Conservatives and gold-bugs often advocate returning to the gold standard.
My question is what happens after the anarchocapitalists take over and put us all on the gold standard?
I’m making a couple of assumptions here. One is that it’s a 100% gold backed system that we’re talking about. No fractional reserve banking. I’m also assuming the new regime would not simply throw away, or void, all the money that’s currently in circulation. Instead, they’d use the gold that’s in government reserves to back the money that’s already out there.
It looks like to me we’d be looking at a massive wave of inflation, and a transfer of wealth from holders of money (checking, savings, cash, etc.), to holders of gold, and from creditors to debtors.
I realize it’s not going to happen, but help me out with it. It’s an interesting thought experiment.
Isn’t inflation caused by having too much money chasing too few goods? If so, it seems to me that such a prospect would result in massive deflation, since there would be much less money chasing the same amount of goods. Without fractional reserve banking, there would be only a tiny fraction of the money out there.
And what would happen to bank deposits? Do they get wiped out immediately, or what? I know that the actual cash I have is only one or two percent of the cash I have in bank accounts.
The whole point of going off the gold standard to begin with was to eliminate the polite fiction that every single bill and ledger account had a piece of gold or silver out there somewhere to back it. The whole international monetary system that’s been in place since the 1930s is based on keeping the transfer of credit and debt flowing so you don’t end up with the sort of log jam that happened during the Great Depression. In modern economic theory, money is a special sort of information rather than a material good, and it ought to be as etherial as possible.
Now you can argue that this is wrong and should never have happened but it’s a dead letter. It would be like arguing that the authority of the US federal government should be scaled back and the semi-sovereignty of the states that was abolished by the American Civil War should be restored. Trying to reverse history like that would do more harm than good.
Alchemists start finding work again? In one sense everyone is free to convert their dollars to gold bars or coins. Try buying a loaf of bread. Nobody wants a gold-standard again, because the financial arrangements that have been worked out in the last 100 years means I still have my job, families can eat and plan for the future to some degree. There just isn’t near enough gold to be used as money. That’s not to say that an objective standard or unit of account isn’t desirable.
Well, that’s a possibility. I don’t know it’s certain, though.
Well, if they voided everybody’s cash and bank accounts, that would cause an economic collapse, I think.
What I’m talking about is using the US govt reserves to back all the money that’s already in circulation. No new money would be printed/created except if it represents a specific amount of physical gold, which could be redeemed on demand by the note-holder.
I hadn’t heard that before. Usually you see money defined as a store of value, and as a medium of exchange. I hadn’t heard it was information, or that it ought to be etherial. I’d be curious to know more. I tend to think of it as an imaginary commodity.
According to Wikipedia, the US holds about 8000 metric tons of gold. Figuring out how much money is in circulation is trickier, but the Fed put M3 at about $10 trillion last year, when they stopped calculating that number.
M3 is - I suppose - the best estimate of the total number of dollars in the world.
Somebody please tell me if I’ve got that wrong.
Anyway, what I’m thinking is - if one was serious about switching to the gold standard - that you’d take M3 and divide it by the gold reserves, and that would be the weight of gold each dollar would be redeemable for.
You’d also have to consider the total stock of money in the world extant, not just those denominated in dollars. Also factor in future obligations that are fixed, pensions, long term bond issues, treasury notes, bills and savings. Social security payments current, Medicare, Medicaid health-care programs, defense outlays and so on. Then, all the “near money” assets or short and long term lines of credit, credit cards.
That would mean that 1 gram of gold would be worth about $1,250. (8 billion grams of gold, into $10 trillion). At present, gold seems to be around $21 per gram. So all private stocks of gold would be worth 60 times as much compared with the US dollar: an enormous windfall to those speculating in gold.
Under a gold standard, only coins and currency are redeemable in gold. The government would need to determine the conversion ratio–that is, the number of ounces for which each dollar can be redeemed. (Or, taking the reciprocal, the price in dollars per ounce.)
Gold has nonmonetary uses and also has a market price. Obviously, the conversion price had better be set very close to the market price, or you will have serious inflation or deflation at the moment the standard takes effect.
Once the standard is in effect, the government needs to keep a fraction of the value of the money supply in gold to handle redemptions. This is similar to the principle behind fractional reserve banking–the bank keeps of fraction of its deposits in cash on hand for withdrawals. I have no clue as to what that fraction would be.
I came out with $39K/troy ounce. 10 trillion/(8000 metric tons * 32,000 oz/ton). Either way, you can see where the inflation comes in. Gold would coming pouring in to the treasury, and lots of new notes would have to be printed to pay for it.
At current gold prices ($665/oz) each dollar would be redeemable for less than 2 cents worth of gold. Eventually (and probably very quickly) dollars and gold would converge.
The only problem - for gold sellers - would be getting their money out of dollars before the dollar finished falling.
In addition to benefiting people who own gold, it’d also be good for debtors, who’d get to pay off their debts for pennies on the dollar.
It’d be hell for creditors, though, or for anyone with dollar accounts - savings, checking, or cash.
I think you’ve got the math reversed. Dollars become individually more valuable not less valuable under a gold standard because there’s only a fixed amount of them (ie the amount of gold in circulation). That’s the whole anti-inflationary point.
You might only be making twenty dollars a week but you won’t mind because twenty dollars will be a good amount of money. You’ll be able to buy as much with twenty gold dollars as you can currently buy with a thousand fiat dollars.
But debtors would get massively screwed. They owe specified dollar amounts that have been set in fiat currency levels. A debt of ten thousand dollars in current dollars is relatively small - but in a gold dollar economy, it’s a decade’s worth of wages. The equivalent of being half a million dollars in debt in our money.
Then right behind the debtors, you’ll see every creditor going down in flames. Because while they theoretically have assets which just greatly increased in value, the reality is that virtually every debtor in the country is going to declare bankruptcy.
It could be possible to go back on a gold standard with fractional reserves…meaning that the government only holds a fraction of the gold needed to redeem each dollar issued. But what exactly is the difference between this and the government simply promising to buy and sell gold for the spot value? As long as gold and dollars are freely convertable there’s no need for the government itself to promise to convert gold and dollars.
In a situation where the government has one ounce of gold in Fort Knox for every gold note it issues, then we’d have a horrible period of adjustment as the government tried to buy up enough gold to back every dollar it issued. There’s only a small amount of gold available, so that would bid up the price of gold to astronomical levels.
Of course, you could get around this by having multiple standards…money redeemable for both gold and silver. The trouble is that having fixed official rates for both metals leaves you vulnverable to arbitrage…every time the value of gold changes relative to the value of silver speculators take that excess value by trading gold to the goverment and demanding silver, or trading silver and demanding gold.
I’m not sure what you mean by a fraction. Are you saying that the government should guarantee a fraction of each dollar’s value in gold or should have enough gold for a fraction of the dollars in circulation?
I agree. Anybody that really wants to go on the gold standard can do so - they can convert all of their dollars to gold anytime they like. I just don’t see why they insist on dragging the rest of us along for the ride.
The thing is gold is an asset. And the United States has a bunch of it. Gold standardists want all of the American economy to be fixed around this one asset. But the United States has a lot of other assets whose combined value far outweigh its gold reserve. Fiat currency, properly managed, is essentially a means of tying our money supply to all of our assets rather than just one commodity.
A metric ton is 1,000 kilograms. There are 2.2046 pounds (mass) per kilogram, and 12 troy ounces per pound.
Not only did you mix up metric tons (1,000 kg) with short tons (2,000 pounds), you also mixed up troy ounces (12 troy oz. per pound) with avoirdupois ounces (16 oz. per pound).
I just took my Professional Engineer’s exam which was a complete mixture of metric and English units. Going back and forth between different systems of units is old hat with me. Try working out a fluid dynamics problem when half of the given info is metric and half is random other units. At least Reynold’s numbers are dimensionless!
1 US dollar entitles you to 1 US dollar of the world’s marketized resources.
Earning that dollar via some productive activity is a gift you give the world, and spending it (or giving it away to spend) is a crime you commit against the world, balancing things out.
For every day you do not spend that dollar, you are doing the world a favor. If you never spend it (say you burn or bury it in a tin can never to be found again), then you gift to the entire world is precisely 1 US dollar’s worth of goods/services that you gave to us all without asking for anything back in return.
Nothing about the particular system of currency we use changes any of that. Going on the gold standard merely makes those conservatives who have spent years buying gold and demanding on their radio programs that other people buy gold that much richer. They are desperate for this, because they’ve invested tons of money in the idea that gold is somehow worth more than all reasonable expectations of its value would suggest.
He means the latter–or, if he doesn’t, I do. When the United States combined a paper currency (greenbacks and national bank notes) with gold interconvertibility after the Civil War, it maintained a gold reserve equal to a fraction of the circulating paper currency. The figures in 1879 were $100 million of gold reserve supporting $350 million in currency; I’m not sure how the ratio changed over time. As long as the reserve was large enough, people wouldn’t try to redeem every last greenback, so you didn’t need to maintain the full amount. Of course, just like a bank, there was risk of a “run” in times of panic, which is what happened in 1893.
LinusK, your math is not only wrong but stunningly irrelevant. Countries were on gold and silver standards for centuries without doing any of that math. The decision as to units of gold per units of currency is completely arbitrary. You can create a new currency called the Freddy and make it redeemable for an ounce or a hundredth of an ounce or a kilogram or any amount of gold that you like. If you chose to make an existing currency like the dollar redeemable in gold, you would make it redeemable for an amount very close to the existing market value to minimize disruption. That’s all.
OK, so tomorrow the we go on the gold standard, and all our Federal Reserve Notes are now convertable to 1/~635th of an ounce of gold, or whatever today’s price is. But what happens next? If we declare that the value of a dollar and the value of gold have a fixed ratio, if the world market price for gold drops or increases, what happens to the value of the dollar?
What it means is that the US dollar will constantly be arbitraged against the value of gold, when gold is high the US government is forced to sell massive amounts of gold at the official price, when gold is low the US government is forced to buy. But this is what happens if we institute a fractional reserve system.
The other system where we have a 100% reserve would mean massive disruption. The US government would have to buy tremendous amounts of gold on the world market to create enough dollars. This would bid the price of gold to stratospheric levels. This is where the $47,000/oz value comes from…if we need a certain amount of money, and each unit of money has to be backed by a fixed amount of gold in a vault, then each ounce of gold would have to represent $47,000 of value in today’s dollars. Sure, we could call the new currency anything we liked, and have the new currency represent any amount of gold we liked. But if the Freddy represents 1 ounce of gold, and the entire US economy is represented by Freddies, each Freddy would buy about 47,000 current dollars worth of goods and services.