Gold in a gold standard system

[Motley Fool]

Hello

There is something I am unable to logically reason out. In a gold standard system how does gold move from the producers hands to the people. Mines cannot accept gold in payment for gold, that constitutes zero exchange. Would someone please enlighten me as to how this would work or how it used to work prior to 1913.

Thanks in advance.

The Fool

[softwareNerd]

Mines cannot accept gold in payment for gold, ...

Yes, they do. Someone like a mint would give them minted gold and receipts for minted gold while buying there unminted gold. However, that is a minor detail. More importantly (if we ignore the minor conversion difference) the process of mining itself puts gold in the "hands of the people". The gold that is mined is paid to the workers who are mining it, and to the manufacturers of equipment, and to the owners of the mine. They use it to buy pork-chops and SUVs, so it reaches butchers and UAW union bosses... and so on.

[agrippa1]

In a gold standard system how does gold move from the producers hands to the people.

Gold was refined and brought to the bank in return for money, that is, minted gold or silver coins and/or gold-backed paper. If the miner brought gold to the bank in return for gold coin, he exchanged gold for money, not gold for gold. The difference is in the explicit valuation of the gold coins, which can then be used in explicit exchanges of gold value for other goods offered at a coin price. The miner would pay a seigniorage charge for the conversion of raw gold, or bullion, for gold coin. The price he paid for that conversion was less than the additional value gained by having a widely accepted store of value, so the miner gained from the transaction, as did the bank.

The gold coin moved from the "producers" hands, not to "the people," but to the producers of other goods. Those producers were willing to exchange their goods for gold coin because of the inherent value that gold held as an efficient store of value and means of exchange.

To say that exchanging gold for gold (coin) constitutes zero exchange is like saying that paying five dollars for five dollars worth of bread constitutes zero exchange.

(My point is that gold is not the same as gold coin or money, because gold coin adds the benefit of explicitly marked valuation.)

Edited June 10, 2009 by agrippa1

[Motley Fool]

Gold was refined and brought to the bank in return for money, that is, minted gold or silver coins and/or gold-backed paper. If the miner brought gold to the bank in return for gold coin, he exchanged gold for money, not gold for gold. The difference is in the explicit valuation of the gold coins, which can then be used in explicit exchanges of gold value for other goods offered at a coin price. The miner would pay a seigniorage charge for the conversion of raw gold, or bullion, for gold coin. The price he paid for that conversion was less than the additional value gained by having a widely accepted store of value, so the miner gained from the transaction, as did the bank.

The gold coin moved from the "producers" hands, not to "the people," but to the producers of other goods. Those producers were willing to exchange their goods for gold coin because of the inherent value that gold held as an efficient store of value and means of exchange.

To say that exchanging gold for gold (coin) constitutes zero exchange is like saying that paying five dollars for five dollars worth of bread constitutes zero exchange.

(My point is that gold is not the same as gold coin or money, because gold coin adds the benefit of explicitly marked valuation.)

Hi there

Thanks for the reply. This was the only logical path I could think of, but reasoned it could not be. I see a problem with this. If this is the case then all gold will first have to be spent by mines in order to reach the general population. That gives them a unique situation whereby they are in 'control' of the money supply. I would assume the mines itself ( owners thereof) make the bulk of the profit. What would they spent it on? If all the wealth in the world is represented by the available gold supply and all additional growth in the economy needs to be accounted for by movement of the 'price' of gold minus of course the inputs by the mines themselves then I have this nagging feeling there will be a problem.

Are there relevant historical records of how this used to occur?

Regards

The Fool

ps. You last statement requires a response as well. Explicitly marked valuation means nothing. The fact of the matter is a gold standard has use as there is intrinsic value in the medium of exchange. Current currency also has an explicit value, yet the intrinsic value is nowhere near the denoted value. That is one of the fundamental problems. I understand that for ease of trade explicit value can be useful, yet with gold weight is a better method of valuation. All your minting process does is guarantee two things. The first is that your coin has a specific weight. The second that when circulation reduces the weight beyond some specified level these coins are to be returned to the mint and reminted at government cost. This is the original meaning for the term legal tender, not the twisted one we use today where it is a force upon you as opposed to a right you possess.

Edited June 11, 2009 by Motley Fool

[Steve D'Ippolito]

ps. You last statement requires a response as well. Explicitly marked valuation means nothing. The fact of the matter is a gold standard has use as there is intrinsic value in the medium of exchange. Current currency also has an explicit value, yet the intrinsic value is nowhere near the denoted value. That is one of the fundamental problems. I understand that for ease of trade explicit value can be useful, yet with gold weight is a better method of valuation. All your minting process does is guarantee two things. The first is that your coin has a specific weight. The second that when circulation reduces the weight beyond some specified level these coins are to be returned to the mint and reminted at government cost. This is the original meaning for the term legal tender, not the twisted one we use today where it is a force upon you as opposed to a right you possess.

Very simple. Do you imagine what a pain it would be to have to weigh (and determine the purity of) every anonymous lump of gold or silver every time you wanted to purchase anything, be it a gumball or a house? You want to carry little scales with you everywhere you go (to say nothing of whatever it would take to assay the gold)?

Within a couple of weeks you'd miss paper 'money'.

It makes sense for someone else to do the work, mark the chunk o' gold (or silver or even copper) and save you the effort.

[John McVey]

If this is the case then all gold will first have to be spent by mines in order to reach the general population.

For new sources of fresh gold, sure, but mines wont be mints' only customers. People will also choose to have old jewellery minted into coins, for instance.

That gives them a unique situation whereby they are in 'control' of the money supply.

That's wrong in a number of ways.

The whole money supply of what's up top will be (and today still is) considerably larger than new mining. The last figures I saw were that gold currently being dug up per year is around 2% of what is sitting in various Central Bank's vaults. If gold were properly money that topside gold would be in our pockets and the vaults of our own banks instead, with the total being pretty much the same. That means the gold mining sector as a whole wont have anywhere near as much influence over the value of gold as you think.

You're also confusing the gold-mining sector as a whole with the individual miners. In reality they are competing with each other, and will have minimal ability to alter the price of gold.

I would assume the mines itself ( owners thereof) make the bulk of the profit. What would they spent it on?

Profits will go to those who keep costs down below revenues, same as for any business. As a proportion of total revenues, the vast bulk will go to payroll and accounts payable, with a bit also going to creditors as interest. The bit left over, the profits, is then either spent as capital expenditure for new equipment etc or forwarded to stockholders as dividends, again same as normal for other businesses.

If all the wealth in the world is represented by the available gold supply

Taking that as stated, it is wrong. I am assuming you really mean to say that the wealth of the world is expressed in terms of quantitative units of gold.

and all additional growth in the economy needs to be accounted for by movement of the 'price' of gold minus of course the inputs by the mines themselves then I have this nagging feeling there will be a problem.

You're confusing two separate phenomenon - economic growth on the one hand and new money being introduced on the other. There is no problem re gold in either alone or in combination.

JJM

[Thales]

Hi there

Thanks for the reply. This was the only logical path I could think of, but reasoned it could not be. I see a problem with this. If this is the case then all gold will first have to be spent by mines in order to reach the general population. That gives them a unique situation whereby they are in 'control' of the money supply. I would assume the mines itself ( owners thereof) make the bulk of the profit. What would they spent it on? If all the wealth in the world is represented by the available gold supply and all additional growth in the economy needs to be accounted for by movement of the 'price' of gold minus of course the inputs by the mines themselves then I have this nagging feeling there will be a problem.

Are there relevant historical records of how this used to occur?

Yes, of course. Gold has always naturally risen to be the standard throughout human history since men have been using money. It started with the Chinese, who were the first to use gold as money. There has never been any such problem where anyone had all of the money. During the classical gold standard (1800s), the American, British and French economies were very strong. The American economy was especially robust.

John McVey points out that gold production each year is a very tiny percentage of the whole, which is one of the reasons gold is such a stable form of specie. In fact, it's really this feature, the integrity built into the nature of gold (you can't just produce it in large volume), that makes it so valuable and sought after. The other key features are its durability, divisibility and the fact that it lasts forever. And, you need to realize that the people who own the gold mines can't eat gold. The value of money comes from goods and services they represent.

Of course, with gold backed fractional reserve banking, dollars (yen, francs, etc.) become the currency of choice, because they are much easier to carry around.

Also keep in mind that if we had separation of state and economics, which is what Objectivists endorse, then we don't know what would arise in a free market, but, given past history, gold is your best bet.

[Jake_Ellison]

That gives them a unique situation whereby they are in 'control' of the money supply.

Now, the government is in conrol of the money supply, through the banks. That's because money has only one source, one they fully control. Without the gov. dictating what we should use as money, everyone could use whatever they want to. People would probably tend to use gold, because it s impossible to control: it has so many sources.

[Eiuol]

http://books.google.com/books?id=6QVm9aQ7s...lpg=PA64&dq

Page 64 has good information on gold mining in relation to the gold standard.

[agrippa1]

I see a problem with this. If this is the case then all gold will first have to be spent by mines in order to reach the general population. That gives them a unique situation whereby they are in 'control' of the money supply

If by "in control" you mean in control of whether or not the individual miner converts his gold into money, then you are correct. If you're implying that "they" act as one to increase or decrease the value of money by converting or not converting gold, or by mining or not mining it, then you run into a problem. The value of gold on the market, aside from its value as money, derives partially from the value individuals place on it for its usefulness in electronics, ornamentation, medicine, etc. That is the demand for gold. It also derives partially from the cost of mining and refining, which is the supply. The price of gold at any given time derives from the combination of these, being the equilibrium point where the demand just equals supply. If the price rises above that point, temporarily, due to increased demand, then gold mines will find it profitable to mine more difficult to reach/refine ores, until the supply increase drives down the price to the point where the return on mining effort does not justify additional mining.

(edit: ) If, on the other hand, the cost of producing gold goes down, as it did in the late 1800's when the cyanide process was created, the supply of gold will increase significantly driving down its price. Of course, at the time, money was measured in gold, so the "price" of gold did not go down, but the dollar price of all other goods went up, reflecting the lower "real" value of gold and dollars from the increase in supply, which resulted from the decrease in cost of production.

I would assume the mines itself ( owners thereof) make the bulk of the profit. What would they spent it on?

The owners, by definition, make all of the "profit," which is the difference between the price paid them by the banks, and the cost required to produce the gold, including equipment, labor, etc. They would spend it on whatever returns the most value to them, but I would guess: Food, housing, transportation, medicine, luxuries, etc.

If all the wealth in the world is represented by the available gold supply and all additional growth in the economy needs to be accounted for by movement of the 'price' of gold minus of course the inputs by the mines themselves then I have this nagging feeling there will be a problem.

Can you define "wealth?" Do you include real estate as wealth? Cars? Stocks? Bonds? Or only cash? Cash is a store of wealth, useful for the efficient exchange of value. Not the store of wealth.

Explicitly marked valuation means nothing.

Remind me never to ask you for change.

Edited June 11, 2009 by agrippa1

[ChefGuy89]

Now, the government is in control of the money supply, through the banks. That's because money has only one source, one they fully control. Without the gov. dictating what we should use as money, everyone could use whatever they want to. People would probably tend to use gold, because it s impossible to control: it has so many sources.

Well I wouldn't exactly say that the Government is in control of the money supply. They merely offer the facade of legality to the cartel of private banking interest which makes up the Federal Reserve. The Fed is meant to appear as a Government entity, yet it cannot be defined exclusively as a government or private entity, it has elements of both in it's make up.

It has to appear as a government run faculty because the public would not accept the idea of a private institution counterfeiting our money, determining the interest rates on bank loans, and allowing fractional reserve banking to exist.

Although the BOD for the Fed is appointed by the POTUS, this is a mere technicality - again - to make it appear as a government agency. No branch of government has any actual authority or jurisdiction over the Fed. For goodness sakes, we have to pass a bill through the legislative branch just to give Congress the authority to fully audit the Fed. The Fed controls the monetary supply of the nation, and nobody has the authority to hold it responsible to anything. People can argue that it's a government agency, it only has the appearance of a legality. The Government protects the Fed and in return, the Fed has the means to print up money and allow the Government to spend as much as they want without ever having to raise taxes or ask the public to buy bonds. We all get hit in the end with the hidden tax of inflation.

Luckily for us, all we would have to do in order to abolish the Fed is to actually read the Constitution. In particular the parts which mention that only Congress shall have the authority to coin money, only gold and silver should be legal tender, and that there shall be no "bills of credit".

To anybody interested in more thorough understanding of the Fed, I highly recommend "The Creature from Jekyll Island" by G. Edward Griffin.

[softwareNerd]

The notion of the Fed being private has been discussed before, in this thread.

The Jekyll island book has also been discussed, in this other thread.

Finally, the constitutionality of the Fed has been discussed in this thread.