Can someone simplify this for me? Gold standard stuff...

[Yukon Cornelius]

PLEASE NOTE: My novel is for entertainment purposes only. It is sci-fish in nature. If I touch upon social, economic, and political issues in the novel it is for the story's concern. I am not trying to push my ideologies (which happen to be libertarian) on my reader in a heavy handed manner. Lots of the folks here would be able to poke holes in some of my story background. But lets face it, 95% of the people who end up reading it (if anyone ever reads it) just want to be entertained. If some of my libertarian views and values rub off, even better.

With that said, in the novel I am writing, certain states have seceded from the US. I need to explain briefly (only a sentence or two even) how those states can peacefully go on a 100% gold standard without wreaking havoc on their new economy.

I did some research and I could easily go deep into the process but again, I am trying to entertain. It might be exciting for some of us here, but for the average reader it may just confuse them, bore them, and bog the story down.

So if anyone can give me a brief breakdown of going on a 100% gold standard with an entire new currency (backed 100% by gold) I would appreciate it...

Thanks in advance.

 

[Seraphim]

Gold standard defined as the government is FORCED to transact with it's citizens in commodity based currency (gold) and is bound by those restrictions. No legal tender laws except for the government. The rest of the market is free to choose what it likes to trade in (which virtually always has a strong gold/silver aspect to it).

 

[LibertyEagle]

Currency backed by gold results in that currency maintaining its buying power; people can't just go out and create more gold. Currency backed by nothing, which is the case today, loses its buying power, because when the government wants more money they can just create it out of thin air.

 

[Yukon Cornelius]

Gold standard defined as the government is FORCED to transact with it's citizens in commodity based currency (gold) and is bound by those restrictions. No legal tender laws except for the government. The rest of the market is free to choose what it likes to trade in (which virtually always has a strong gold/silver aspect to it).

How do I get around the fact that not everyone in that seceded state owns any gold and their old US dollars are worthless?

 

[luctor-et-emergo]

How do I get around the fact that not everyone in that seceded state owns any gold and their old US dollars are worthless?

You can't.
Without initiating force that is.

PS: as becomes clear from the posts below, there is nothing that stops an individual from bartering anything for gold, including worthless dollars. But to be clear, my point was that you can't 'get around' it without initiation force. There are certainly ways people can get gold from voluntary exchange.

 

[matt0611]

How do I get around the fact that not everyone in that seceded state owns any gold and their old US dollars are worthless?

People start selling products on the market for gold -> firms start to get revenue in gold -> firms start to pay employees and investors in gold -> people have gold to buy stuff on the market -> ....

 

[LibertyEagle]

How do I get around the fact that not everyone in that seceded state owns any gold and their old US dollars are worthless?

If the rest of the country is still using paper dollars, they can trade them for precious metals, if they so choose. They have the same opportunity to buy precious metals as anyone else.

 

[Seraphim]

They can simply use the State issued gold certificates and aquire them by **GASP**....working.

State issued gold currency would compete with market currencies...but if the State currency is actually quality...it will be used.

How do I get around the fact that not everyone in that seceded state owns any gold and their old US dollars are worthless?

 

[Seraphim]

this as well.

If the rest of the country is still using paper dollars, they can trade them for precious metals, if they so choose. They have the same opportunity to buy precious metals as anyone else.

 

[specsaregood]

How do I get around the fact that not everyone in that seceded state owns any gold and their old US dollars are worthless?

maybe you shouldn't try to shoehorn a gold standard into the story if gold isn't something that geographic region naturally contains. there are other precious metals, or other items of value. especially something that other states/trading partners need. if it is sci-fi you could even make up your own fictional element with wonderful properties.

 

[Seraphim]

competing currencies would be a better angle then just a gold standard.

 

[rpwi]

100% gold backing is difficult...and I'm not sure it doable. The process probably would be best started by the government issuing their new currency and declaring that only it could pay taxes. This would give the new currency a lot of value. An option would be to pay taxes in gold as well.

Then the government would probably start a fractional backing. There might be restrictions on redemptions to start...otherwise speculators will crash the backing.

Then incrementally the government will start hoarding gold from tax receipts and other various financial transactions...until the market value of gold = the market value of the money backing the gold.

Then a proper 100% backed currency could commence.

If you ignore market values...a gold backing (100%) is pretty easy. You can say declare that 1 million dollars = .0000001 ounces of gold. This way you don't have to have a lot of gold on store. The problem is obvious though...if these dollars are exchangeable for gold...then speculators would take advantage of the difference between the market exchange rate and the government exchange rate and crash the backing.

There are other types of gold standards... You can keep a fiat currency and not back it with gold...but you can peg it to the market price of gold...and while you do have a fiat currency...inflation of that currency would be held in check somewhat as it wouldn't be able outpace the market price of gold.

The wildcard are the banks. They fractionally back deposits to dollar bills and fed funds. Would they be able to accept gold? Would the government create a gold standard off of the base currency or somehow incorporate deposits into the backing? Tricky questions...and if misplayed would result in mass insolvency.

Any type of secession that involves currency would create interesting side-effects. There are so many contracts and derivative contracts that are dependent on the delivery of dollars and dollars worth a certain value, that a new currency would lead to mass bankruptcy (not that that is the worst thing).

Greece if facing a similar dilemma now. Probably the most peaceful way to transition to a new currency...it to back it 100% with the old currency...then gradually reduce that backing over time until your new currency is no longer backed by the old currency.

...After thinking about this some more... Probably the easiest way for government to go to a 100% gold backing would be if they created a national repository for gold...in which their new currency was exchange for gold 1-1. Government then accepts as tax payments only national repository notes or deposits...so there is a strong incentive to deposit gold with the government to back the new currency. This would achieve 100% backing of the currency...and do the trick. There would some chaos though as the economy (and all its contracts) adjusted from the old currency to the new).

 

[rpwi]

competing currencies would be a better angle then just a gold standard.

If the new government collected taxes...then there can never be a truly free market for competing currencies. Whatever currencies the government accepts as tax payments...would be the 'winners' in the currencies competitions...and the other currencies would be the losers.

 

[danda]

remove legal tender laws and capital gains tax on sales of precious metals. accept tax payments denominated in gold ounces. voila.