I’ve read things about how gold currencies wouldn’t work currently because the demand has been increasingly heavily for gold while the supply has barely made changes in supply. I’ve also read that we would be dependent on South Africa for our money supply since gold mining is done there. Would it also be true that deflation would become a problem?
If the increase in gold’s price in dollar terms is due to inflation and more generally a dollar crisis, this is a problem with the dollar itself, not gold; remember, gold is being measured in terms of dollars. Regarding the gold supply, what matters is the total supply of gold - not new gold. I think gold (according to Mark Skousen) increases at a rate of 4 - 5% p.a., so it shouldn’t be deflationary (but generally the quantity of money does not matter in the case of full-reserve systems.)
So basically gold increases around the percentage that the monetarists even have proposed for fiat money. According to some the problem with gold is we would be allowing South Africa and Russia control over our currency since they basically control the worlds gold supply. This is one thing I have a hard time combatting. What you’ve said so far is pretty much right since the total supply of gold is the most important thing except what happens the supply is controlled by others?
The Fed hasn’t exactly been doing a marvelous job of controlling the money supply itself, and is no less foreign to most Americans than Russians or South Africans are. Again, what matters is existing rather than new inflows of gold (or platinum.) These countries may control the future supply of the precious metals, to an extent (disputable in ZA’s case; Chinese firms are buying up old South African gold mines), but I think a lot of gold already exists outside of their domain, within the US (if anyone has figures for this, I’d be interested.) Another problem with this view is why exactly would these countries withold their precious metals’ supply? Its only worth something to them if they can exchange it for something else. Even if they refuse to sell, say, to Americans, Americans can simply acquire the gold supply from third parties who aren’t so discriminatory as to whom they do business with (presumably who themselves have bought gold or platinum from the countries in question.) I’m sure there are even better arguments against this notion, but what this seems to be is protectionism at its heart. If they withold supply indefinitely, they will lose out. As long as Americans have something they want, these governments will only harm themselves by refusing to trade or acting difficult. The above could do with some refinement, but I think it’s good reason enough to be skeptical of such arguments.
Alright, first it’s applied wrong. Gold as a currency and gold as a commodity are two different things. All you have now is gold as a commodity, you can’t properly measure it as a currency.
Second, who is “we”?
Third, money supply also means money demand; you need two blades of the scissor to cut the paper and so merely implying that “demand is so high alsfj;fj;alfja;sfdlj” or “supply is so low ;lsafjka;fljka;dsflj” doesn’t really mean much to a trained economist. I’m not really concerned about price stability; I’m concerned about price accuracy.
Deflation? Fine.
Inflation? Fine.
It isn’t the flation that’s the problem, it’s the producer of it.
Monetarists are annoying, mainly because they literally thing Milton Friedman = a deity.
Inquisitor, could you please reference Mark Skousen’s article where he says the gold supply is increasing by 4-5% per year. This seems awfully high to me. I’m not saying it’s wrong, but I’d like to know how he arrives at that figure.
Conspiracy theories aside for the time being, the USA has more than twice the gold reserves of any other nation, so I don’t think we’d be especially dependent on South Africa.
I’m not sure if this tallies up with those statistics but according to Wikipedia:
“According to the World Gold Council, annual mine production of gold over the last few years has been close to 2,500 tonnes. [11] About 3,000 tonnes goes into jewelry or industrial/dental production, and around 500 tonnes goes to retail investors and exchange traded gold funds. [11] This translates to an annual demand for gold to be 1000 tonnes in excess over mine production which has come from central bank sales and other dishoarding. Demand from the electronics industry is rising by 11% a year, jewelry by 19%, and industrial and dental by 21%. [11]”
And some figures I pulled from Mike Hewitt’s Blog (not sure how reliable it is but this was just a quick search on my part) indicate that global gold reserves would be not much less than 155,000 tonnes… so that would imply the supply of available gold is increasing annually at a rate of about 1.61% (nowhere near 4-5%). However no doubt a good portion of the 155,000 tonnes is currently being used as jewlery of fancy dental work, so I’m not sure what percentage of the total above ground supply is actually being used for monetary purposes. I suppose the majority of such gold would currently be held by central banks or major commercial banks (such as the primary dealers).
As a side note, the above wikipedia article also states:
"In January 1959 US M3 money supply was $288.8 billion [22], and the official gold reserves of the United States was then 17,335.1 tonnes, or 557,336,000 ounces [23] (there are 32,150.7 troy ounces in a tonne). That means that in 1959, there were $518 in circulation for every ounce of gold reserves held by the USA. Although the actual ratio of dollars to gold was $518 per ounce, the actual price, as fixed under the gold standard, was only $35 an ounce.
By August 2005, the US M3 money supply had risen to $9,873.9 billion, whilst at the same time the Official Gold Holdings of the United States had fallen to just 8,133.5 tonnes, or 261.50 million Troy Ounces [24]. This means that today, in 2005, there are $37,831 in circulation for every troy ounce of gold held by the United States"
Which puts the a bit of perspective on the current “record high” gold prices and certainly implies that a gold standard (in case anyone really needed convincing that the sky is blue) would be a hell of a lot less inflationary than the current monetary system (regardless of what the annual mining production is as a proportion of existing reserves).
Leonidia, it’s in his book Economics of a Pure Gold Standard. He mentions that the gold supply tends to grow from 1 to 5% p.a. (depending on production levels.) As another useful tidbit of information, he mentions even gold rushes never extended the gold supply by more than 5% at a time (compare that to how inflationary fiat money is.)
The dependence arguments are just bunches of crap. The amount of gold mined is a function of the market price for gold in other economic resouces that must be beneficially TRADED. Otherwise the gold supplier sits on a pile of gold that he doesn’t want while the gold buyer sits on pile of stuff that he doesn’t want. Yes there would be a supplier advantage if that supplier had a lower production cost than its competitors. And yes that supplier might become rich. This is infact exactly what has happend with suppliers of oil. The countries that have access to cheap oil (More useful than gold) gained tremendous wealth. But they still can not seem to control the world. The best example of this is the failed cartel OPEC. In the 1970s OPEC was the king of the hill until Mexico, Russia, South America, etc found it profitable enough to join the energy business.
As for inflation, there will be some inflation under a gold standard as people mine more of the stuff. The 19th century had an inflation rate of about 0.6%. That is nothing compared to the inflation that comes from fiat banking. The US would need a gold price of 20,000 per ounce to cover the amount of currency in the world. Inflation is bad. It is a wealth transfer from investors to consumers. Without investment in new productive capacity, the economy flounders in the long term.
As for deflation, this is not an issue. In fact deflation is not a bad thing. It is a natural adjustment by consumers to higher prices created by devalued money. There is a maximum amount of deflation possible which is the amount of inflation previously. As consumers tire of paying higher and higher prices, they eventually quit buying stuff and wait for prices to fall. This is a natural consequence of banks inflating/devaluing money. The deflation spiral in Japan in the late 1990s was the product of the government taking resources from the private sector and then paying for them with de-valued money. This is not really a period of deflation at all but an example of a revolt against the central bank who prints money like crazy and the consumers just sit back and watch prices rise. Deflation is typically good for an economy as consumers turn into investors and store money in increased productive capacity.
It also depends upon how you define inflation.
If you define it like Rothbard, it’s any increase in the money supply at all. If you define it like Mises, it’s any increase in the money supply that goes above demand for money.
According to Greenwood and Earnshaw in Chemistry of the Elements “total annual production of new gold is about 2300 Tonnes of which 27% comes from South Africa, 15% from the USA [emphasis mine] and 11% each from Australia and the former Soviet Union”
Of course datas change constantly but these datas speak for themselves.
Inflation is when things grow in size (like a baloon). Rothbard is talking about Monetary Inflation, which quite often causes what Mises is talking about (Price Inflation). As such, their two definitions are not contradictory at all - they’re simply talking about two different but related phenomena.
Thanks for all the quick responses you all answered my question substantially well.[:D]
I’ve been looking for some more literature on the Gold standard. Thanks for bringing this up!
I am very glad to meet you. You are my teacher! I want to learn futures from you.And I want to make sure if Gold will rise to the pole: December 2008.Thank you very much!
I am very glad to meet you. You are my teacher! I want to learn futures from you.And I want to make sure if Gold will rise to the pole: December 2008.Thank you very much! This is my e-mail: futugoog@126.com
Uh oh… Here comes the Rothbard-brigade
What’s this about contradictive? Mises defines inflation one way. Rothbard defines inflation in another.
Sorry, but an increase in supply past the level of demand does mean something different than an increase in supply, period. I know this shakes the ground you pray on, but Rothbard was not infallible or completely true to Mises.
Erm, I’ve barely even heard of Rothbard… much less doing any of this praying business you’re talking about.
We seem to be talking past one another though. According to what you wrote about their respective “definitions” of inflation, it seems to me that Rothbard is talking about monetary inflation (increase in the money supply) and Mises is talking about price inflation (when money supply increases at a greater rate than production, more dollars will chase fewer products → hence price inflation). Neither of them has redefined the word inflation - they’re simply talking about different things (baloon inflation, breast inflation - I could go on about all sorts of unrelated other kinds of inflation as well - none of which would change the meaning of the word inflation).
In any event, I apologise if I offended your religious views because you pray to one or other of these gods who I’m apparently not paying due homage to.
I think you should read what Niccolo said more carefully. Mises’ approach to money was rather revolutionary; he applied the notion of marginal utility to it.