[Jason_b]

If we decide to back our currency with a large quantity of a commodity, we are going to instantly create a huge demand for that commodity and greatly inflate its value. We also have to take that vast amount of that commodity out of circulation. So we store it, and while it is stored it serves no useful purpose.

The demand for gold is already balanced with the demand for other things. The idea is not to back our currency with a "large quantity" (why large?) of a commodity, but to make the commodity itself the currency. You won't be forced to carry heavy metal in your pants pocket, any symbol functioning as currency, any note, any bill, would be an enforcable promise to pay a certain amount of the commodity and would not be legal tender, it could be refused. Demonetizing federal reserve notes and monetizing gold would send the demand for FRNs to zero, and the demand for gold up. But the demand for gold would still be in equilibrium with the rest of the economy. Not a problem. The commodity would not be taken out of circulation, just the opposite, it would circulate! Even when on deposit in allocated storage, or something like e-gold.com, you say it isn't performing a useful purpose, but it is, the one it is meant to, to store the wealth of him who owns it, for a time, until he exchanges it for consumable goods or services. There is an enormous amount of gold in the vault at the NY Federal Reserve. If it was wrong to store gold do you think they'd store it? What's really going on is big boys own and trade gold as always. We have the same right they do. But the big boys have marginalized us off into the paper money ghetto where we can be abused by the inflation they cause.

Dr. Paul thinks we should have never gone away from backing our currency with gold. He suggests that we should back our currency with a material that's main source of value is that people think it is pretty. Does that really have a more real value than our current currency? Does backing a currency with gold really make it less susceptible to fluctuation and manipulation?

That it is pretty is a tiny bit of what makes gold the money par excellence. But it is the only monetary asset that is not simultaneously someone else's liability. The currency you are used to is debt and is debt based. Gold states that its owner is the possessor of wealth. Currency states that its owner is the possessor of someone else's debt. Which do you think is more valuable now? The language of saying to "back the currency with gold," is incorrect. Is a gold coin backed by gold? No, it is gold. Same with silver. What you consider being backed by gold is a gold certificate, backed by silver is a silver certificate. They are for convenience only, so holes don't get worn in your pocket. A gold certificate is by definition backed by gold. If it weren't backed by gold, it wouldn't be a gold certificate. I don't believe gold and silver are susceptible to manipulation of any significant degree. In the past, any time there have been manipulations, what has been manipulated was some paper promise, their proliferation and then deflation, that ruined people, not the gold and silver itself. Silver has had some problems with inflation, new mines might reduce the value a little, after the franco-prussian war, the germans demonetized silver, that caused some reduction in value. But Congress regulated the value by making the UNIT no longer silver, but gold, and then changing the amount of silver in the silver dollar, to keep it in equilibrium. After that, they could had returned the UNIT metal back to silver, but they didn't, they chose to keep it gold. But the ratio of values (it took more silver to equal the same value of gold) was maintained.

If countries of private organizations find new sources of gold and mine them aggressively, the value of our currency would drop. If a country with large gold holdings decided to sell off a large quantity the value of our currency would drop.

Countries and organizations would mine only when it is economically advantageous to do so. When it is not economical, they stop. Say your country decides to dump gold, as the franco-prussian example above indicated, we could do the reverse, make the UNIT metal silver, increase the amount of gold in the gold coin until it is in equilibrium, then return the UNIT metal to gold. You are so worried about the value of our currency dropping, what the hell do you think has been happening since 1913? A dollar will buy in groceries what 5 pennies maybe 3 pennies by now would have bought in 1913. At no time between 1813 and 1914 was there an inflation like that. Maybe 2:1, and a deflation of 1:2, but not an inflation of 100:3.

The value of our currency wasn't stable when it was backed with gold in the past, why would we expect that to change now?

What do you want? Utopia? The stock of gold and silver was nice and stable. It was overissuing of bank notes that created massive inflations which turned into deflations. There was a lot of land speculation too, over creation of credit during land booms, then the collapse and bust. You can't do anything about that. Look at the Nazdaq bubble, look at the housing bubble, nothing has changed, speculation is rampant. People lost their shirts in 2000 and will again with the housing bust.

Our currency is a commodity. It is traded, and it is worth whatever investors believe it to be worth. We can change the monetary supply to some extent to try and control it's value to some extent, just as OPEC tries to control oil production to exert control over the value of oil.

Is an IOU a commodity? A contract for goods is not the goods themselves. Our currency may behave as a commodity as it behaves like a money but that doesn't make it either. We only control the value of our currency in one direction only: down. Anything else and the economy could be ruined. The accumulation of new debts depends that existing debts not be forclosed. We are solvent as long as new debts are being created and accepted. When lenders are afraid to lend and borrowers are afraid to borrow, the economy stops and we discover we are insolvent. We get into this situation by trying to monetize debt, then we find we cannot stop. It is an addiction.

Returning to a gold backed currency is for all practical purposes impossible, and it is also pointless.

The main advantage is that it removes interference direct interference by our government attempting to manipulate the the economy and control inflation.

However, the proponents of such ideas never manage to explain how we are going to be protected against currency manipulation by others if our government doesn't get involved.

The government ought to be involved. It is in the Constitution, Congress has the power (which originally was vested in the several states until delegated, and could revert) to coin money and regulate the value thereof. Coining money means stamping gold and silver coinage, not printing money. Regulating the value means keeping the value of the UNIT constant, just like Congress did after the Franco-Prussian war.

I have heard many valid arguments about how the Fed manages the money supply, but I've yet to hear anything resembling a realistic suggestion of how to get rid of the Fed completely.

You get rid of it by getting rid of it. Shut it down. Tell the Mint to tool up for making silver coins as they did up until 1964, and gold as they did up until 1933, and copper pennies as they did, I forget which year they went to zinc alloy, nickels would be nickel again. Bureau of engraving and printing would prepare to produce silver and gold certificates for when the people decide to trust the government by having their gold and silver on deposit. America thrived for a time with protective tarriffs, only after 1929 did the idea fall apart. Low, fair, tarriffs to run the government would support a constitutionally limited government. The income tax would be abolished. The IRS and the Fed go together. Both: out of here! The welfare state would turn into the get off your ass and work state. Illegals would stay home, no welfare magnet to attract them, no free emergency room visits.

Thanks for your good questions and interesting comments.

[Toddsterpatriot]

The currency you are used to is debt and is debt based.

So do I owe interest to someone for the $20 bill in my wallet? Or does someone owe interest to me?

[untrained skeptic]

The demand for gold is already balanced with the demand for other things.

It's almost universally true that the demand for something is balanced by the demand for other things. This includes currencies which can be traded for other things.

The idea is not to back our currency with a "large quantity" (why large?) of a commodity, but to make the commodity itself the currency.

Large because the united states has a lot of wealth, and if we only have a small portion of the world's gold backing out currency we are more susceptible to price manipulation through hoarding and dumping.

The actually gold backs the paper currency. It represents the gold itself. The paper currency is backed by the gold, but it is also true that gold is the currency and that the paper is just a convenient representation.

Demonetizing federal reserve notes and monetizing gold would send the demand for FRNs to zero, and the demand for gold up. But the demand for gold would still be in equilibrium with the rest of the economy.

Equilibrium infers that it doesn't fluctuate. The purchasing power of gold definitely fluctuated when the US was using it as a currency.

The commodity would not be taken out of circulation, just the opposite, it would circulate!

It would circulate as a currency. It would however pull gold away from other uses by making it extremely expensive to use for other purposes, and for what? So we can have the illusionary feeling of stability brought to us by having a currency based on shinny stuff.

There is an enormous amount of gold in the vault at the NY Federal Reserve. If it was wrong to store gold do you think they'd store it?

The Federal Reserve invests in gold because it is liquid, and it tends to go up in value when the markets go down abruptly. It's is a hedge investment against a market crash.

What's really going on is big boys own and trade gold as always. We have the same right they do. But the big boys have marginalized us off into the paper money ghetto where we can be abused by the inflation they cause.

No one is stopping you from purchasing gold. Invest in gold all you want.

That it is pretty is a tiny bit of what makes gold the money par excellence. But it is the only monetary asset that is not simultaneously someone else's liability.

So what are the advantages of having a currency that is not debt based? Are you saying that it is better if the value of our currency doesn't change with respect to the currency of another country? That will only work if the world converts to using gold as a currency, not just the US.

What is so bad about a debt based currency?

Which do you think is more valuable now?

The idea that $100 worth of gold is worth more than a $100 worth of someone's debt is illusionary.

The debt becomes worth less if there is increased risk that the debtor will be unable or unwilling to fulfill that debt. The relative value of the debt and the gold may also change if people decide gold is coming into fashion and people start buying more gold jewelry. Or maybe gold becomes used more in industrial applications. The relative values fluctuate.

You are so worried about the value of our currency dropping, what the hell do you think has been happening since 1913? A dollar will buy in groceries what 5 pennies maybe 3 pennies by now would have bought in 1913. At no time between 1813 and 1914 was there an inflation like that. Maybe 2:1, and a deflation of 1:2, but not an inflation of 100:3.

Actually I'm not worried about slow, steady inflation. I'm worried about rapid fluctuation both up and down that throw markets into chaos. Having your currency become inflated in value is great, as long as it stays inflated. However, it the value bounces around, it creates too much uncertainty and investment suffers.

I don't worry about slow inflation, because I don't stuff my money in a mattress, or hoard in the form of gold in a vault. I invest it.

A small amount of inflation is considered desirable because it encourages investment. Investment keeps our economy growing, which benefits everyone. It is a concept that has served our country very well.

Is an IOU a commodity?

It most definitely is. Debt is traded all the time. Mortgages are traded, some of which are relatively stable investments that are well secured, others are risky investments.

Debt is often not a very liquid investment, but it is traded like other commodities.

Currencies are traded, and you were the one that pointed out that they are based on people's debt.

It is in the Constitution, Congress has the power (which originally was vested in the several states until delegated, and could revert) to coin money and regulate the value thereof.

So they can coin money and regulate it's value. That means that the government has authority to take actions effecting the value of the money.

Coining money means stamping gold and silver coinage, not printing money.

So you are arguing that creating money in any form other than coins is unconstitutional?

The Constitution does not stipulate that the currency be gold, or any precious metal. It does stipulate that the government may regulate the value of that money, which doesn't really mesh very well with reading into the Constitution that the value of currency must be dependent on the value of gold or any other precious metal.

In that same part of the Constitution it also stipulates that the federal government has the authority "To borrow money on the credit of the United States". It says that a mere three lines about where it says the government can coin money.

If the government buys on credit, it basically hands out IOUs. Such IOUs are a tradable commodity.

You get rid of it by getting rid of it. Shut it down...

I don't really see the connection between the Fed and all the other things you mention in that paragraph.

Getting rid of the IRS would provide a great benefit to our country economically and also by weakening the ability of elected officials to provide benefits to favored supporters.

Reducing the welfare state would greatly reduce government's drag on the productivity of our nation and would provide less encouragement for deadbeat illegal immigrants to come to the United States. It would likely have the opposite effect on those willing to work hard to get ahead, because America would be even more of a land of opportunity than it is now. However, those who are willing to work to get ahead are far less of a problem than those who want a free ride off of our government.

I am still unconvinced that there are benefits to returning to gold as a currency, nor do I think it is even close to practical to do so.

Of course I also don't see slow but controlled inflation as a problem as long as the Fed softens major market corrections and does a reasonable job of preventing a major crash or at least lessens such a crash. You can't really do away with market fluctuations. Such corrections are a normal part of a healthy market, however the Fed has done a decent if far from perfect job of preventing long term harm to the market that could result in a major depression.