening of the expansion/contraction cycles since the move from a gold-based currency system is the evidence, the science is economics.

Economics is not a uniform profession. There is considerable debate over a wide range of issues. As for a flattening of cycles, I'd have to ask what period you are comparing to what other period? You seem to indicate that we did not truly have a fiat currency until the collapse of Bretton Woods -- and that all previous monetary policy counts as a "gold standard."

Certainly there was significant economic trauma immediately following the total end of the gold standard (the 1970s and early 80s). Were it not for Volcker's high interest rate policy to crush inflation expectations, the dollar could very well have collapsed. Since the early 80s, we haven't actually had a recession. All downturns have been re-inflated and asset prices have shot towards the moon. This may seem good right now, but the party is about to end. After stocks and housing take a dive, what's the Fed going to inflate next?

It's not fair to claim it was caused by the Fed, however it is fair to say the Fed didn't help.

That would be the argument of many monetarist economists. Stripped of all the jargon, this argument boils down to: If you want to avoid a hangover, don't stop drinking. Which is, of course, ludicrous.

One of the reasons cited for the Great Depression is a worldwide shortfall of gold production, which directly impacted the growth ability of all economies as they were all gold-based.

Not by any reputable economists. Even your average monetarist would avoid an argument like this. If you increase the money supply while claiming that each unit of money is exchangeable to a fixed quantity of gold, then pretty soon you run into a problem. You also seem to be subscribing to the "lack of money" fallacy about growth. Economic growth is in no way dependent on the number of slips of paper in circulation.

Start with that then think through how to measure the value of everything produced using gold. Consider the effects of a new gold mine discovery, and the effects of an old mine going dry.

The effect on world gold supply of a new mine being discovered pales by comparison to the rate of expansion of a modern fiat currency. This argument doesn't make any sense.

The question:

I'd have to ask what period you are comparing to what other period?

The answers:

the collapse of Bretton Woods

Since the early 80s, we haven't actually had a recession.

I'm comparing the last 30 years with data from before the conversion.

Stripped of all the jargon, this argument boils down to: If you want to avoid a hangover, don't stop drinking. Which is, of course, ludicrous.

What argument? I said the Fed wasn't a sole, or primary, cause to the Great Depression. I don't see how that statement can be boiled down into a different unrelated statement.

Not by any reputable economists.

Economics is not a uniform profession. There is considerable debate over a wide range of issues.

This sounds like you are picking and choosing your economics based on a pre-defined notion of what is correct. Either I'm wrong because there are other economists who disagree with me or you are right because no economists, that are reputable, have shown otherwise.

If you increase the money supply while claiming that each unit of money is exchangeable to a fixed quantity of gold, then pretty soon you run into a problem.

Perhaps this confusion all along has been around what you think a gold standard is exactly. Increasing the money supply when it's based on a fixed quantity is the original definition of inflation. This is the pitfall some governments were fond of falling into during the gold standard days. A variant of this is used now, however market forces (currency auctions) make it much more difficult to pull off without everybody knowing about it. Allot harder than say, lying about how much gold is locked away.

Economic growth is in no way dependent on the number of slips of paper in circulation.

That is a nice summation of why the gold standard is a bad idea. Economic growth shouldn't be tied to the amount of gold available for trade because they aren't after all the same thing.

The effect on world gold supply of a new mine being discovered pales by comparison to the rate of expansion of a modern fiat currency. This argument doesn't make any sense.

I'm sorry it doesn't make sense, try again later when you are not upset. As far as thought exercises go I thought it was pretty straightforward but you got sidetracked making points about fiat currencies instead of sticking to the question at hand.

On a slightly different note, is your impassioned defense of the gold standard tied with a desire to support Ron Paul or an issue you previously cared about and researched?

I'll work backwards . . .

On a slightly different note, is your impassioned defense of the gold standard tied with a desire to support Ron Paul or an issue you previously cared about and researched?

The latter. I actually think Ron Paul deserves attention because of his views on foreign policy and I hope he will shake up the Republican primary debates on those issues. I have an interest in economics going way back and monetary policy is particularly interesting to me.

I'm sorry it doesn't make sense, try again later when you are not upset.

Not upset, just incredulous. The discovery of new gold couldn't possibly be as inflationary as a fiat currency in normal operation.

That is a nice summation of why the gold standard is a bad idea. Economic growth shouldn't be tied to the amount of gold available for trade because they aren't after all the same thing.

Long term, economic growth is dependent on savings (including accumulated capital) -- the quantity of whatever money unit you use is irrelevant. Having a gold standard does not inherently limit growth any more than having fiat money with a tight money policy inherently limits growth.

All that a gold standard means is that your currency is defined as equivalent to one particular quantity of a particular good. The currency has value due to the relative value of the standard good (in this case gold) to all other goods. These relative values will fluctuate, but to no ill effect. Defining a dollar is just like defining an "inch" -- the length of an object is not dependent on the definition of an "inch."

If, for example, there are a million goods for trade and a million ounces of gold, and then later there are 10 million goods for trade and the same amount of gold, the only difference is that the value of the gold has increased by a factor of 10. Growth isn't limited since growth depends upon the capital available to create new goods. All that has changed is the value of goods relative to gold. Such relative changes in value happen all the time in a market economy. There's nothing scary or calamitous about it.

Now a fiat currency on the other hand can increase in quantity regardless of material circumstances. To double the amount of a fiat currency requires a printing press and some paper and ink (or these days, some computers). To double the amount of gold requires some serious mining operations. As a result, a fiat currency is likely to drop in value relative to the average good -- especially since the issuer of a fiat currency creates the money out of nothing and has a direct incentive to create more notes.

Over time, all fiat currencies will decline in value until the public considers them worthless and then a new currency will arise of necessity. If the government does not provide one, the market will create one -- and historically the market has tended to chose gold or silver.

A variant of this is used now, however market forces (currency auctions) make it much more difficult to pull off without everybody knowing about it.

All currency auctions do is mitigate against large differences in the relative rate of expansion of various fiat currencies. Such auctions in no way prevent a general expansion of the money supply (as has been occurring since Bretton Woods collapsed).

This sounds like you are picking and choosing your economics based on a pre-defined notion of what is correct.

I do have opinions about which economists are better than others, as do economists themselves. The "lack of money limits growth" thesis doesn't appear to have a much of a following. The more typical argument is that during a downturn in the business cycle a gold standard makes bank failures more likely which further feeds the downturn. Thus, the debate over the gold standard ultimately comes down to the question: What causes business cycles?