RoR: Forum

The total amount of extracted gold in the world is less than the annual production of the U.S. populace, so gold alone couldn't suffice as the sole currency.

There are other sources of value to back a currency that could supplement or almost entirely replace gold or silver as currency if the Fed was ended. For example, shares of widely traded mutual funds are currently a somewhat illiquid form of cash. I own a lot of Vanguard Total Stock Market mutual fund shares, for example, which as of this writing each has a market price of $33.54. So, a piece of paper currency that was a tenth share of that would be worth about $3.50 -- and not be subject to inflationary devaluation, since such a tenth share would be backed by something tangible, ownership in companies. It would, in fact, be a currency that, unlike gold, could be expected on average to grow in value over time instead of just remaining more or less static in value, or worse yet, depreciating rapidly like dollar bills.

This is just one example -- in a competitive marketplace, other sources of currency representing something tangible would spring up.
(Edited by Jim Henshaw on 3/03, 5:41pm)

Post 1

Thursday, March 3, 2011 - 6:43pm

Jim,

I agree that there a number of things that could be used as money because of their tangible worth. But gold is still the best and is still practical. We don't have to concern ourselves with the ratio of people in America to gold, or with the fact that it might take 1,500 new gold certificates in exchange for a single troy ounce coin. It is still workable. And I believe that Sam had an idea for direct us of gold, rather than a paper certificate, and his idea would work even with gold being very scarce, but I don't remember it well enough to describe it.

Just this last week or so, Walter Williams proposed that the Federal Government offer 100 acres of land that it owns to anyone that voluntarily gives up their right to receive any Social Security payments.

And land was used, if I remember correctly, to back the new German currency following their hyperinflation. Increases in population would not be followed by increases in certificates unless there is an increase in whatever backs it.

It would mean that increases in productivity over the years, (more goods relative to dollars) would decrease prices but without any of the depressing effects of credit crunches or the decreases that come from excess demand for currency out of fear of economic hard times.

Just like a voucher system is the best way to transition to a free school system, I think a gold backed dollar is the best start to a system where banks (or anyone) is free to offer their own currency and the market place would quickly spawn rating services and there would be a hot market for honest competent ratings. And I assume there would things like insurance of some kind available to cover the issuers and maybe even those who registered as users of a given currency.

Contracts could be denominated in this or that currency and the government could gradually pull out of that market -destroying the old paper as it becomes tattered and selling the tangible backing as they retire the paper.

Post 2

Thursday, March 3, 2011 - 7:13pm

Jim:

The total amount of extracted gold in the world is less than the annual production of the U.S. populace, so gold alone couldn't suffice as the sole currency.

With all respect, you have compared the amount (in ounces) of total gold in the world with the annual production of the US (in dollars).
Firstly, it's got nothing to do with annual production, or GDP, per se; it's got to do with the amount of the commodity needed to service circulation requirements.

Isolated facts:

There are about 5,000,000,000 troy oz. of gold that have been extracted from the earth and are still available either as bullion, coins or jewelry.
There are $830 billion $US in circulation in the United States.
The US GDP is $14 trillion
The global GDP is 74 trillion $US.

If the US is typical of the world $830x10**9 can service a GDP of $14x10**12 � a ratio of about 6 percent.

Therefore, for a world economy, 6% of the global economy of $74 trillion can service the circulation needs of the world and is $4.4 trillion.

So, what would the price of gold have to be to service the world economy? $4.4 trillion divided by 5 billion oz. = $900 per ounce.

What fraction of the 5 trillion oz. would be available as currency? I have no idea, as a lot of it would be hoarded as jewely or collectible coins, but if it were all available the least value would be $900.

It doesn't make sense to carry out an analysis except on the world finances as any gold the $US would own would have to be transacted at world prices. What we need is a world currency where countries can't prop up their currencies to further their agendas.

It would, in fact, be a currency that, unlike gold, could be expected on average to grow in value over time instead of just remaining more or less static in value.

On the contrary, if the world economy were to grow and the supply of gold were more or less static the purchasing power of an ounce of gold would grow with it.

Sam

(Edited by Sam Erica on 3/03, 7:17pm)

Post 3

Friday, March 4, 2011 - 9:23am

"The total amount of extracted gold in the world is less than the annual production of the U.S. populace, so gold alone couldn't suffice as the sole currency."

Continuing with Sam's critique of this fallacy I'd like to add that it's not how much quantity of currency you have (whether it be gold or dollars) but it's 'purchasing power' that is important. If the quantity is small it would have higher purchasing power, meaning a little bit of currency would buy a lot of products. If it's in very large supply, it wouldn't have as much purchasing power. Comparing the quantity of one currency to another and saying one is inadequate because it's in short supply reveals a misunderstanding of how money works.

EDIT

Woops, I didn't realize Sam just said the exact same thing I just wrote at the end of his post.

Great minds must think alike :)
(Edited by John Armaos on 3/04, 9:24am)

Post 4

Friday, March 4, 2011 - 10:02am

Gold just needs to be used as the ultimate extinguisher of debt. Remember, no one runs around with suitcases of trillions of dollars either. They don't need to do that with gold, either. There are a wide variety of ways gold can be used as a currency and not need to cover the entirety of GDP, in the same way that M0 (cash dollars) are not the entire money supply.

As long as, if you want to, you can convert to real value = gold, then you can have a stable currency.

Post 5

Friday, March 4, 2011 - 10:45am

"Bernanke also said that gold couldn't return as the world standard because there's not enough gold in the world to effectively support the U.S. money supply."

Sam wrote:

With all respect, you have compared the amount (in ounces) of total gold in the world with the annual production of the US (in dollars).
Firstly, it's got nothing to do with annual production, or GDP, per se; it's got to do with the amount of the commodity needed to service circulation requirements.
Isolated facts:
* There are about 5,000,000,000 troy oz. of gold that have been extracted from the earth and are still available either as bullion, coins or jewelry.
* There are $830 billion $US in circulation in the United States.

I agree with Sam's first sentence and am inclined to agree with Bernanke. However, I wouldn't presume all that gold in jewelry can be converted to use as currency. Also, I believe the comparison should start with the M2 money supply rather than "$US in circulation." Per here that is $8840.7 billion, which is roughly 10 times as much.

Post 6

Friday, March 4, 2011 - 10:53am

8837.7 / 1853.8 = 4.76734276

I tend to not care what Bernanke says, because his words are 1984 doublespeak. On the other hand, I do care deeply what he does (he's killing the USD), and the public's reactions to his doublespeak indicate the intelligence (or lackthereof) of the populous.
(Edited by Dean Michael Gores on 3/04, 10:54am)

Post 7

Friday, March 4, 2011 - 12:52pm

"Bernanke also said that gold couldn't return as the world standard because there's not enough gold in the world to effectively support the U.S. money supply."

Merlin replied, "I . . . am inclined to agree with Bernanke." Why? What about the argument that it's the purchasing power, not the amount of physical gold in circulation, that's important? A smaller amount will have a higher purchasing power per ounce of gold, just as a larger amount would have a lower purchasing power.

Also, on a gold standard, people would probably be trading gold receipts, rather than the physical metal, and these paper receipts could be scaled to reflect whatever denomination one chose. You wouldn't have to restrict the receipts to an ounce of gold per receipt. You could have receipts for (say) 1/1000 of an ounce of gold, or for whatever amount is practicable. If gold were valued at $1,000 an ounce in today's dollars, then a paper dollar could simply serve as a receipt for 1/1000 of an ounce of gold. In that case, you would need 1,000 of them to redeem an ounce of gold, but you could also have $1000 receipts as well, which would simply say, "Pay to the Bearer on Demand" One Ounce of Gold.

Also, silver could be used for smaller purchases, and would be valued in relation to gold according to its market price, based on its supply and demand relative to the supply and demand for gold. At its current price in US dollars, a silver dime (1/10 of an ounce) would be about $3.50. Smaller denominations could be handled by silver receipts. Token receipts in other forms of metal, such as nickel could also be used for smaller transactions.

This is not the problem that Bernanke seems to think it is. He writes as if he has never even considered these monetary alternatives.

We are so accustomed to viewing money in terms of fiat currencies that we've lost the ability to think of it as a commodity whose value is determined by supply and demand on the open market. We've also apparently forgotten that at one time paper money served not as final payment but simply as a receipt for final payment whose face bore the inscription "Pay to the bearer on demand" (some amount of an ounce of gold/silver).

I have in my possession two 2-dollar bills, printed 50 years apart: The first one, printed in 1953, says "The United States of America will pay to the bearer on demand Two Dollars." Now that declaration makes no sense if the 2-dollar bill were not a receipt for a commodity money held by the bank to which it is presented. On the second 2-dollar bill, printed 50 years later in 2003, the inscription "will pay to the bearer on demand" is conspicuously absent. In it's place is simply "The United States of America, Two Dollars." Also, on the earlier bill, it says "This note is legal tender at its face value for all debts public and private." "At its face value" also makes no sense unless there is some commodity money for which it is being exchanged. On the bill printed in 2003, it simply says, "This note is legal tender for all debts, public and private." "At its face value" has been removed, and with good reason. In addition, the earlier note does not include "In God We Trust," whereas the more recent one does. As long as we believe in a fiat money, we might as well acknowledge our belief in a fiat universe.

(Edited by William Dwyer on 3/04, 1:53pm)

Post 8

Friday, March 4, 2011 - 2:11pm

Bill wrote:

Merlin replied, "I . . . am inclined to agree with Bernanke." Why? What about the argument that it's the purchasing power, not the amount of physical gold in circulation, that's important? A smaller amount will have a higher purchasing power per ounce of gold, just as a larger amount would have a lower purchasing power.

It is not simply the amount that matters. Velocity matters, too, and has a practical limit. Anyway, what I said was nothing about purchasing power over time. It was about a quick, massive conversion to a gold standard. Wikipedia here says the amount of gold in Fort Knox is 147.3 million troy ounces. At $1320 per troy ounce it is worth about $194 billion. But M2 is $8841 billion!� The government would have to declare gold to be worth about $60,000 per troy ounce! Do you really believe the government would do that?

Also, on a gold standard, people would probably be trading gold receipts, rather than the physical metal, and these paper receipts could be scaled to reflect whatever denomination one chose. You wouldn't have to restrict the receipts to an ounce of gold per receipt. You could have receipts for (say) 1/100 of an ounce of gold, or for whatever amount is practicable.
Also, silver could be used for smaller purchases, and would be valued in relation to gold according to its market price, based on its supply and demand relative to the supply and demand for gold.

How a hypothetical gold-based, or gold and silver based, currency�might operate has nothing to do with�what I have said. You address "point B" only. I have addressed getting from "point A" to "point B."

(Edited by Merlin Jetton on 3/04, 3:32pm)

Post 9

Friday, March 4, 2011 - 3:31pm

Merlin:

I wouldn't presume all that gold in jewelry can be converted to use as currency.

Nor would I, that's because I said:

...a lot of it would be hoarded as jewelry or collectible coins ...

Merlin:

I believe the comparison should start with the M2 money supply rather than "$US in circulation."

"M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000), less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in retail money market mutual funds, less IRA and Keogh balances at money market mutual funds. Seasonally adjusted M2 is constructed by summing savings deposits, small-denomination time deposits, and retail money funds, each seasonally adjusted separately, and adding this result to seasonally adjusted M1."

I disagree. The gold in circulation needs only be the amount that passes from hand to hand. When you make a deposit of gold to a bank to a savings or money market account it just doesn't sit there, it gets loaned out to others. It's a bookkeeping arrangement only and the gold wouldn't reside in the bank vaults. What I propose is that the government no longer has any control over the money supply and if a bank decides to use fractional reserves as its policy then it's up to the depositor to weigh the risk of default vs. higher interest rates.

Any bank, or individual, for instance should be able to issue gold receipts to avoid the encumbrance of physical gold to cement transactions but only those with highly rated credentials would be able to pull that off.

Merlin:

At $1320 per troy ounce it is worth about $194 billion. But M2 is $8841 billion! The government would have to declare gold to be worth about $60,000 per troy ounce! Do you really believe the government would do that?

The government would have nothing to say about the value of gold. It would auction it off gradually at whatever the going rate was in order to get out of the currency business and regulation forever. The market would decide what the value should be. If there wasn't enough gold in circulation to service the economic requirements then the price would rise, if not, it would drop. You are probably ignoring the major influence of the other traders, speculators and investors in the rest of the world. Gold would come in from all over the world and if the wisdom of the US were acknowledged other governments would embark on a similar strategy.

Sam

Post 10

Friday, March 4, 2011 - 3:42pm

Merlin wrote,

Anyway, what I said was nothing about purchasing power over time. It was about a one-time conversion. Wikipedia here says the amount of gold in Fort Knox is 147.3 million troy ounces. At $1320 per troy ounce it is worth about $194 billion. But M2 is $8841 billion! The government would have to declare gold to be worth about $60,000 per troy ounce! Do you really believe the government would do that?

Probably not, but right now it probably wouldn't agree to any kind of dollar-gold conversion. In any case, its unwillingness to do so does not address Bernanke's statement, "that gold couldn't return as the world standard because there's not enough gold in the world to effectively support the U.S. money supply." Besides, I suspect that the total amount of gold in the U.S. is considerably more than what currently exists in Fort Knox itself.

However, a return to the use of gold and/or silver as money need not depend on a one-time conversion, but could gradually be accomplished by decriminalizing their use as media of exchange. If the value of the dollar eroded sufficiently, people would be motivated to employ a medium of exchange that held its value, with the use of a commodity money gradually replacing that of a fiat paper currency.

Post 11

Friday, March 4, 2011 - 4:22pm

Sam wrote:

Merlin:
I wouldn't presume all that gold in jewelry can be converted to use as currency.
Nor would I, that's because I said:
...a lot of it would be hoarded as jewelry or collectible coins ...

Then why did you divide by 5 billion ounces, which includes jewelry and collectible coins, in post 2? You wrote: "So, what would the price of gold have to be to service the world economy? $4.4 trillion divided by 5 billion oz. = $900 per ounce."

I disagree. The gold in circulation needs only be the amount that passes from hand to hand.

I disagree. Note that money market funds and time deposits (<$100,000) are in M2 but not M1. Those aren't "money" in your view? They do circulate, although much slower than M1. Also, money is a store of value as well as a medium of exchange, and it seems you ignore the former.

The functions of money as a transmitter of value through time and space may also be directly traced back to its function as medium of exchange. Menger has pointed out that the special suitability of goods for hoarding, and their consequent widespread employment for this purpose, has been one of the most important causes of their increased marketability and therefore of their qualification as media of exchange. (Theory of Money and Credit, I.1.19, by Ludwig von Mises)

Sam wrote:

The government would have nothing to say about the value of gold. It would auction it off gradually at whatever the going rate was in order to get out of the currency business and regulation forever. The market would decide what the value should be.

The market will also decide what the value of dollars will be! The government will remain in the currency business as long as people value dollars.

(Edited by Merlin Jetton on 3/04, 4:23pm)

Post 12

Friday, March 4, 2011 - 4:32pm

Merlin, people only value dollars because the government forces people to use them as a medium of exchange. Without that force a fiat currency couldn't survive.

I don't want to mistake your position here Merlin, so if you could clarify, do you think the government ought to force people to use dollars as a medium of exchange?

Post 13

Friday, March 4, 2011 - 5:01pm

Merlin, people only value dollars because the government forces people to use them as a medium of exchange. Without that force a fiat currency couldn't survive.

Most people who value dollars do so because it is a medium of exchange, and many of them don't even recognize the government's coercive role in money.

I don't want to mistake your position here Merlin, so if you could clarify, do you think the government ought to force people to use dollars as a medium of exchange?

No.

Post 14

Friday, March 4, 2011 - 5:16pm

Merlin:

Most people who value dollars do so because it is a medium of exchange, and many of them don't even recognize the government's coercive role in money.

Who's them? Again, it is a medium of exchange because the government forces people to use it as such. Your logic is circular here. That some people aren't aware of this coercion I don't think is particularly relevant. Should the coercion end, it wouldn't survive as a medium of exchange.

And if you don't believe the government ought to force people to use government money as a medium of exchange, how would you propose the government end that force?

(Edited by John Armaos on 3/04, 5:35pm)

Post 15

Friday, March 4, 2011 - 5:46pm

Who's them? Again, it is a medium of exchange because the government forces people to use it as such. Your logic is circular here.

And who are the people you refer to in posts 12 and 14?

No, it's not circular at all. I was merely saying what I think other people think. Unlike you, I'm not attributing my own thoughts to them. Try polling a bunch of people randomly. Ask them "Why do value money? A. Because you can buy things with it. B. Because the government forces me. C. Both. D. Other."

What fractions of them do you think will answer A, B, C and D, respectively?

And if you don't believe the government ought to force people to use government money as a medium of exchange, how would you propose the government end that force?

Start basing the currency on a basket of commodities held in reserve. It would not be an easy task.

(Edited by Merlin Jetton on 3/04, 5:48pm)

Post 16

Friday, March 4, 2011 - 6:06pm

Merlin:

And who are the people you refer to in posts 12 and 14?

Everyone in the economy. I'm describing the mechanisms that needs to be in place for people to find value in government currency. They value it because they can use it to buy products and services, of course, but without that force it's value would erode, eventually to the point no one would value it anymore.

No, it's not circular at all. I was merely saying what I think other people think. Unlike you, I'm not attributing my own thoughts to them. Try polling a bunch of people randomly. Ask them "Why do value money? A. Because you can buy things with it. B. Because the government forces me. C. Both. D. Other."

Ok, so if the government ended it's coercion over currency, do you think people would still use government currency as a medium of exchange?

If not, then why not? If not, then I'm correct in saying people use government currency as a medium of exchange because they are forced to use it as such. That some people don't know they are forced to use that currency wouldn't change the reason why the current mechanisms allows for this government currency to exist. What they think is irrelevant, what is reality is. But if I'm wrong, you are saying the currency would survive despite the government ending its coercion. Please explain.

(Edited by John Armaos on 3/04, 6:43pm)

Post 17

Friday, March 4, 2011 - 6:16pm

By the way I should note in my posts here I mean to refer to government currency in its current form as a fiat currency. I can certainly see if government ended currency coercion people might still use government currency if it's commodity backed. Otherwise I'd like to hear if it's at all possible how a fiat currency could survive if competing with a commodity backed currency.

Post 18

Friday, March 4, 2011 - 6:17pm

Merlin:

Then why did you divide by 5 billion ounces, which includes jewelry and collectible coins, in post 2? You wrote: "So, what would the price of gold have to be to service the world economy? $4.4 trillion divided by 5 billion oz. = $900 per ounce."

Because this would be the baseline as an absolute bottom value. If you think that only a half or a quarter of the total gold in existence would be in circulation then you would adjust the value accordingly.

Note that money market funds and time deposits (<$100,000) are in M2 but not M1. Those aren't "money" in your view? They do circulate, although much slower than M1. Also, money is a store of value as well as a medium of exchange, and it seems you ignore the former.

M1 and M2 are only inventions of the Fed in order to think they can manage the economy by the values of them. Money market funds and time deposits aren't just a stash of assets that are in a vault and it doesn't matter how fast they circulate except as far as the velocity of money is concerned. The velocity would be considered by the market in determining whether there was enough gold in the system or not. Of course money is a store of value and under a new gold system jewelry and collectible coins serve that purpose, and anyone wishing to hoard bullion could do that also.

The government will remain in the currency business as long as people value dollars.

When they've sold all the gold and burned all the dollars there won't be anything to value.

Sam

Post 19

Friday, March 4, 2011 - 7:02pm