Gold TOO valuable for use as a currency

Economics Economics Questions
1

Yesterday, I did a little math to check what the value of one ounce of gold would be if the federal reserve and government used all their gold to purchase the entire dollar money supply. In other words, what would the price of gold have to be for the government to remove all federal reserve notes and factional reserve credit from circulation, replacing them with gold.

The answer was just over $13,000/oz. Of course, that’s not the only method of removing FED notes from circulation…and not necessarily what the gold price would be if gold became the de facto money again. But it’s still huge.

Even at the current price, gold coin would be a difficult medium of exchange. A 1/10 oz coin broken into 8 pieces would still be $10 per piece. Using dust and grains would work, but I would think in modern times that it would be somewhat easy to counterfeit…or difficult/expensive to measure. Are there any cheap means to test the purity, weight, density, etc. of such forms of gold? I know coins have cheap and easy testing devices.

So I thought, well maybe silver would come out better from a monetary standpoint, but there is actually less silver than gold when taking into account industrial usage. Thus, it would fare worse, as its price would quickly approach gold’s when used commonly as money. (Actually, if both were freely used, the money supply would be larger, and coins would exchange at a lower price with real goods, but there is still not enough liquidity.)

So…are the Jacksonian ideals of getting gold/silver or other precious metals to circulate on all levels of the economy impossible today? Is there a need for greater liquidity? Would a gold standard be forced to use paper and bank accounts to reach the desired amount of liquidity?

Has anyone ever attempted to issue notes that are difficult to counterfeit and represent a trusted source institution, yet rather than allow them to simply be redeemed for gold, for the gold to be embedded in the note itself? In such notes, the only means of removing the gold from the note would require destroying the note. (It doesn’t have to be a paper note, but any kind of container, marking the gold content and issuer.)

2

Actually, it would be a pretty dumb idea to use physical gold as money. It would make it quite hard to check if the coins have been messed with. So yes, paper money backed 100% with gold is probably the best thing, e.g. having 1/100 grams notes, 1/10 grams notes etc..

3

How do you check your paper hasn’t been “messed with”? You can weight and mesure the coin, with an instrument such as the Fish in seconds, and it makes it pretty hard to counterfeit.

Paper money can be printed with a good printer and paper and fool most people.

4

You can always have silver and copper for small units, but today with electronic payments, it makes a gold standard even more practical than the past, where one can use a debit card drawn on a bank account denominated in gold oz.

About the conversion of the total supply of dollars to gold oz, it would probably happen simply by having the dollar collapse in hyper-inflation and people start using other money instead, such as gold, so the total dollar supply would not be redeemed for gold at all, simply disapear into nothingness.

I seriously doubt the governments will ever give up such a massive power as long as they can keep it. The states employing thousands of court economists to justify its power, those people won’t ever start saying the state needs to be downsized.

5

I think I was a little ambiguous with my first post. I was not arguing that the FED and government will buy back the Fed’s notes and banks’ credit with gold. Of course they won’t. And even if they were to do so, they could borrow gold from domestic or foreign sources for such a purpose. I was merely attempting to point out that while gold or silver would make a good currency, it would today have severe problems of liquidity and counterfeit to be used directly instead of via money substitutes. The current price shows this point; the theoretical price exemplifies it.

As far as notes and checkbook/digital gold, this is missing the point. The Jacksonian plan to rid the nation of unsound money meant trading actual precious metals at the everyday consumer transaction level. This means that actual gold/silver would be traded at all levels of the economy, not just between banks to settle accounts. The belief was that without such use of actual metals at such levels of the economy, bank credit and its subsequent problems would permeate.

About silver - I made this point in the original post. Silver is now rarer than gold. Should it become dominantly used monetarily rather than industrially, we will not find it resume its ~16:1 price with gold, but have an even greater price. That is, unless government fixes the price of gold to silver, in which case, only one would become predominantly used as money, as seen during the Jacksonian banking period.

Copper makes much more sense, and seems like a viable alternative…not as a complete monetary solution, but to provide liquidity in smaller transactions without sacrificing the actual exchange of money, not money substitutes. It would require floating, not fixed, exchange rates with gold, silver, and any other good, of course.

6

Err, not quite. Security elements can easily be placed on paper money or debit cards. Moreover, there are devices that can check their validity, and one can even cryptographically ensure safety. On a free market, warehouse-like banks (which issue such notes or cards) could be certified to be trustworthy by 3rd parties.

On the other hand, if you rely on weight checking, one could easily mint coins that contain other metals on the inside. And you can’t really automate any checking process for gold coins, making it tedious to deal with ordinary consumers.

7

Coins can be tested chemically, electrically, magnetically, by weight, by size, and by accuracy of the minted design. Additional security features could be incorporated onto future coins. Similarly, paper already has many security features, and can improve by leaps and bounds as well, with micro(eventually nano?)printing, special inks, special paper, complex designs…I’ve heard talk of eventually incorporating MEMS onto them, so that the picture will change if you rub it in certain manners…or something like that.

But for gold coin, the point is that the pieces of gold are so small that it is difficult to imprint a recognizable design on them. They would have to trade as dust or grains, which could be debased or counterfeited. In which case, vendors would require either the transaction cost of testing almost all payments or the bank cost/risk of using notes. Almost certainly, they would go to the banks.

What do you think of this idea? Paper money containing gold dust inside of it, unable to be removed, except by destroying the paper, such as burning it. Anyone could audit this money at any time, yet it would retain the wanted features of paper money. It seems that government control over money and banking has probably had more backwards effects on society than we could ever fathom.

Checking accounts and such are great and would definitely still be around. What I’m talking about is the people today who cash their paycheck and don’t have one and don’t want one. The Jacksonian vision was that such people would use actual gold or silver as money, rather than banknotes, and that this would prevent the inflationary expansion of bank credit.

8

What if we just froze the monetary base? Fix the amount of banknotes in existence. Would that be costless?

9

If there were a human administration that would do that, it would be nice; however, it would not be costless, as they’d have to replace notes that are destroyed or will soon fall apart. But good luck on finding that benevolent monopoly administration.[:S]

10

Why assume that gold is the only commodity asset of the government?

They have buildings, land, planes, helicopters. employees (human capital).

They could auction these assets off for gold, to lower the gold/dollar ratio while simultaneously decreasing the monetary supply if necessary.

11

Not likely to do any good unless fractional banking guarantees are also dropped. But that would make banks collapse.

Anyway, freezing the monetary base is not a better idea than switching to gold. In contrast to gold, paper money is not a commodity and the monetary base will still need perpetual fixing. Gold is produced and even if gold “inflates” (higher supply) it will do good to the economy, as it satisfies needs, but inflating the dollar is bad.

12

Not if it first floods into the credit sector. That would cause a business cycle according to Mises. Rothbard believed increases in the gold supply to be too small and more easily anticipated to cause any severe disruption.

13

That was not my point. Of course they could lower the potential gold price by lowering the money supply. The point is what we would expect about using physical gold in leui of cash, if bank accounts were backed 100% with gold and the cash was directly swapped with gold

Of course, there is far more gold available from sources other than the government/FED. Dividing the True Money Supply by America’s share of all gold according to GDP gives us a price of about $3,740/oz. This would be a more realistic of how physical gold translates to current prices if it were to replace the fiat money supply. It is still too seemingly expensive to be traded in physical form.

14

We cannot know the precise answer to these kinds of questions. The whole thing about replacing the fraudulent funny-money system with a free-market commodity money system carries the same implications as every other technical/logistical question of a “but how would this work?” variety when discussing the substitution of liberty for the status quo: We simply do not, and cannot, know for sure.

But that’s the whole point. We are not into the whole central planning thing. We cannot say with any degree of certainty how things would play out, because freedom is unpredictable; and frankly, this is an asset.

What we do know, though, is that humans, acting rationally to maximize utility and satisfaction, will freely and voluntarily establish a generally-accepted medium of exchange, and one which best serves the purpose of making all goods and services universally-echangable for all others, and which makes relative exchange valuations of all goods and services easy and accurate. We know this because this is how money came into existence in the first place; and because Mises and Rothbard have taught us a thing or two about the ways in which humans tend to interact with one another.

But it’s impossible to say for sure exactly how the technical aspects of a newly-established commodity-money system would work out. We’ll just have to wait until we have the necessary freedom to establish one, and see.