Where does it come from? The United States has about $800 billion in circulating coin and currency (M0). At a market price of $670 per ounce, this would require 1.2 billion ounces of gold for 100% backing. The current United States gold stock is about 261 million ounces, sufficient for only a 22% fractional reserve. The current world gold stock is about 5.6 billion ounces, with about 80 million ounces mined every year.
Now there is no question that a single buyer, buying a billion ounces out of a total and relatively fixed world supply of five billion, would put upward pressure on prices. But $47,000 per ounce seems a little extreme.
Freddy, as Lemur pointed out, the problem with a gold standard is prices don’t stay fixed in the real world. A governmental gold standard is just a law ignoring this basic economic reality. If the United States government arbitrarily declares that it will buy or sell an ounce of gold at $670 then it’s opening itself up to abuse. If gold prices on the free market drop to $660 an ounce, then everybody sells their gold to the United States for more than it’s worth. If they want, they can then turn around and buy more gold on the foreign market at market prices and sell that to the US government as well. If the market price of gold goes up to $680 an ounce, then you just reverse the program and buy underpriced gold from the government.
That’s how the system is supposed to work. If the market price edges above the statutory price, there has been too much inflation. People redeem dollars for gold and take money out of circulation until the two prices converge. If the market price edges below the statutory price, there has been deflation; people redeem gold for dollars, putting more money into circulation and solving the problem.
Of course, this brings related problems. If the price of gold rises from $670 to $680 because the Fed has been printing too much money, well and good–taking the excess out of circulation corrects this. But the price of gold may rise because the winning dancer wore gold jewelry on American Idol, or because unrest shut down the mines in South Africa, or for any number of other reasons. The gold standard converts these exogenous blips into inflation or deflation, which is why the price index was more volatile in the short term (but much more stable over the long term) when we were on it.
As I said in the other thread, I don’t support a gold standard. But it isn’t as exotic and unworkable as many of the people posting in this thread seem to think; every country on Earth used it before 1914, and countries weren’t run by brain surgeons then any more than today.
Right. And as people start to buy up gold to sell it to the US government, the price rises. Eventually the world price rises to the value set by the US government.
So a dollar is worth X amount of gold, and always will be. The trouble is that the government won’t be able to resist interfering with the gold market. If you believe that fiat currency is ripe for government manipulation, then why isn’t the gold market ripe for government manipulation? The government has the power to make it illegal to own gold, they have the power to confiscate your gold, they have the power to tax away your gold, they have the power to void their supposed promise to redeem your useless pieces of paper for gold, any time the political conditions allow it.
Fiat currency at least has the benefit that everyone realizes that it has no value except to pay taxes to the issuing government.
I don’t know how much convincing you want or need, but at the very least, the U.S. economy would rapidly if not catastrophically shrink to a level insufficient to maintain interstate highways and the military and other expenditures that only the most fervent libertarian is prepared to abandon. Forget about purchasing foreign goods because of restrictive laws that’d have to be installed to keep gold from leaving the country. That might sound like a good way to kickstart moribund U.S. industries, assuming you don’t mind paying $5/gallon for gas (it may not matter, since few can afford to pay $40,000 for a Ford Escort). Forget about the aerospace industries, since they rely on aluminum, unless you’re prepared to use the military to seize bauxite reserves in Guinea, Brazil, Venezuela and Jamaica. What nation is going to accept an American dollar, backed by gold they can never claim?
There was a reason the gold standard was abandoned - it was no longer useful. Bringing it back is like thinking communism works if you shoot anyone who says it doesn’t.
Personally, I never understood the need to replace trust in one’s nation’s stability with trust in shiny stuff.
Yes, but for most of that period, people used a simplified gold standard - money was made out of gold. So there was no conversion to manipulate. The type of gold standard you’re talking about, where paper currency is backed by a gold reserve, didn’t appear until fairly recently - 1862 in the United States. And the manipulation of the system quickly followed.
There’s only two ways to avoid these manipulations. Either go on a real gold standard where you’re either using gold coins or have a direct one-to-one relationship between each note and a piece of gold. Or get gold entirely out of the picture and have fiat currency. Any other system is just an attempt to bind together the prices of two independant entities and will cause problems.
It could be possible to do away with government issued fiat money. Go back to gold and silver coins, do away with paper money. You pay for everything with gold, silver, or copper ingots.
But paper money is only a fraction of the money supply. Are we going to ban credit cards? No, of course not. If a bank issues you a credit card they are creating money. Sure, that money isn’t a printed note with fancy engraving, it’s just an entry in an electronic ledger. But noting down that Bob owes Fred $10.00, Fred owes Steve $15.00, Gladys owes Charlie $6.00, and so forth, is creating money. The notion that each of those transactions must correspond to the movement of a third good from one shelf in a bank to another shelf is silly.
All fiat money does is create a way to balance those credit transactions with anonymous reciepts. If I owe Bob $10.00, I can give him a piece of paper issued by the government that says the government owes me $10.00, and he can give that piece of paper to anyone else. But the vast majority of my personal finances do not involve federal reserve notes, they involve electronic transactions. I pay for most things by credit card, I pay my credit card with a transfer from my bank, I get my paycheck directly deposited to my bank, my employer gets HIS payments electronically, and so forth. And this is bad…why?
The gold bugs have the fear that the government can just run the printing presses and print more worthless federal reserve notes, which will cause massive inflation. Except most money isn’t federal reserve notes. Running the printing presses CAN cause inflation, but the government doesn’t do business in cash any more than most people do.
Banks create money (by making loans, one form of which is credit cards) in any realm where fractional reserve banking is legal–irrespective of whether the base currency is fiat money or specie. Fractional reserve banking has always been legal in the United States, save in a few states during the early years, and coexisted with the gold standard for many decades.
No, when the government wants to increase M0, the base money supply (coin and paper money), it buys securities on the open market and wire transfers millions of dollars into the accounts of large securities dealers. Eventually, however, after a chain involving several intermediaries, this activity does result in people carrying around more green pieces of paper with presidents on them, which the Bureau of Engraving and Printing has to print.