What would be the cost of gold standard?

20 Responses to What would be the cost of gold standard?

1. MattW says:

   March 26, 2015 at 12:21 pm

   I’m mostly ignorant on the topic, but I believe only in the gold specie standard is actual circulating currency made of gold. More likely we would follow the gold bullion or gold exchange standards, which typically don’t use gold for circulating currency. Although the exchange I believe requires that you peg your currency on an economy that IS using gold as circulating currency – and I’m not aware of any out there today.

   If you are specifically speaking of the gold specie standard, I’m not sure there is an easy way to estimate the amount of gold needed to create circulating currency, the impact on industry, and the potential change in current gold value. Due to the incredible increase in demand.

   Interesting thought exercise though. Be interested to hear from economists or other people who actually know what they are talking about!
2. Michael Blum says:

   March 26, 2015 at 12:43 pm

   Even a 5 gram gold coin would be about $200 at current gold values. It would have to be very “watered down” (alloyed) to be a coin usable in regular life.

   As of 2008, the $100 bills in circulation had a value of $625 billion … if you made a 1 for 1 swap to gold, at $1350 per troy ounce, you’d need over 400 million troy ounces of gold. That’s about 12,400 metric tons … the United States has reported holdings of 8,133 tons. I suppose if you threw in some silver, you could come up to the $625 billion. And the price of gold might well go up, if the U.S. announced that it would need a huge amount of it.

   You don’t have to replace all the paper money of course — plenty of paper money backed by gold was used before the Thirties. And usually central banks didn’t carry an amount of gold exactly equal to the amount noted on the face of paper currency.

   For example: The United States Treasury in 1900 was required by law to maintain a minimum of $150 million dollars in gold reserves (the price of gold was set at $20.67 per ounce). Gold notes (i.e., redeemable in gold) in that year totalled $317 million dollars in value; there was also $610 million in gold coins in circulation.
3. Michael Z. Williamson says:

   March 26, 2015 at 12:46 pm

   The problem with a gold standard is that in a growing economy, the gold appreciates from deflation. There’s no reason to spend it, when it will be worth more later.

   The problem with a fiat currency is runaway inflation, since there’s always more of it.

   As to how much you’d need, that depends on how much value you are assigning to the total–see my first comment.

   Von Mises, IIRC, proposed a combined backing of metals, minerals, land and labor capital as the basis for a nation’s currency, which allows for flexibility and growth.
   • Paul Koning says:

     March 26, 2015 at 1:47 pm

     I don’t think von Mises said any such thing. But I’m quite sure that “flexibility” and “growth” are absolutely NOT desirable features of a medium of exchange. In fact, exactly the opposite is needed. Von Mises described a number of historic options, but he also spelled out at length that by the early 20th century the world had converged on a single answer, which is gold.
     Everyone interested in this subject should read, first of all, “Economics in one lesson” by Henry Hazlitt. Follow it by Human Action by Ludwig von Mises. If you want to dig deep, read The Theory of Money and Credit, also by von Mises. All three are available as free downloads from the Von Mises Institute (http://mises.org/library/books).
     Deflation caused by the growth of the economy at a higher rate than the growth of gold supply is not a problem — it’s a feature. Modern “economists” claim that deflation is bad; in doing so, they mix up deflation caused by incompetent management of fiat “money” with the normal and healthy slow deflation caused by growing productivity measured against a real money standard such as gold. In fact, it’s trivial to prove that deflation is not evil per se: just consider the deflation that has applied to the computer industry since its beginning, or to electronics more in general for that matter.
     A useful gold standard does require gold. Sorry Sigivald. You don’t have it, nor the benefits, unless “token money” is actually exchangeable for gold on demand. It is the exchange on demand that prevents inflation, because politicians can’t inflate the money supply then. But paper money “pegged” to gold, as it existed between FDR and Nixon, is a fraud: it is no more real than any other paper money, and you are no more safe from runaway inflation than with any other paper money.
     Yes, inflation has been fairly modest most of the time, because the Fed is reasonably competent and politicians are afraid of inflation, as well they should be. But any inflation is theft; the fact that the government only steals a couple of percent of your wealth each year isn’t much consolation. And disaster is avoided only through luck plus political restraint, while it lasts. Consider not just Zimbabwe, but also Venezuela, or Russia, or several other countries that have or had high rates of inflation.
     • ctd says:

       March 26, 2015 at 2:40 pm

       A given money supply represents the total wealth of a country (allowing that this is a casual post on a non-peer-reviewed thread); a unit of currency represents a fraction of that wealth. Inflation is useful to increase the money supply to cover increased wealth without changing the value which a unit of currency represents (if a loaf of cheap bread is $1, inflation keeps that loaf of cheap bread at $1 even if the GDP triples). Methinks inflation, used correctly, keeps prices stable.

       Gold, it seems, has a history of being mined at a rate roughly equal to the societal value it represents – inflation keeping pace with the value it represents, keeping prices stable. As an old aphorism notes: a good handgun or suit is always worth an ounce of gold.

       (I might be somewhat misusing “inflation” for want of a better term. Hopefully you get the point.)

       Elsewhere I SWAGed a return of the dollar to the gold standard. Details escape me at the moment, but figured the price of gold would have to increase 33x to make it work.
4. Sigivald says:

   March 26, 2015 at 1:31 pm

   If gold standard was reintroduced, how much of the currently available metal would have to be devoted to making currency instead of industrial or decorative uses?

   Zero.

   Metallism requires that the money basis “be” the precious metal, but it does not require that the metal actually be passed around in daily use.

   “Token money” is the term Mises used, I believe; you make paper or plastic or base metal tokens worth a set amount of the precious metal (much like US silver certificates).

   Works fine as long as the token issuer is trusted, which is easy enough to manage in a free country. And the exchange can be in simple bullion, rather than coins, as desired.

   (And what Mr. Williamson said. The sole advantage to metallism is that you can’t inflate the currency [you can debase, but people notice and it collapses or reprices to match the real content].

   Since it’s not 1930, significant inflationary policy has a bad reputation and only dictatorships ever try it – see Zimbabwe.

   Deflation is unavoidable with metallism [or BitCoins!], and in the long run is probably worse than the sort of targeted inflation the West does these days. A well-known inflation figure that they actually follow at the monetary policy level– which more or less matches reality – is easily priced into the price levels across the entire economy, and unlike deflation, does not encourage simply holding money as an “investment”.

   [One need not be an economist to see how using money as a holding-in-itself rather than investing it in capital or consumption is … less than ideal for economic growth.]

   This reminds us once again why carping about “but the official inflation numbers don’t include fuel and food!” is foolish – those numbers are for controlling monetary policy and the relation between the supply of money and productivity, to control supply-side inflation or deflation.

   A spike on oil prices makes everything more expensive, but not in a way relevant to fiscal policy – prices would go up even if we were using metallic currency. That’s why they deliberately don’t include that stuff in the inflation figures, because they’re not meant to be a cost-of-living index. They have separate indexes for cost-of-living.)
5. Patrick says:

   March 26, 2015 at 4:19 pm

   “What would be the cost of gold standard?”

   The end of the American economy.

   America survives on fractional reserve banking and borrowing from the future. Fiat currency makes that possible. The gold standard is a stake in the heart to that system.
   • Kristophr says:

     March 26, 2015 at 8:46 pm

     Fiat currency is its own stake in its own heart.

     All fiat currency eventually go to zero value as the issuer keeps abusing its value by issuing more and monetizing government debt.

     When the US dollar loses it’s place as the world reserve currency due to Federal Reserve abuse, all that outstanding currency will rush back to the US, triggering gods own inflation spike.
6. Kristophr says:

   March 26, 2015 at 8:53 pm

   The ammount or value of gold in dollars is not important, once the dollar dies.

   Yes, some gold coins ca be issued, but a gold backed currency can be handled electronically. Set the base coin equal to one gram of gold, with electronic ATM and credit payments figured to the nearest 1 hundredth … a flat screen tv price might be 31.10g on the cash register, and that would be dedusted from your bank account when you swipe your card.

   This would only work if the US treasury can resist the urge to claim more grams than they already own. Gold withdrawels from the Treasury should be allowed, with a bracket buy/sell price set at a percent needed to encourage gold to stay in the system.

   Eventually the value of the gold and the goods bought and sold with it would float to whatever the market level is.
7. Down River says:

   March 27, 2015 at 1:37 pm

   Y ‘all have pretty well described how this commie country got to be such a solid communist shithole. Dear leader said how he would fundamentally change this country. He meant change it from commie light to complete communism.

   Never mind that Article I, Section 10 found in Bush’s “Its just a goddamned piece of paper” states, among other things: “…No State shall make any Thing but gold and silver Coin a Tender in Payment of Debts…”

   This country is toast, thanks to a nation of commies.

   F all commies.
   • Sigivald says:

     March 31, 2015 at 3:54 pm

     The Federal Government is not a State in the Constitutional context, it turns out.

     Section 10 prevents the several States from having their own independent paper money and requiring people to accept it [“tender”], just like it prevents the States from Coining Money.

     Since Section 10 has never been thought by anyone to prevent the Federal government from coining money, it likewise cannot prevent it from issuing paper money.

     (Whether some handwaving around the Bills of Credit clause and lack of an enumerated power to issue them means that the Federal government cannot use fiat money is another matter – but it certainly can issue paper token money; that’s not a bill of credit.

     [One reason I suspect it’s handwaving is that there was no felt need to put in a direct prohibition in the set of limitations on Congress’ power along with the others, like ex-post-facto laws and bills of attainder.

     At worst, it’s a Constitutional gray area, as the Founding-era arguments for and against the power go both ways, and the lack of authorization or prohibition appears to be a deliberate compromise by the Founders.

     Certainly from an economic point of view, paper token money is identical to metallic money, if the reserves/exchange are trustworthy, which is easy enough to verify – arguably easier than doing your own assay of coins!])
8. Lyle says:

   March 27, 2015 at 3:34 pm

   “How would fractional payments we set up, in copper and silver or fiat coinage made of something less costly?”

   Needs editing. I can’t parse it.

   First question though; “Should your government be in charge of your currency or other medium of exchange, and why?” Or perhapes we could word it differently;
   “If the legitimate role of government, as our Declaration of Independence says, is to secure human rights, how does that role involve controlling a common currency?”
   Another way of asking the same question is; “Are we so stupid and non-creative, so un-imaginative, that we simply could not function as an industrial economy without government being in control of a common currency?” but of course that’s something of a leading question. If you don’t already know the answer, however, then there’s not much hope for you.
9. Dougman says:

   March 27, 2015 at 4:49 pm

   Well, sometime ago $20 = 1-ounce of gold. So in terms of 1920’s constant dollars and taken into account inflation and artificial price fixing, the suggested cost would be $8-10K USD.
10. Bruce MacLean says:

    March 27, 2015 at 6:52 pm

    With over 50% of the trades on the NYSE being conducted by computer, and most of that AI and currency arbitrage taking place at light speed around the world, what could Mises have to say? Your gold is too slow and heavy for this economy. Let it rest as an industrial metal.
11. DonM says:

    March 27, 2015 at 9:57 pm

    Having currency be fixed at a particular exchange rate to gold would indeed be workable, absent radical new discoveries of gold. Imagine a the currency disruption of a solid gold asteroid hitting the market suddenly. That would cause major inflation, at least where the asteroid went on the market.

    Gold standards work because such events are rare, especially as a fraction of all the gold that is in circulation at one time. Where they occur, the gold standard fails. The old song in San Francisco during the good rush offered “one pound of butter for two pounds of gold”.

    Absent that kind of sudden monetary disruption, very small amounts of exchangable gold is needed as a fraction of the money. When gold is worth more than the money, people will line up with money to exchange for gold at the fixed rate. When money is worth more than gold, people will line up with gold to exchange it for money at the fixed rate. Either sends a price signal that there is too much, or not enough money in circulation. An honest government responds quickly to such a signal, and takes action to keep the proper amount of money in circulation. A dishonest government doesn’t, rather, will ‘shoot the messenger’ and leave the gold standard.

    The idea that deflation is bad is amusing. Certainly despite fiat money governments continually inflating the currency, the cost of computer power has gone down in real terms or in inflated currency terms. Still, the computer industry is doing rather well. So long as people know and understand that the currency is being deflated, wages and prices can be adjusted to make up for any change.

    The problem is what happens with government manipulation of credit: The 1927 US actions to prop up British currency, the reduction in permitted leverage on the stock market in 1929 from 10% to 50%, and that was followed by a big tax increase, that further encouraged removing money from the market… No amount of gold would ever be enough to cover for the degree of dishonesty that is possible in a group of politicians. That is why a standard is important: Absent that standard, politicians cheat, and get away with it. With that standard, politicians may still cheat, but they are restricted in how much they can cheat.
12. Kristophr says:

    March 27, 2015 at 10:24 pm

    “How would fractional payments we set up, in copper and silver or fiat coinage made of something less costly?”

    I’d avoid a bi or tri-metal currency system. I suggest you look up The Crime of 1873.

    Just use one metal. Fractional coins below a tenth gram can be made out of cheap base metal, as long as they can be exchanged for gold at a bank.
13. Jim R says:

    March 28, 2015 at 7:33 am

    Do the Swiss follow a gold standard or something similar? I ask because, as I understand it, the Swiss franc has a very stable value. This is the goal of a monetary system, no? To provide a reliable, stable medium of exchange so that one can trust that the money one has today will have roughly the same buying power a year from now? Given the fairly wild swings in the value of gold over the past few decades, I don’t think a gold standard is such a good idea.
    • Paul Koning says:

      March 28, 2015 at 4:16 pm

      No. There is no country in the world that currently follows a gold standard. The Swiss have a somewhat more stable currency because they have less powerful politicians.
      • Kristophr says:

        March 28, 2015 at 5:28 pm

        They also decided to de-peg the SF away from the Euro … and the SW shot up in value.

        Which says something about investor confidence in te dollar and Euro.
14. LibertarianLurker says:

    March 29, 2015 at 10:46 am

    All too often in these discussions an important point is forgotten, that money is a product of free market activity (see Mises and Menger) and not merely a government edict. All these questions will be solved effortlessly by individuals making choices based on price information transmitted via the market. Remove the gov. coercion (via legal tender laws) and all these problems go away.

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