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Gold Standard in Currency

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If the growth in the supply of gold turns out to be drastically different from economic growth (which I very much doubt), then a free market will settle on another or additional standard.

I read somewhere that the last quarter of the nineteenth century saw a spreading wave of mild deflation - the world gold supply did not keep pace with the monetary needs of an expanding world economy. Is that accurate?

I also found this:

The total amount of gold that has ever been mined is estimated at about 142,000 tonnes. At a gold price of US$800 per Troy ounce, the value of this entire planetary stock would be $3.65 trillion, which is less than the value of cash circulating in the U.S. alone.

What would be a better model? A symmetallic system?

Edited by ~Sophia~
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I read somewhere that the last quarter of the nineteenth century saw a spreading wave of mild deflation - the world gold supply did not keep pace with the monetary needs of an expanding world economy. Is that accurate?

For the US at least prices did fall during that period:

USCPI.gif

but I wouldn't say "didn't keep up with needs." There's more than enough gold and silver to handle global currency needs because they are indefinitely divisible. The real issue is what you raised next - bringing them back is going to result in major pricing shifts.

The total amount of gold that has ever been mined is estimated at about 142,000 tonnes. At a gold price of US$800 per Troy ounce, the value of this entire planetary stock would be $3.65 trillion, which is less than the value of cash circulating in the U.S. alone.

What would be a better model? A symmetallic system?

Two or more commodities (gold and silver, possibly copper too), each independently usable as media of exchange, would help alleveiate the problem. There is MUCH more silver about that gold: in the earth's crust gold exists at 3 grams per ton while silver is 80 (and copper is 68,000). People are already perfectly capable of handling the world's present multiplicity of currencies, banking practice on currency exchange will scale down, and the accounting techniques involved are now old hat. What's to be avoided is any plan of having a single standard that combines two or more commodities in set ratios, because the real value of each component will move around following its own path. Eventually that will break the standard through the effects of a variant of Gresham's Law.

The remonetisation of both gold and silver will also increase their value dramatically, particularly silver because there aren't the same scale of above-ground stocks of it compared to crustal prevalence as for gold. Building up those stocks is what will make the price of silver go up considerably. The process of going over to a commodity standard has to be carefully done and over a long period of time (and has to be done concurrently with many other reforms equally well-thought out). One of the biggest stumbling blocks is the sociopolitical side of deflation. Done slowly enough it wont be a problem for the economy generally - if there are no barriers in the way of all prices falling. The problem there is likely to be the nominal value of wages and salaries, though if a government gets elected with the mandate to do this then I imagine the problem wont be insurmountable. As to how much deflation there would be and how long this process would last, I haven't a clue, but I am confident there will be a fair bit involved if only because it took us so long to get into this mess in the first place.

JJM

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At a gold price of US$800 per Troy ounce

This is your problem. Current gold prices do not reflect the value of gold as currency - because it is not. If gold comes back into circulation (by whatever means), its dollar price will be adjusted by the market. In fact, it is reasonable to look at the issue as the gold price of the dollar (i.e. today the dollar is worth 0.001oz of gold).

You don't need any determinate amount of gold in order to use it as currency - prices simply will reflect its relative abundance or scarcity. Yes, there would be constant price decrease as the economy outruns gold mining in productivity - but that is not a problem. If gold prices become so low that coins would have to be made in milligrams, a switch to a more abundant metal (most likely silver) would occur by market forces.

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The total amount of gold that has ever been mined is estimated at about 142,000 tonnes. At a gold price of US$800 per Troy ounce, the value of this entire planetary stock would be $3.65 trillion, which is less than the value of cash circulating in the U.S. alone.
According to the Fed., the total currency is a little under $800 billion. Regardless, I think a symmetallic could work well. Strikes me that Gulf states could issue "oil-based" currency: e.g. 500 Rial = 1 barrel of crude!
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According to the Fed., the total currency is a little under $800 billion. Regardless, I think a symmetallic could work well. Strikes me that Gulf states could issue "oil-based" currency: e.g. 500 Rial = 1 barrel of crude!

I would think that it should cover the entire money supply within an economy.

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Would the supply of money have to increase? I think you could get the same effect by lowering prices when the economy expands.

There's a regulating action affecting the supply of gold, and that is that gold production will increase somewhat exponentially as new technologies or harder-to-process ores edge up into profitable endeavors. I believe you will find that there is plenty of gold ore that is too impure to refine profitably at current rates. This should be a growing amount of gold ore available for processing as prices rise, that is, there is very little gold that is profitable to mine at $5/oz, much more at $10, much, much more at $15, and so on (sorry to be so technical, I believe wiki has an entry on the concept of "much, much"). In the (unrealizable) limit, you could find the value of gold rise so high that processing seawater would become profitable, but this would be a self-regulating enterprise, as a large flood of gold would drive the venture to unprofitability (unless it was limited by secrecy or patent rights).

We saw this happen in the late 1900 [typo] 1800's deflationary period, as new technologies were introduced to increase the production of gold in response to higher gold demand (value). Eventually this led to the cyanide processing breakthrough, which flooded the market with gold, driving its market exchange rate with silver below the gov't mandated exchange rate, and cementing it over silver as the monetary standard from that point on.

Edited by agrippa1
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According to the Fed., the total currency is a little under $800 billion. Regardless, I think a symmetallic could work well. Strikes me that Gulf states could issue "oil-based" currency: e.g. 500 Rial = 1 barrel of crude!

This is an interesting prospect, but I'm not sure oil will work as a standard unless they establish very well defined specifications. The problem is best illustrated by the use of tobacco as currency in the colonial days of the U.S. What tended to happen was that good quality tobacco was hoarded for consumption while poor quality (and sometimes "augmented") tobacco was used for exchange, that is, bad money drove out good.

The same would likely happen in an oil standard, as lower quality crude was gradually stockpiled for currency backing. Unless, of course you very tightly controlled the quality of reserves.

The inherent strength of gold and all metals is that every atom of gold is exactly like every other atom, so there's no way for "bad" gold to drive out "good." Anything other than an elemental (chemically speaking) standard will be subject to quality and monitoring issues.

Limiting the choices the elemental metals, there are basically four options to choose from:

1 - Monometallic standard - one metal only is used as the standard.

2 - Bimetallic standard with fixed exchange rate - this is what we had in the 1800's when gold and silver were used and their rates were fixed to 16 (oz silver) to 1 (oz gold). As the market exchange varied around this rate, arbitrage opportunities led to the less valuable (wrt to gov't rate) metal was used for exchange.

3 - Bimetallic standard with floating exchange - this is a variation of 2, but the gov't monitors the market exchange rate, and keeps the mandated exchange rate within the margin of unprofitable convertibility. (if the arbitrage opp is very small, the cost of converting - including seignorage charges - would make it unprofitable to do so) This allows two (or more) metals to circulate as currency (or back currency).

4 - fixed basket (symmetallic) standard - this establishes a gov't price for a fixed basket of two or more metals. For instance, the gov't could mandate that it will purchase or sell a basket of 1oz gold and 15oz silver for $2000. As the exchange rates of gold and silver fluctuate, the gov't could opt to accept or sell a single metal, as long as the appropriate amount of that metal was "converted" (could be mathematical only) to the other metal to get to the correct basket mix. This appears to be a very good way of fixing currency to multiple metals without introducing arbitrage conditions.

My vote would be for #4

Edited by agrippa1
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Limiting the choices the elemental metals, there are basically four options to choose from: ...

My vote would be for #4

There is a fifth, which I vote for: two or three independent systems operating simultaneously within the one economy, each being mono-metallic. There would be a high-value-per-weight one for high-value transactions, medium value one, and possibly a third low-value one too. Historically this matches the actual practice of the use of gold, silver, and copper, which for example in England were pounds-shillings-pence and in Germany were marks-grosschen-pfennig. The history, however, also has attempts at fixed relationships in these, but I wont go there here.

How can it work today? Easy! Anyone can specify which they will accept in trade. Each business will pick one as the unit of measure for their own accounts. If it accepts two or more different metals then it will initially book receipts in its chosen unit at equivalent value it can easily look up on an electronic ticker service, and then later book formal revenues when it physically banks the takings into bank accounts denominated in its chosen unit of measurement, possibly with a minor profit or loss (though I doubt it in most instances). All this is exactly what is already done by any business that deals in exports and imports. More importantly, it doesn't have to be the PITA that it was in Europe prior to the Euro because there are only the two or three to deal with, and, a business that too large to decline one or the other in trade is also large enough for it not to be burdensome.

I once did some quick and dirty calculations with gold bearing 75% of trade by value and silver 25% by value and I worked out that the resulting per-ounce values of gold and silver would not be astronomical. Gold alone, however, did result in a range of prices from eyebrow-raising to eye-watering. Of course those calculations had some licence in them, but they included consideration for the fact that gold is heavily used jewelery and that there would be lots of objection to particular pieces becoming hideously expensive.

JJM

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There is a fifth, which I vote for: two or three independent systems operating simultaneously within the one economy, each being mono-metallic.

Aah, I get it now. This is similar to a symmetallic system in that it involves an implicit metal exchange included in many transactions. In general, this scheme seems to tend towards a pseudo-barter system, which should, if history is any guide, lead to a single dominant currency. The natural exchange rates of the metals would vary in real time, which makes the system a little inconvenient for low-tech vendors. Actually, this would be very much like shopping in Mexico, where two currencies operate simultaneously in most shops, with a small fee for translation from one currency (US$) to the vendor's chosen currency (MEX$). I'm not sure what the extra cost to businesses would be, having to deal in two-three currencies, keep them all straight, provide accurate exchange rates, etc. It seems like a hassle, and that eventually one form of currency would gain acceptance as common usage would eliminate the exchange fees. The single remaining metal would gain value, relative to the other metals, by virtue of its additional trading efficiency, and would probably (I'm guessing here) end up with an aggregate purchasing power roughly equal to the original aggregate value of both or all three metals, taking the exchange burden itself, and leaving the other metals to trade naturally. I also would object based on the modern trend to deal more in credit/debit manner, without the need for currency, which would tend to favor the efficiency of a single currency. I would also posit that the chosen metal would be the one least in demand in the market (on Gresham's principle) for non-currency transactions.

I still prefer the symmetallic system, as it involves metal exchange fees only when trading in raw metals with the bank. Otherwise, and for most users, the backing mechanism would be transparent, you would have a single currency and price schedule to deal with, and you would still have your currency tied to a commodity, or in this case, a basket of commodities, for even more stability.

(on edit, parsed down quote)

Edited by agrippa1
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I would think that it should cover the entire money supply within an economy.
I stand corrected. All of M1 ($1.4 Trillion) should definitely be in there, as should some fraction of M2 ($7.5 T).

The really big question is whether so much 100% gold-based money would be required, or whether fractional-reserve based notes will fulfill the role for a large part of what is M1 today. My guess would be that people would accept certain types of such notes quite willingly (even if they're discounted from their notional value). I guess that's a question for the other thread though.

Edited by softwareNerd
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