Why don’t we use the gold standard anymore?


Today we no longer use a gold-backed currency. Even when the dollar was backed by gold, the U.S. government would adjust the gold-to-dollar ratio with regularity, essentially muting any effect of the currency’s gold backing. So while officially abandoned in 1971, we’ve been off the gold standard for quite a while, since about 1914.

Beginning in and around the 19th century, developed nations almost universally adopted the gold standard. Uncoincidentally, the 2nd half of the 19th century is heralded as one of history’s great economic eras. But, in 1914, at the outset of WW1, developed nations involved in the fighting began moving away from the gold standard. They were faced with two options to finance war operations: 1) increase taxes, 2) leave the gold standard and print money. Option one would have been supremely unpopular, option two would accomplish the same thing as option one just without the national outrage. Taxes are one thing, people understand what’s happening, they’re giving up their money for a government to provide services that the collective majority generally agrees upon. Fiat money is different. Instead of imposing additional taxes, fiat money allows the government power to print money, devaluing the currency and causing citizens to end up with less money via inflation. Imposing taxes and printing money grant the same outcome for governments, they end up with more money, and it also creates the same outcome for citizens, they end up with less money. The issue is that citizens have a measure of control over taxation by voting, complaining, revolting, etc. They have very little control over printing money.

It’s impossible to prove, but nevertheless an interesting thought experiment: what if governments hadn’t abandoned the gold standard in 1914? In all likelihood the war would have endured for a fraction of the time it did in reality. Taxes would have been imposed (the only way for governments to fund the war), they would have been incredibly unpopular (because ordinary people didn’t care about petty monarchical conflicts between nations), governments would have run out of money to fund their war efforts, and the war would have ground to a halt, almost certainly sooner than four years, and more probably within one year. Again, it’s impossible to prove, but certainly possible.

Since 1914 little has changed, fiat (government-issued) money is the currency of the age. Taxation has steadily decreased over the last one hundred years while government spending has steadily increased by borrowing and printing notes. A return to the gold standard at this point is all but impossible. The fact is that gold, while a great purveyor of value, is impractical for day to day use. It’s heavy, it’s hard to divide into smaller bits, and it’s costly to keep secure. These are the reasons why gold was concentrated into central banks and traded via government promissory notes in the first place.

Unfortunately, every example in history involving the utilization of soft money (money that’s easily producible) has eventually resulted in large-scale economic collapse. That’s not to say it’s impossible for fiat money to succeed, the U.S. government, while far from perfect, has not inflated the currency to disastrous levels, and may not for a long time. But no human or human institution has been able to stave off the temptation to over-print currency indefinitely.

So that’s depressing, is there a solution? We know that hard money (money that’s scarce and/or hard to produce) is foundational to thriving economies. Gold is the best example we have of hard money, but it has inherent flaws that make it difficult to use in our modern world. An interesting development in the last decade is the inception and rise of crypto-currencies. I won’t pronounce Bitcoin the ultimate salve of modern economics, but it’s certainly worth keeping an eye on. Crypto-currencies offer many of the beneficial characteristics of gold (difficult or impossible to produce, widely accepted), and avoids many of gold’s pitfalls (it’s not heavy, not hard to divide, and inherently secure). The market will ultimately decide if some type of crypto-currency is any type of answer, for now, it’s a fascinating concept. 

Your 401k account is probably loaded up in the wrong asset class



401k accounts good and bad. They’re mostly good because they provide an avenue for people to save and invest money for their future, but there are some things to watch out for.

Good stuff:

  • The main benefit of a 401k is that it allows you to invest qualified money. You could just invest money on your own, but investing in your 401k accounts means that you get some significant tax advantages (no capital gains on the growth of your investments and an income tax break). The same advantages apply to IRA accounts, but 401ks include two other significant advantages.
  • Many employers offer a matching contribution. For example, if you contribute a certain small percentage of your income (say 5%), the employer may kick in an additional small percentage into your 401k account (say 4%). That’s free money, and you should definitely take it.
  • 401k contributions are capped at $19,000 per year by the employee, employer contributions can exceed that. IRA contributions are capped at $6,000 per year. Not all of us are maxing out our qualified retirement accounts, but the larger cap offered by 401k accounts is certainly an advantage.

Bad stuff:

  • 401k accounts offer a limited number of investing options, and they’re almost never great. 401k Plan sponsors (employers) are typically concerned with one thing when choosing a plan: cost. If the plan seems expensive it will be harder to explain to the board, regardless of the value or benefits of the portfolio and the advisor.
  • Your money is locked up for as long as you work at the company. You’re stuck with the options available and you can’t move the money elsewhere unless you leave or retire.
  • Investors have little to no help deciding which funds or options to use within the 401k so they end up in default options, which are usually target dated funds. You may have seen these funds that end with a future year, like 2045, which you’d be in if you were expected to retire sometime around 2045. A target dated fund is not the worst investment you could be in (which isn’t saying much) but it’s far from ideal. A target dated fund will load you up in U.S. large growth companies (essentially the S&P 500), sprinkle in some international large growth companies, and decide what percentage of your money should be in bonds based on the target year. Unfortunately, in the history of the market, large growth company asset classes are among the lowest-performing of any asset classes over time. A target dated fund is usually made up of index funds (along with their inherent problems) so at least it’s not active, but it will sacrifice large amounts of return over time because of its poor diversification.

Don’t be afraid to use your 401k account, especially if your employer offers a matching contribution (again, free money). But if you’ve obtained the maximum matching contribution, think about investing additional money into a better portfolio through an IRA. Unfortunately, your 401k is probably loaded up in the wrong asset class.

Thoughts on capitalism (part 4)

4: Capitalism isn’t perfect.

I wanted to finish up these thoughts on capitalism with an observation: capitalism is great, but it’s not perfect. Again, many of these thoughts are extracted from John Addison Teevan’s Integrated Justice and Equality which I can’t recommend highly enough, and a few are gleaned from Not Tragically Colored by Ishmael Hernandez.

Capitalism does not contain values, it’s amoral. It can’t distinguish anything on any basis besides price. For capitalism, there’s no difference between a missile and a bushel of apples besides its market value. This basically means that capitalism is as good (moral) as the people who are utilizing it.

Capitalism relies on the self-interest of humans, a pretty reliable foundation. However, apart from values, self-interest can quickly and easily devolve into greed. Greed is a problem, Teevan argues that it ‘flattens the soul.’ Greed changes the equation from self-interest to gross indulgence. It’s the opposite of moral, and it can wreak havoc on society.

We know that capitalism is the single greatest sociological economic force in creating wealth and alleviating poverty. But we also know it’s not perfect, it can be manipulated for greedy ends, harming people and environments. So what’s the solution? A popular conclusion is to hand over responsibility to the government to regulate and stipulate and care for the underprivileged, that personal generosity and compassion should be delegated. That’s a bad idea, for a few reasons:
(1) Government compulsion stifles generosity and compassion within society. Generosity means giving, void of any obligation or compulsion. When the government requires and stipulates giving, generosity dies. Not only do people resent the government for taking from them, they learn to resent the people to whom their proceeds are redirected. They learn to hold what they have closely. Why do you think CPA’s do so well? It’s not because they help people pay taxes, they help people pay the least amount of tax possible. People lose compassion when it’s delegated to the government.
(2) Redistribution deprives people of their dignity. Recipients of government ‘compassion’ efforts don’t receive a gift, whatever they receive becomes a right, an entitlement. Instead of gratitude, they learn to expect. Instead of self-reliance, they learn dependence. Part of a person’s self-worth is lost in all this.

Instead, in order for capitalism to work in society, shared moral values, specifically personal compassion, are required. The delegation of personal generosity and compassion from the people to the government is destructive for everyone. Capitalism is as strong as the values of the people who embrace it. “P.J. O’Rourke is alleged to have quipped that civilization is a bootstrap operation: we have to work at being civil. We cannot assume that the bounty of wealth or the freedom to enjoy it can be continually provided without continual care” (Teevan, p121).