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zridling:
I see a Mad Max world soon for those of us in the lower 99%! Note that all austerity policies around the globe only affect those "without the gold" (the richest folks), so I apologize for the digression.



Is It Better to Forgive Than to Receive?
Repudiation of the Gold Indexation Clause in Long-Term Debt During the Great Depression
by Randall S. Kroszner, 1998.
http://faculty.chicagobooth.edu/finance/papers/repudiation11.pdf

Here's a blockquote short version:
This paper examines the consequences of large-scale debt relief during the Great Depression in order to examine theories of debt overhang and the costs of bankruptcy. When the U.S. went off the gold standard and devalued the dollar with respect to gold, the government declared that the courts would no longer enforce gold indexation clauses which appeared in virtually all long-term private and public debts up to that time. If the gold clauses had been enforced, the debt burden of borrowers would have increased by the extent of the devaluation, which was 69 percent. I examine asset price responses to the Supreme Court’s decision to uphold this effective debt jubilee. Equity prices rise, but more surprisingly, the debt relief also led to higher prices for corporate bonds (all of which contained gold clauses). In contrast, government bonds with gold clauses fall in value. These responses suggest that the benefits of eliminating debt overhang and avoiding bankruptcy for private firms more than offset the loss to creditors of some chance of trying to recover the additional 69 percent. Consistent with large costs of debt overhang and bankruptcy, in the cross section, stock and bond prices of firms closer to bankruptcy rose more than other firms. The results suggest that in these circumstances it is indeed better to forgive than to receive.
_____________________________

* Following the inflation during the Civil War, almost all long-term financial contracts in the U.S. came to include a “gold clause” which effectively indexed to gold the value of the payments to creditors. This clause protected creditors against devaluation of the dollar since they could demand payment in gold or the equivalent value of gold in nominal dollars if the price of gold were to rise during the life of the contract. On June 5, 1933, Congress passed a Joint Resolution nullifying gold clauses in both private and public debt contracts. One legal authority has remarked of this Resolution: “In legal history there is probably no other statute of a purely private-law character which has engendered such enormous financial changes…”
*
* The abrogation of gold clauses was a key part of Roosevelt’s “first hundred days,” providing the foundation for much of the New Deal policies directed at reflating the economy including the departure of the U.S. from the gold standard. Although the Supreme Court struck down most of Roosevelt’s early New Deal programs, the Court upheld the government’s ability to alter financial contracts by refusing to enforce gold clauses. Given that the price of gold rose from $20.67 per ounce to $35 per ounce when the U.S. officially devalued in 1934, the abrogation of these clauses was tantamount to a debt jubilee….
*
* Justice McReynolds, in a strident and emotional dissent, decried that “the Constitution is gone” and compared the actions of the government in these cases to those of “Nero in his worst form.” The minority expressed “shame and humiliation” at the majority’s decision and found the consequences of the decision upholding repudiation “abhorrent.” With the sanctity of private contracts now eliminated and the government effectively repudiating its obligations, the dislocation of the domestic economy could be much greater in the long run than any possible short run disruptions due to gold clause enforcement….
*
* High Bankruptcy Costs and Debt-Deflation Hypothesis: If the costs of bankruptcy and distortions of investment incentives of debt overhang are sufficiently large, then enforcement of the gold clause could have reduced the expected payments to corporate bond holders. This occurs when the anticipated benefit of enforcement of the gold clause, which would raise nominal payments to bond holders by 69 percent times the expectation of a decision upholding enforceability, must be more than offset by the expected reduction of payments to bond holders due to bankruptcy and distorted investment incentives….
*
* In addition to the bankruptcy costs that affect individual firms, there could have been an external effect of massive bankruptcies and underinvestment incentives induced by a decision adverse to the government (e.g., Fisher 1933, Myers 1977, and Lamont 1995). The two-year long recovery of the economy might have been stopped and a severe crisis could have arisen as individual firm bankruptcies led to further waves of failures of financial intermediaries and to broad financial and economic collapse…
*
* VII. Conclusions
* The evidence presented above is consistent with the “high bankruptcy costs and debt deflation” hypothesis. The debt repudiation that was the practical effect of the gold clause decision increased the value of both debt and equity, and firms with greater likelihood of experiencing financial distress had the greatest increase in the value of their securities. These preliminary results suggest that models emphasizing debt overhang and the costs of financial distress may have empirical relevance for evaluating policies of debt relief for both firms and nations.
It really shows what a total bad ass Franklin Roosevelt was back in the day compared to our leaders today.

steeladept:
To base the entire world's economy on one material of limited supply that has no intrinsic value is the part that is the problem, and most economists agree with that point.-wraith808 (June 25, 2011, 03:18 PM)
--- End quote ---

I don't see how basing the entire world's economy on one material of unlimited supply that has no intrinsic value is any better.
-Deozaan (June 25, 2011, 03:46 PM)
--- End quote ---
It doesn't.  In fact, it makes it worse.  The fact that gold has no intrinsic value is not part of the problem, rather it is the reason it is a good basis for monetary policy.  If you have a continuously variable supply that can be consumed by any number of sources (silver, for example) then the value is based on the supply at hand and makes everything relative and meaningless.  Gold has a stable supply (it increases supply at a miniscule, stable rate and has no significant source of consumption), can only be increased by small amounts (you have to find it before you can dig it up), requires economic activity to grow, and most importantly can not be created or destroyed by those who control the monetary system.  The only thing they can do is control how much exits their system (the banking system); and to a certain extent, how much enters it.  If they can not control a material that is intrinsically valuable due solely to scarcity (which is the only intrinsic value of gold), then they can not arbitrarily control the entire economy at will as they do now.

As far as "... most economists agree on that.", the only thing I have seen economists agree on with regard to your argument is that gold has no intrinsic value.  I have never heard an economic debate where they agree that the problem was because it is a limited resource of no intrinsic value.  That argument is patently absurd for the reasons mentioned above.  If it is unlimited resource, then by definition it also has no intrinsic value.  If it is a limited resource with an intrinsic value (and few resources truly do, BTW) such as food stuffs, then the variability of the supply makes it far too unstable to be a useful source to base monetary policy on.

worstje:
I've got a simpletons solution to everything.

...

Let's base it inversely on the amount of CO2 and other crappy stuff in our air. It will finally give the beancounters a reason to favor nature and the generations we are currently ignoring with our own selfishness. :D

In case it isn't obvious yet: I can't really bother with analyzing economy like that. :) I understand it is important for tons of people, most of whom are beancounters, but in the long term I only see it mess stuff up given the inherent Do-Take-Dont-Give mentality it embodies.

But just to add my $0.02... my naive view is that relying on gold as our base commodity is pretty decent if only for the fact that way back countries weren't in as major debt as they are now. Money is an abstract number nowadays. Going deeper into debt doesn't seem to matter once you are already into debt for billions, and fixing it isn't something anyone wants - they just want to spend. If it was based on gold, we'd need so many shitty amounts of gold that countries/companies would finally stop biting into the apple-of-infinite-debt-money. Realistic people don't give their time or hard work away willy-nilly with a promise of being paid, but around all the big money that little fact seems forgotten. Greece is only the first of many running into a wall they created for themselves.

Renegade:
Let's base it inversely on the amount of CO2 and other crappy stuff in our air.
-worstje (June 26, 2011, 11:26 AM)
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AIR?!!??!

C'mon... If you're gonna do something different, at least try and center it around porn...

Cripes... Some computer dude you are... Can't even... pron... mrphle... tits... mufle... muff-diver... mmmfff... nookie... garble garble...

:P :D

steeladept:
Porn.  Nice...

Worstje, you nailed it.  Very perceptive.

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