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Thread: Gold Standard

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    Gold Standard

    I never took many courses on monetary policy, and I'm curious about the gold standard. As his supporters know, Ron Paul has been an outspoken proponent of the gold standard. I believe Alan Greenspan is as well. I suppose having the currency backed by gold keeps the fed from being able to manipulate a whole lot, which basically fits into the Austrian School of Economics.

    I think the problem, however, is the fact that gold can be mined. We don't know exactly how much gold is out there, and it's not exactly useful, so if we discover fifty tons of gold, then the true value of the gold goes down, but our money is still inflated. How do supporters of the gold standard argue against this?

    Beyond the difficulty in transporting, storing, and preventing the debasement of gold, one of the main disadvantages of a gold standard is that it might artificially inflate gold's value, increasing the cost of items and industrial processes in which it is used.[3] The total amount of gold that has ever been mined is estimated at about 142,000 tonnes.[4] At a gold price of US$800 per Troy ounce, or around $26,000 per kilogram, the value of this entire planetary stock would be $3.65 trillion, which is less than the value of cash circulating. In the U.S. alone, more than $7.3 trillion is in circulation or on deposit.[5] Under a U.S. gold standard, the price of gold would be more than proportionally higher, because all the gold in the world can not be brought in to U.S. bank vaults.

    Under the gold standard, gold mined at a different rate than the economy grows can produce both inflation, when deposits are discovered and extracted, and deflation when they are mined to exhaustion.[6] In practice, the production of gold has usually trailed economic growth, resulting in periods of deflationary pressure, including contributing to the cause of the Great Depression[7] and events during it.[3] During the gold rushes in California and Australia, soaring gold output contributed to a 5% yearly increase in wholesale prices during the period between 1850 and 1855.[8][9]

    Using a fixed commodity as a monetary standard gives central banks fewer options with which to respond to economic crises and stimulate economic growth.[10] In particular, gold-backed currencies prevent tailoring the money supply to the economy's demand for money, and are subject to speculative attacks when the government's financial position looks weak; attacks which often require punitive economic measures to counter. Such measures exacerbated the Great Depression when the U.S. raised interest rates in the middle of a recession in order to defend the credibility of its currency.[7] Finally, since commodity currency devaluations produce sharp changes in their values, rather than smooth declines, their effects are magnified.[11]
    http://en.wikipedia.org/wiki/Gold_standard

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    IIRC, Currently the gold supply does not change. Whatever is mined is in general used. Even a gold rush, only increases the supply by 5%, contrast that with the highest spikes of inflation.

    Gold is ridiculous difficult to debase, its a Noble Metal, so its nearly immune to corrosion. Plus you can use it to pack paper currency, or digital currency, you do not need to lug it around. Plus you don't need to back all of the currency, just a good 10-20% I'd believe.

    Gold is highly useful as an industrial product, its used in a number of industrial applications, a simple google search will review this. You don't need to know how much gold there is, you just need to know how much there is which backs the currency people are using.

    The final paragraph states that the Gold Standard was a cause of the great depression. This is highly debatable. The US government did not follow a strict gold standard, the Federal Reserve was in power in 1913 and kept low interest rates which caused the money supply to increase and false gains in the economy. By false I mean they were not real gains, they were just momentary spikes, something similar to the internet bubble. Eventually, the false gains had to be returned in the Great Depression.

    The Gold standard isn't necessarily about just using gold, but you could use a basket of commodities to back a currency, perhaps even investments as well.

    The Gold standard keeps the government from printing money, which is essentially a stealth form of taxation, (because the value of everyone's dollar drops) and from artificially propping up the economy.


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    I see the "not enough gold for economy" argument a lot but for some reason the people who act as authorities and push this argument apparently don't realize that as gold gets rarer the price (or dollars per ounce) would start going up quite a bit. If there's one last ounce of unowned gold on the planet you know you wouldn't be paying $800 for it.

    In the end I think competing currencies is the way to go. In the absence of a government you'd see organizations that issue money or credits but also back them with some solid commodity, whether it's gold, land, or diamonds.

    Also remember that one balancing force for the price of gold is that when it becomes worth more per ounce then that gives mining companies incentive to push hard to find more of it, and the opposite is true for a decreasing value of gold.
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    Senior Member shootermcgavin7's Avatar
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    There is a little bit older thread (Ron Paul thread, maybe?) where this is touched on.


    The biggest reason for some type of gold indexing is that gold has always had international value as medium of exchange. This sounds stupid, and is almost like saying "Gold has value because everyone thinks it does." As long as you believe in fairies, Tinkerbell doesn't die. Then again, if you think about it, every currency in the world operates on the exact same principle.

    The main differences are that gold seems to be more accepted internationally, and that the supply is relatively fixed (although it is subject to new discoveries, it isn't subject to the whims of politicians). Inflation is GOOD for borrowers, and BAD for lenders, so an inability for national governments to inflate away debt results in a lower cost of capital across countries. You can observe this anecdotally, nations with a recent history of high inflation are charged significantly higher real interest rates on their borrowings.



    The stuff I've mentioned has been well known for a long time. It still wasn't enough to prevent the world from going to floating currencies in the early 1970s.

    The newer quirks that have popped up, like shenanigans with derivative instruments, speculative attacks on central banks, speculative asset bubbles, etc, etc, etc seem to indicate that the cross-border transaction costs are higher than a lot of people thought in the 1960s and 1970s.



    The biggest reason some people want to return to a gold standard is that it almost entirely eliminates inflation. The inability to inflate the currency forces governments to be more responsible in their borrowing/spending habits because they actually have to repay debt at the real amount that they borrowed at.

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    Senior Member shootermcgavin7's Avatar
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    Oh, and as for the Great Depression, there have been entire books written on it, so a line on wikipedia doesn't do it justice.


    The reason for the deflation was that western nations spend the 1920s trying to re-index their currencies at the pre-WWI rate (there was a massive inflation during WWI as the combatants abandoned the standard).

    If the countries involved had simply re-indexed their currencies at the 1920s rate instead of trying to undo the WWI inflation, things might have been fine.

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    The gold standard can only really work if the supply of gold keeps pace with the growth of the economy. It also wrecks international exchange rates, keeping them fixed when they need to go up or down.

    Another problem is that it takes a substance which is massively useful in industry, jacks up the price and keeps it locked away in a vault.

    I'm not a Ron Paul fanatic, so I think that gold is better served in teeth and in circuitry than buried in Fort Knox. If you're going to back a currency, at least back it with something that doesn't have any real use, otherwise you're hampering industry and progress for the sake of ideology.

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    Quote Originally Posted by anelka View Post
    The gold standard can only really work if the supply of gold keeps pace with the growth of the economy. It also wrecks international exchange rates, keeping them fixed when they need to go up or down.
    Money doesn't need to keep up with the economy. Money should not shift in value either through inflation or deflation because some people benefit and some people are hurt artificially. Rampant inflation hurts the people on the bottom of the economy (blue collar workers, people on fixed incomes, and the rank and file of most businesses) and helps the people who recieve the new money (The largest and richest banks in the country and government contractors). Additionally, inflation and and low central bank interest rates helps borrowers and hurts creditors, creating an unnatural, unsustainable consumption investment cycle, which manifests itself through hyperconsumerism and malinvestment (please see the internet bubble and housing bubble,) which will undoubtedly explode. The Founding Fathers understand that fiat money was dangerous because it allowed stealth taxation and created unnatural winners and losers in a free market.

    If everyone used gold to back their currency, the international exchange rate would be inherently perfect, because everyone would be using the same currency, gold. A nation couldn't prop up its economy by printing more money, so it would never have an artificially propped up economy, which would mean its currency would always be correctly valued.

    IF only America used gold to back its currency, it would have the strongest currency in the world because the value of its money would never change, making it more viable as a store of value, which may further increase its value.

    Quote Originally Posted by anelka View Post
    Another problem is that it takes a substance which is massively useful in industry, jacks up the price and keeps it locked away in a vault.
    Using something that is useful in industry is actually a plus side because it keeps the gold valuable. And as massively useful as gold is for industrial applications, its mostly used in jewelry. Global jewelry demand was 15.4 billion dollars for the last quarter. Based on the amount of gold extracted in a year normally, 2,604 tons, that would mean about 18.5 billion dollars of gold is mined quarterly, and 15.4 billion is used in jewelry. The Gold Standard would MOSTLY reduce the amount of jewelry used.

    http://www.nationaljewelernetwork.co...fddc842cf97274

    Quote Originally Posted by anelka View Post
    I'm not a Ron Paul fanatic,
    You are contrarian though. You rarely bring up the fact that he was one of the few in congress to speak out against the Iraq war and American interventionism, two ideals you're wildly against. Also, I'm not sure how you stand on his social liberalism (getting government out of marriage, drug control) but you rarely speak about it.

    Quote Originally Posted by anelka View Post
    so I think that gold is better served in teeth and in circuitry than buried in Fort Knox. If you're going to back a currency, at least back it with something that doesn't have any real use, otherwise you're hampering industry and progress for the sake of ideology.
    Gold is mostly used in jewelry. If you back the currency with something of no use, the currency will be worth nothing. The only industry you'd really be hampering heavily is the jewelry industry, and this isn't some insane ideology. It is a well known historical fact that many empires fall because they can't resist the urge to print and spend more money. It is a form of stealth taxation on the people who don't receive the new money.
    Last edited by nejar462; 01-12-2008 at 08:33 AM.
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    Quote Originally Posted by anelka View Post
    If you're going to back a currency, at least back it with something that doesn't have any real use, otherwise you're hampering industry and progress for the sake of ideology.
    If you back it with something that has no 'real use', then why would it have value to back currency in the first place?
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    Quote Originally Posted by nejar462 View Post
    Money doesn't need to keep up with the economy.
    So what happens when the money supply doesn't keep up with the economy?

    Founding Fathers understand that fiat money was dangerous because it allowed stealth taxation and created unnatural winners and losers in a free market.
    More economic disasters happened under a gold standard than with fiat currency.

    If everyone used gold to back their currency, the international exchange rate would be inherently perfect
    It would be inherently imperfect, as the values of currencies wouldn't be decided by supply and demand as in a free market, but artificially fixed.

    because everyone would be using the same currency, gold.
    You're in favour of a single global currency? I'm not sure that would work, what if a country needed lower interest rates to boost the economy, or higher rates to curb inflation? You'd have a problem like in the Euro, where countries have economic problems due to not being able to control their currency.

    IF only America used gold to back its currency, it would have the strongest currency in the world because the value of its money would never change, making it more viable as a store of value, which may further increase its value.
    So the currency would be artificially high even when demand is low, making American exports even less competitive, destroying US manufacturing and transferring wealth from the US to places like China with weak currencies.

    As it happens, this fiat currency has the dollar weak, boosting tourism and helping the trade deficit. So much for the gold standard...

    Using something that is useful in industry is actually a plus side because it keeps the gold valuable.
    Why would you want the price of something used to industry to be high? I just can't see the point in keeping a useful substance under lock and key for the sake of ideology. If gold was cheaper it could be used more in circuitry.

    Also, I'm not sure how you stand on his social liberalism (getting government out of marriage, drug control) but you rarely speak about it.
    Under Ron Paul, states would be able to pass all sorts of stupid, bigoted laws. Minorities, as well as workers, across America would lose their rights that were protected by the federal government.

    It is a well known historical fact that many empires fall because they can't resist the urge to print and spend more money. It is a form of stealth taxation on the people who don't receive the new money.
    Empires fall because they can't control their provinces, or they get attacked from outside. And the gold standard doesn't protect empires. The Spanish economy was wrecked by the gold standard for example.

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    Senior Member shootermcgavin7's Avatar
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    Quote Originally Posted by anelka View Post
    So what happens when the money supply doesn't keep up with the economy?
    It is pretty apparent that you are confusing the metal that the money supply is pegged to (gold) with the money supply itself. You could reindex at whatever GDP growth was for the year, or as Milton Friedman suggested you could simply increase it at some fixed rate (say, 3%) each year.


    The way you've phrased your statement implies that the economy is still growing fast (too fast, in fact, for the money supply), which would raise interest rates and raise the "standards" for lending.

    Given what is currently occurring the credit markets, this self-correction mechanism might have been nice to have.



    More economic disasters happened under a gold standard than with fiat currency.
    This statement is ridiculous.

    The gold standard covered a few centuries, floating currencies have covered an aggregate of about 40 years.

    Since recessions/liquidity crises occur with somewhat regularity, the absolute number would be greater.

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    Quote Originally Posted by anelka View Post
    So what happens when the money supply doesn't keep up with the economy?
    [/QUOTE]

    The money becomes worth more, allowing you to purchase more goods with the same currency.

    Quote Originally Posted by anelka View Post
    More economic disasters happened under a gold standard than with fiat currency.
    Proof? The federal reserve started in the 1913, after that point the nauseating boom and bust economic cycles became readily apparent and occur far too often. Additionally, as shooter correctly pointed out the gold standard covered centuries, so I really want you to find any 100 year period where the gold standard produced as many boom and busts as it did the past.

    Quote Originally Posted by anelka View Post

    It would be inherently imperfect, as the values of currencies wouldn't be decided by supply and demand as in a free market, but artificially fixed.
    The value of the gold would be decided by true market forces. This is because there isn't a central agency which has control over the supply of gold. Additionally, as the demand of gold increases, so would its subsequent worth.

    Quote Originally Posted by anelka View Post

    You're in favour of a single global currency? I'm not sure that would work, what if a country needed lower interest rates to boost the economy, or higher rates to curb inflation? You'd have a problem like in the Euro, where countries have economic problems due to not being able to control their currency.
    I'm saying countries get economic problems BECAUSE they control their own currency. One reason cited in the Rise of and Fall of the Roman Empire for the decline of the empire is the debasement of its currency due to creating far too much of it. If a government controls its own currency it will nearly always cause a grossly unfair and generally stealthy inflation tax.

    Quote Originally Posted by anelka View Post

    So the currency would be artificially high even when demand is low, making American exports even less competitive, destroying US manufacturing and transferring wealth from the US to places like China with weak currencies.
    The currency never has an artificial value, it always has the market value. Countries with weak currencies do not gain wealth, they might gain it artificially for a short period of time, but they lose the power to invest abroad because of their weak currency.

    Quote Originally Posted by anelka View Post

    As it happens, this fiat currency has the dollar weak, boosting tourism and helping the trade deficit. So much for the gold standard...
    Also impoverishing a vast sum of Americans. The trade deficit wouldn't have gotten so out whack if it wasn't for rampant inflation. Inflation was high so Americans ended up spending more abroad then they should have, which ballooned up the trade deficit.


    Quote Originally Posted by anelka View Post
    Why would you want the price of something used to industry to be high? I just can't see the point in keeping a useful substance under lock and key for the sake of ideology. If gold was cheaper it could be used more in circuitry.
    Gold is already used in circuitry. As I said before its mostly used in jewelry however. You'd mostly be hurting the jewelry industry. Additionally, a good many people feel that a central bank with control over the money supply gives government far too much power.

    You could also pick a basket of commodities and investments as oppose to simply using gold. I would actually prefer that over a strict gold supply.

    Quote Originally Posted by anelka View Post

    Under Ron Paul, states would be able to pass all sorts of stupid, bigoted laws.
    Instead now the federal government can. Case in point...

    Quote Originally Posted by anelka View Post
    Minorities, as well as workers, across America would lose their rights that were protected by the federal government.
    I don't want to get involved in a debate over AA so I'll stop here.

    Quote Originally Posted by anelka View Post
    Empires fall because they can't control their provinces, or they get attacked from outside. And the gold standard doesn't protect empires. The Spanish economy was wrecked by the gold standard for example.
    The spanish economy was 'wrecked' because empires in the past believed in mercantilism. There are a number of different reasons for the fall of empires. One is that they overspend. The gold standard is one method which keeps empires from doing so.
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    I for one would just be thrilled to celebrate the cessation of a group of private banks from non-US countries controlling the financial status of our country. Otherwise, in 5 years I'll be having my "Century of Control" party, marking a momentous year contributing to the downward spiral of America.

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    Quote Originally Posted by shootermcgavin7 View Post
    It is pretty apparent that you are confusing the metal that the money supply is pegged to (gold) with the money supply itself. You could reindex at whatever GDP growth was for the year, or as Milton Friedman suggested you could simply increase it at some fixed rate (say, 3%) each year.
    So it's not really a gold standard at all then if you can arbitrarily play with it.

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    The money becomes worth more, allowing you to purchase more goods with the same currency.[/quote]

    Deflation, in other words. Which would slash investment, lead to massive unemployment, and make the rich richer. I suppose libertarians dream about such situations.

    The value of the gold would be decided by true market forces.
    But if the value of the gold changes, then the currency isn't as stable as the gold standard is supposed to make it.

    I'm saying countries get economic problems BECAUSE they control their own currency. One reason cited in the Rise of and Fall of the Roman Empire for the decline of the empire is the debasement of its currency due to creating far too much of it.
    I'm pretty sure it's due to being attacked from all sides by rivals, and the inherent difficulty in controlling such a huge area with Roman technology. And most Roman coins were silver or gold.

    If a government controls its own currency it will nearly always cause a grossly unfair and generally stealthy inflation tax.
    Inflation isn't a tax. And a country controlling its own currency is better than it being controlled by forces outside of its control. For example suppose the US has the gold standard, then China dumps a load of gold onto the market. If your government is wrecking your currency, that is a problem with the government, not fiat money.

    The currency never has an artificial value, it always has the market value.
    The same goes for fiat currencies, they lose value in the market if less people want them, or if the supply increases.

    One is that they overspend. The gold standard is one method which keeps empires from doing so.
    It would instead force them into underspending.

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    Senior Member shootermcgavin7's Avatar
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    Justin, hopefully you got want you wanted out of this thread, before it degraded into another pseduonomics lesson.
    Last edited by shootermcgavin7; 01-13-2008 at 02:28 PM.

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    Yeah this is why I no longer talk deep into utilitarian arguments for libertarian positions. The argument from morality is far superior since you don't need to pull statistics and whatnot out of your ass. You either are willing to imprison someone for using currency other than the dollar or you're not.

    Plus it's not like anelka is going to magically change his mind by now. Some people just think it's okay to force people to do things so let them take that ****ty philosophy into their personal relationships and poison them. No need to waste time trying to teach a Tiger to eat vegetables. Could have convinced 10 people that the gold standard was good by the time you guys decide to let anelka just believe whatever he wants to believe.

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    Quote Originally Posted by d'Anconia View Post
    Yeah this is why I no longer talk deep into utilitarian arguments for libertarian positions. The argument from morality is far superior since you don't need to pull statistics and whatnot out of your ass. You either are willing to imprison someone for using currency other than the dollar or you're not.

    Plus it's not like anelka is going to magically change his mind by now. Some people just think it's okay to force people to do things so let them take that ****ty philosophy into their personal relationships and poison them. No need to waste time trying to teach a Tiger to eat vegetables. Could have convinced 10 people that the gold standard was good by the time you guys decide to let anelka just believe whatever he wants to believe.

    Gotta keep things efficient.
    In terms of converting people, I think that economic arguments are better off than the moral ones. Most open-minded people will accept libertarian economic arguments against the war on drugs or against Iraq, etc., but will write us off as lunatics if we just talk about the morality. Or such has been my experience.

    I think it's an interesting enough debate anyway.

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    Quote Originally Posted by shootermcgavin7 View Post
    Justin, hopefully you got want you wanted out of this thread, before it degraded into another pseduonomics lesson.
    Hey, yeah. The discussion has been interesting (to me).


    I have one more question/argument.

    How often does gold change in value? If it becomes more/less valuable to people, you're looking at inflation/deflation, both of which cause serious problems.

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    d'Anconia is correct.

    I was mainly arguing for the benefit of KingJustin. Obviously anelka will not change his mind. I prefer fact based arguing mainly because to me it is more likely to change someone's mind that a moral approach (which may have to deal with more entrenched ideas).

    Justin. Gold rarely changes in value. Relative to currency it might spike, but thats relative to currency. Generally speaking, the gold supply is fairly stable year to year and so is gold demand.

    However, I fear you may be missing the point. The Gold Standard in my mind is a misnomer because I feel that it could refer to using any commodity or mixture of commodites and assets as a backing of currency. To me a gold standard would be fleeing from the system where the government has a monopoly on the money supply.
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    Two more arguments against gold.

    Many argue that the Panic of 1893 was caused by the gold standard.
    People attempted to redeem silver notes for gold; ultimately the statutory limit for the minimum amount of gold in federal reserves was reached and U.S. notes could no longer be successfully redeemed for gold.
    A series of bank failures followed, and the price of silver fell. The Northern Pacific Railway, the Union Pacific Railroad and the Atchison, Topeka & Santa Fe Railroad all failed. This was followed by the bankruptcy of many other companies; in total over 15,000 companies and 500 banks failed (many in the west). About 17%-19% of the workforce was unemployed at the Panic's peak
    I buy into the fact that economics can't be seen in a vacuum, but this seems like it was undeniably a serious problem. What would we do differently, now, to fix this?

    Short term price instability is another serious problem supposedly caused by the gold standard. This causes real issues. How would we avoid this problem now?

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    Senior Member shootermcgavin7's Avatar
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    All of the bank failures from post Civil War to the founding of the Federal Reserve were caused by liquidity crises. Not unlike the one we have right now, but we aren't witnessing any bank runs.


    In the particular crisis that you mentioned, the US increased their silver repurchases by over 100%, basically printing money to purchase the silver while guaranteeing the fixed exchange to gold.

    Any nation that backs its currency and then attempts to inflate the money supply will see reserves quickly drained. This is what happened to Mexico in the 1990s - their currency was pegged to the US dollar, they attempted to inflate their money supply while standing firm to the peg.

    This is easier to show with a graph, but the short explanation is that if you stand by a fixed monetary regime, you can't underhandedly inflate the currency...arbitragers will drain whatever you have it pegged to (as what happened in the late 1800s).

    There's another piece to this as well....several historians have argued that the US would have been better served with two currencies in the late 1800s, one in the west & midwest, and one in the east. One area was experiencing inflation and the other deflation, the same monetary policy didn't fit the whole country's problems.




    As for the short-term price instability; dynamic economic models are interesting, but one should hold off judgment until there is empirical evidence to go with it......because they're usually not applicable in real life.

    I also know that freely floating exchange rates are a lot more volatile than anyone predicted they would be when we moved to them in the 1970s, whereas the international gold standard led to roughly fixed exchange rates.
    Last edited by shootermcgavin7; 01-17-2008 at 02:32 PM.

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