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Question about how the free market can work with a gold standard?

I keep getting into conversations/debates about free market principles and the gold standard. But Im never really effective because I don't fully understand either one.

A) To have a gold standard, does this mean the money supply will always be finite? Or will gold simply be added to the treasury to match the GDP?

B) I keep hearing about how there is not enough gold to go back to the standard. Im pretty certain there is some fallacy or misunderstanding of economics here. Can someone explain this?

C) When, if ever, should the government introduce new money into the market? Should it rise and fall in correlation with the GDP?

D) When it comes to free markets, the argument against it ultimately comes down to free markets leading to monopolies and the notion of letting people die. These are all too common. But what are the arguments against these?



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Late night response... I reserve the right to modify tomorrow...

A) Technically, the amount of gold that exists on earth is finite. So, with a pure gold standard the amount of "money" would be finite. However, using coinage, coins could be made with measured plugs of gold surrounded by less precious metals, thereby making gold coinage practical in size and in value relative to goods. Alloys are not necessary. Using gold plugs to establish the value of coins would mitigate the finite availability of gold.

B) My answer in part A takes care of this question, but suppose a person had pure gold coins. As the supply of goods increased relative to that of gold, prices would fall making products more affordable for the consumer. What's bad about that?

C) Governments should not have the ability to introduce more currency. History has shown that when governments are given the ability to "make" money, they live beyond their means at the detriment to the affected society.

D) Ill-willed monopolies can only exist with the assistance of government. In a free market, producers must meet the demands of consumers. There exists a market price where maximum profits are realized. Above that price, profits fall because people become unwilling to pay it based on the utility provide by the product or service. Below that price, profits fall because the added demand at the cheaper price is not able to make up the difference. Mathematically speaking, there MUST be a market price such as I described. Even if a monopoly is established, it would have to charge market prices in order to maximize profits; there is no way around it. Apple has a monopoly on iPhones. What do you suppose would happen if they charged beyond what the consumers of the market were willing to pay? Regardless of the "rarity" of the product, competition will always exist in any practical scenario. For instance, if oil producers decided to charge $1 million per barrel, biofuels would take over the market very quickly. Only when governments grant special privilege or create barriers to entry can ill-willed monopolies exist.

"I keep hearing about how

"I keep hearing about how there is not enough gold to go back to the standard."

This is indeed a fallacy. So long as there is gold existing in the world, you can have a gold standard. The dollar price for gold would have to skyrocket, but the value of the gold would remain unchanged.

Quick answers:

A) Going back to the gold standard is dangerously limited. Like the good doctor suggested, we should go to a basket of currencies, or better yet let many currencies compete.

B) You're right, economically, one ounce of gold could be enough money for the whole world to trade if we could just separate the molecules and keep track of them better. It's still dangerous putting all your eggs in one basket though.

C) Strict constitutionalists will say that the treasury should be in charge of regulating the money supply and adding to it as they see fit. Rising and falling with the GDP would make sense if they do so.

Of course, AnCaps like myself think that it's a mistake to ever let a government touch your money supply at all. The free market should determine EVERYTHING.

D) There are so many great arguments against that horsecrap it's almost common sense to most anarchists of any school. The best way I know to put it is that monopolies lose their teeth in the free market; only a government has the power to make monopolies undesirable. The fact that people speak about monopolies as being a bad thing is a testament to the sheer evil of governments themselves!

HONEST RON 2012!
LEGALIZE LIBERTY!

Regarding introducing more

Regarding introducing more money into a system:

- who decides when to add/remove monies into the market?
- where does/should the money come from?
- when it is added, where does/should it go (banks?)?

You're stuck in "Central Planning" mode. Stop that.

No one has to decide.

And in a free market, no ONE does. Not even a group.

The "decision" of a market is merely the result of millions of transactions over time.

There's no ONE final decision on anything.

People will simply begin doing whatever works best.

In some cases, there will be no single result. Perhaps various solutions will be used, each depending on the circumstance.

There's also no way to know what these will be ahead of time.

We can make a guess.

We can try to enter a market and offer a "solution" or product or service. If it works, we don't starve. Otherwise, it's back to the drawing board.

Here ya go.

#1 - No one in their right mind is calling for a "gold standard." That is, it is unwise to consider backing paper bank notes with promises to pay anything. That is, after all, how we got here in the first place. Federal Reserve Notes were originally "backed" by gold and silver coin. (depending on the size of the note) The FED quickly printed more than they had in metal, and a depression ensued in short order. The government did nothing about it, and the depression ended 18 months later. The FED then began printing again, albeit this time, much more slowly. However, they printed so much, they created another depression. This time, the government stepped in, and it lasted over 20 years.

What we need is not a gold standard, but a return to actual silver and gold coin circulating as money again.

Thus your answers:

A) The supply is not finite, but compared to what we have now, practically so. New mines ARE still opened and there is still production from current mines going on. No, there is no tie to GDP. (or properly GNP, as GDP is a Keynesian fabrication)

B) Again, gold will not be used to back anything. It will be used directly in coin and/or bar form. As will silver, copper and perhaps nickel, palladium and platinum, but those others will depend on market demand. Still, this issue needs to be addressed regardless of if the metal is backing worthless paper, or if it is used directly. The question is one of adequate supply. The answer is simple: "price" is merely a ratio. What you will see happen is not a one:one exchange rate, but rather a one:many exchange rate transition. Thus, gold will likely be "priced" in terms of goods at a much higher rate than it is now. Some estimate this number to settle in anywhere between 5000 and 16000 FRNs to the ounce, or more.

However, most likely, depending on how this comes about, there will be some destruction of FIAT currency accounts, and thus gold will likely not rise any higher than it is at the start of the transition, whatever that might be.

If you need more explanation of this, let me know.

C) Government would not be in the money monopoly business in a free market. Coin would come into circulation as needed and as it is produced, which as noted in point A, will be relatively slowly compared to FRNs, and also compared to production of goods and services. Thus, prices will eventually fall over time, which is the natural benefit of improved efficiencies, economies of scale, and specialization. Hence, GDP/GNP is irrelevant here. The market will always make sure that there is enough coin in circulation because prices will adjust to reflect the amount available for demand of goods and services. The end effect is standards of living will rise, rather than spiral downward.

D) Monopolies are not really possible with a free market. Only government privilege, intervention, and protectionism can make them a reality. In a true free market, anyone is open to competition. The more share a business has of a market, the more likely they will face competition in various forms.

Please explain the "notion of letting people die" and this being "all too common."

I don't see what this has to do with a free market.

Conversely, socialism is well documented to cause massive starvation and death at the hands of the government, to the tune of hundreds of millions of people in the last century.

Regarding monopolies, the

Regarding monopolies, the argument I always hear is this:

If an entity (company or person) that is rich decides to jack up prices or take advantage of people, they have a monopoly, and they might very well become greedy and be abusive...etc (a big corporation with a history of anti-trust issues comes to mind, like Microsoft).

My usual reply is let the market sort it out. That competition will rise. And that monopolies are usually built by government intervention. But it never sounds convincing, to the person im debating as well as to myself.

Your second paragraph wrongly defines monopoly.

A company can raise prices for any number of reasons.

They may have all sorts of excuses for shoddy customer service.

But simply because they exhibit either or both doesn't define a monopoly. A monopoly means that not only are you the ONLY company providing a good or service, no other company is legally allowed to. (or effectively, regulatory barriers are so high and expensive, no upstart can join the market - only you, or you and a few buddies, can afford the cost of compliance and lawyers for non-compliance to offer this product or service)

Monopolies can ONLY be built by government intervention. Government has to intervene to either prohibit entry into that market outright, or erect "sensible" regulations that are in reality nothing but disguised exorbitant fees and hoops which can't be paid or jumped through by anyone but the existing players. This intervention creates an effective monopoly, though legally, it is not.

Someone who is already rich could start a massive company all at once and pay the lawyers to make it happen, but this is not likely. Thus effective monopoly takes hold.

Of course, government does this, not necessarily because of corruption or political payback of politicians. It happens as a result of regulatory capture.

This is a situation where industry attempts to regulate itself, by proposing government boards or agencies to manage the regulations. Then their CEO's get nominated to sit on the boards. And of course, they get to recommend new regulations. The end result is that the big players push through a mountain of red tape designed to make sure that no one else can afford to compete with them.

Thus, government CANNOT solve this problem. The only way to prevent monopoly is for a FREE MARKET and stay the hell out of it entirely.

Competition will "solve" the problem of high prices and abusive practices. If the market is free and unfettered, someone will see the opportunity to enter that niche and sell higher quality, lower price, or better service. Every time. The asshole eventually has to fly right, or go broke.