Our understanding of monetary system is wrong?

[trefoil]

Quote from Traden4Alpha:

You can't have a gold-based currency AND let the price of gold float -- that's a complete contradiction. The essence of a gold-backed currency is that a fixed number of currency units are backed by a fixed quantity of gold. Let the price float and currency units can be created out of thin air by changes in the price of gold.

And in a world where all economic expansion requires new gold (unless you allow fractional reserve banking), the miner of gold become extremely rich. Its no different than our geopolitical problems with black gold or oil (which also can't be created out of thin air but can be mined from certain countries and acquired by productive economies through trade). I doubt that any Western government would cede sovereignty over their currency to the Organization of Gold Exporting Countries.

I understand your position, but you have to understand the components of the gold price.
All commodities eventually wind up selling for the cost of their extraction plus some small premium that makes it economically viable to get the stuff. Every dollar over that small premium amounts to speculation on the commodity in question's price rising in the future due to some circumstance that makes it more valuable, which in the case of any other commodity means some new use for it that will make it more valuable, or some looming shortage due to, as in oil last year, the depletion of the resource.
In the case of gold, the price tends towards the residual premium unless there is, as Bernard Baruch once put it, "a question about the currency".
Call it atavistic, barbaric, or whatever other adjective you want, people will gravitate towards gold in times of crisis because it represents value. It probably costs, these days, somewhere between 400 to 600 dollars an ounce to extract gold. Given that, every dollar over, say, 660 or so represents a premium that gold buyers are willing to pay because, in these times, there is that question about the currency. Every single one.
The spot market in gold doesn't measure jewelry demand: it measures confidence in the world's currencies, which is another way of saying that it measures confidence in how the world is being governed, since currencies are, in this day and age, purely a product issued by the governments of the world.
The gold price has a persistent premium on it because the world, in its collective judgment, thinks the world's governments are not up to the challenges facing them.
A floating gold price doesn't really float: the world's currencies are still being measured in terms of gold, which is why there is, in normal times, a strong negative correlation between the gold price and the price of the world's reserve currency, which for the time being is the dollar. In terms of the gold price, then, all currencies are depreciating. Which explains how a floating gold price is nevertheless consonant with a gold standard.
In short, the gold standard never really went away. It just went underground.

 

[intradaybill]

Quote from moo:

The problem can very well be solved by forbidding fractional reserve banking, a totally absurd system. With 100% gold-backed money, and no ability for banks to create money out of thin air, we will see no more huge bubbles and crashes.

No. This creates more problems than it solves.

 

[achilles28]

Quote from intradaybill:

No. This creates more problems than it solves.

No. It doesn't.

 

[TraderD]

Quote from Traden4Alpha:

You want to run a real-time global economy of 6.6 billion people with only 4.6 billion ozt of physical gold? Good luck!

BTW, gold-backed economies have bubble and crashes, too.

The whole world runs on real grain, real gazoline, real labor. Why can't it run on real medium of exchange??? You can't put a fractional gaz in your car...

Sugar crash is different from crack crash....

 

[trefoil]

Here we go again.
Fractional reserve banking has always been a part of capitalism. Take it away, and we're back to the Middle Ages.
Islam still prohibits interest on money, which is of course the product of fractional reserve lending. It does it for the same Medieval reason that it was prohibited under Christianity: time belongs to God.
I will concede that you can't kill time without injuring eternity, but fractional reserve lending is as much a part of free markets as limited liability companies, forward selling of commodities, and a host of other practices that the ignorant think are unwise, but that the educated know are absolutely vital to a functioning market economy.

 

[Stosh]

Quote from trefoil:

Here we go again.
Fractional reserve banking has always been a part of capitalism. Take it away, and we're back to the Middle Ages.
Islam still prohibits interest on money, which is of course the product of fractional reserve lending. It does it for the same Medieval reason that it was prohibited under Christianity: time belongs to God.
I will concede that you can't kill time without injuring eternity, but fractional reserve lending is as much a part of free markets as limited liability companies, forward selling of commodities, and a host of other practices that the ignorant think are unwise, but that the educated know are absolutely vital to a functioning market economy.

If we posit that the UNDERLYING ENABLER of the severe financial crisis that we are in is due to cheap credit of previous years, didn't the fractional reserve sytem allow parlaying of deposits and capital to the extremes which largely caused this mess? Perhaps a more constrained, and more objective, monetary system, though not perfect, wouldn't have allowed such a bust. Stosh

 

[moo]

Quote from Stosh:

Moo.....I'm beginning to think you may be right. We need some way to keep these "masters of the universe" from managing the money supply. Human beings just aren't that smart...

Even worse, they are corrupt. Money and power corrupts. And not just the leaders, or "masters", but everyone. Most Americans, as well as other nations, have been corrupted by this easy credit and free fiat money. People are addicted to debt, and that must change.

We had the Great Depression due to the big bubble caused by fiat money and fractional reserve banking, and now we are going to have the Greater Depression due to an even more massive bubble. Will people ever learn? From history we know the answer is always NO.

The politicians will continue to try one easy fix after another, which will all fail, because they don't dare or understand to try the real cure: eliminate excessive debt and its cause, the absurd FRB system.

 

[moo]

Quote from Traden4Alpha:
You can't have a gold-based currency AND let the price of gold float -- that's a complete contradiction.

Of course the government does not set the price of gold, it is set by the market. All the government needs to do is to get completely out of the way after outlawing FRB (which is fraud anyway). Gold will naturally rise to the role of money, because it is best suited for it (perhaps aided by silver). I was only speculating that if this were to happen, the price of gold in today's fiat money would have to rise at least tenfold.

And in a world where all economic expansion requires new gold (unless you allow fractional reserve banking), the miner of gold become extremely rich. Its no different than our geopolitical problems with black gold or oil (which also can't be created out of thin air but can be mined from certain countries and acquired by productive economies through trade). I doubt that any Western government would cede sovereignty over their currency to the Organization of Gold Exporting Countries.

That fear is completely unfounded. The annual production of gold is minimal to the total stocks available (because all gold ever mined stays in use, unlike oil which is consumed). No miner, nor all the gold miners combined can have any noticable effect on the price of gold ever.

Besides, even OPEC has been totally inept in controlling the price of oil, as should be very obvious after the recent crash.

You're right in saying that the gold miners will get rich, if gold were to become money again. But this is just a one-time bonanza. New gold mines will have to use poorer ore, so increased costs will eat up a big part of those dreamed (or feared) profits. Gold mining would be a booming industry, but still no new "masters of the universe" there.

 

[intradaybill]

Quote from trefoil:

... and a host of other practices that the ignorant think are unwise, but that the educated know are absolutely vital to a functioning market economy.

Not only ignorant...

Banks cannot lend without fractional reserves to anyone but to those who have an equivalent amount to put down as security. Otherwise interest rates must be extremely high to compansate for the risk. Abolishing fractional reserves is equivalent to making sure that the rich will always remain rich and the poor will always remain poor...

which I think is the hidden agenda of some of those who propose abolishment of fractional reserves, the rest are ignorant fanatic followers.

 

[HomoSalmon]

Quote from intradaybill:

Abolishing fractional reserves is equivalent to making sure that the rich will always remain rich and the poor will always remain poor...

which I think is the hidden agenda of some of those who propose abolishment of fractional reserves, the rest are ignorant fanatic followers.

Maybe I'm simply a ignorant fanatic, but why FRL should help a poor to become richer?
I'm sure it is true that a non-FRL system will make credit more difficult to obtain. But we can find a way to make this relative more scarcity hits only who use that money to consume or speculate.
The only way in which credit can help people to alleviate their poverty, IMHO, is when help them to find a productive way to making a live. And that credit can be backed by state or simply by savers who accept a share in their venture. Moreover, I believe no more difficulties than today will arise for innovators who're trying to improve our wealth by the use of their inventive.
Surely most people making a live manipulating credit will have to find a new job (maybe Business Angels and venture capitalist?), but this will raise the output and make all, including them, more rich. Someone could be not as able in new needed jobs as was before, thus becoming less profitable, but in a zero-sum game -and I believe FRL is worst than that- who cares?

IMHO we should start to foster people who're working on creative side of economy (ie improving productivity by process/product/organization innovations) than continue to incensate who is working only on distributive side of economy, moving wealth from who creates it to someone else. And to be cristal clear, I believe there are a lot of legitimate jobs on that side even for who manage money for living, including banks (but a "little" different type than today's).