Gold Standard Question

[drpiotrowski]

I suppose I'm not quite savvy on the entirety of this issue, so please bear with me.

I can't seem to wrap my mind around the idea of national wealth and the stock of gold...

Here's a fictitious hypothetical:

Assume:

a) All gold in the world has been discovered.
b) $1.00 is equal to 1 oz of gold.
c) There are 1000 oz of gold in stock (equivelent of $1000 dollars)

What happens when the domestic demand for the medium of exchange (ie "dollar") exceeds $1000 in value? Vis., what happens when the wealth of a nation exceeds the static value of the amount of gold in stock? Do we then move onto a different asset?

Perhaps my hypothetical oversimplifies things, but there would assumably be a point when the demand for gold certificates as an exchange medium would be greater than the amount in stock. Or do I have things completely off, here?

If this example is foggy, let me know and I'll try to explain my question better.

 

[Dave Pedersen]

I think as the amount of gold increases in demand the value of the dollar would increase compared to what it could be exchanged for.

Instead of one dollar buying one loaf of bread it would be able to buy more and more loaves of bread. Then with the buying power of the dollar increasing wages would go down in terms of dollars and there may be a need as an economy grows to multiply the value of a dollar by ten to make more currency available. Like a stock split one dollar would become ten new dollars.. of course this would be disruptive so then it is better to use silver as the metal of choice and assign many dollars to equal one ounce.

Today the value is about $15 so maybe $100 should equal one ounce of silver. Then there would be room to grow the economy without any such disruption. But then I am not a fan of economics so I don't have a clue.

 

[DirtMcGirt]

as long as we have competing currencies

 

[Jeremiah]

If you are really interested in drilling down on this question then read RP's book "The Case for Gold". It can be downloaded free at http://www.ronpaullibrary.org/books.php.

The term "gold standard" has been misapplied in the past by fixing the "price" of gold at a certain level, e.g. $20 or $35 an ounce, then inflating the money supply through the fractional reserve banking system. Of course the artificially determined "peg" is broken eventually and the assumption is that it was the fault of the "gold standard" when the problem was with fractional reserve banking, promiscuous lending and inflation of the money supply. This is what happened after World WAr II. J.M. Keynes created the post Bretton Woods fixed exchange system anchored on gold and the US dollar. He knew perfectly well that through fractional reserve fiat currency creation, the hybrid system would fail and that was his intention because he favoured a pure fiat system. Never underestimate the cunning of the plutocrats and their "court" economists.

 

[superschupp]

f gold were allowed to trade in a range, then the market could set the value.

Here is how it would work: (I think Steve Forbes, first proposed something like this)

The power to print money would be striped from the federal reserve (or the fed would be eliminated) The comptroller of the currency would then be charged with adjusting the money supply (printing or destroying) according to the following rules:

Each day the 30 day moving average price of gold would become the "Set Price" of gold. The comptroller of the currency would "buy" gold if the daily price fell to 5% below the set price. The gold would be bought with new currency printed by the comptroller and currency would thereby be added to the economy. The government would take possession of the gold and store it. If the price of gold rises to 5% above the set price, the comptroller would "sell" gold, and destroy the currency that was collected from the proceeds. Each day a new "set price" would be established based on the new average by adding today's closing price and dropping the close price of 31 days ago from the calculation.

The official currency would be the new gold certificates. To get the system started, currency sufficient to represent all the gold currently in the possession of the federal government would be printed (using the above rules) and put into circulation through debt repayment. Then, taxes collected and debts paid to the government would have to be in "gold". An exchange market for Federal Reserve Notes (like other foreign currencies) would insure convertibility and since the U.S. Government would deal only in gold, as old debts were paid in Gold Certificates, the Federal Reserve Notes that those debts represent, would be removed from circulation. The demand for U.S. debt obligations denominated in FRN's would rise and insure a robust exchange market.

Obviously, a massive cut in government spending would be necessary to prevent the collapse of FRN's and the exclusive use of Gold Certificates by the government would have to be phased in over a number of years; but this plan could restore hard money without killing the economy, although complete removal of all FRN's from circulation might take 50 years or more.

 

[Gilby]

The constitution does not allow the US government to issue paper money. They only have the power to "coin" money. The states have the power to make legal tender laws, but they are restricted to only making gold and silver legal tender.

What happens when the domestic demand for the medium of exchange (ie "dollar") exceeds $1000 in value? Vis., what happens when the wealth of a nation exceeds the static value of the amount of gold in stock? Do we then move onto a different asset?

Gold is simply a medium of exchange. You don't need as much gold as there is wealth in a nation. Gold and silver are only needed as money when transacting with the government, because that is what the constitution restricts them to. In a constitutional society, you would not be transacting much with the government. The constitution does not restrict the free market on what they can use for currency, which means that every single asset that can be easily exchanged is the money supply. Today, in our digital communication world, we can easily trade stocks, bonds, commodities, and many other assets instantly. All of that is the money supply. Your bank will offer you various funds that meet your needs and digital transactions can happen through market makers. Let's say you go to the corner store and the price is denominated in gold. You may pay in physical gold or some other commodity, or you may pay in some bank issued note that has a known value, or you may use a credit card in which your bank sells some of your XYZ stock (or whatever fund you have set your account to sell) in exchange for the ABC futures that the convenience store wants, which is all automatically handled by the market maker. Gold has simply become the index in which all transactions are done in and no gold is needed to complete a transaction denominated in gold.

 

[superschupp]

Paper Money

The constitution does not allow the US government to issue paper money.

A receipt for gold on deposit is not "Paper Money" The constitution refers to, and prohibits bills of credit which is a paper currency that is backed by nothing. The constitution does not require that we tote the physical gold from place to place.

 

[jonahtrainer]

as long as we have competing currencies

Because of technological advances there now exists the ability to use gold in daily transactions. This is a 'whole new level of currency.' I really recommend you watch some videos at RunToGold.com. We are loose with our words and generally think of money, money substitutes and currency as the same thing. They are not.

 

[fsk]

Before the gold standard was abandoned, there was a financial instrument known as a "Bill of Exchange". If a customer makes a time-deposit in a bank, and the bank loans that gold, that is not exploitative like fractional reserve banking.

Even under a pure gold standard, you can have more trade than physical gold. Gold is merely a benchmark used to set price.