What would change if the whole world turned to the gold standard, by magic?
What would dissapear?
What would appear?
Hypothetically speaking, of course 
I am now learning about gold and the gold standard.
I have a series of videos in my TODO list: “GoldRush 21 The GOLD Bull Market”
But I have a question first, from Wikipedia:
Is this a limiting factor? The fact that there’s less gold than value.
What has the price of gold in dollars got to do with anything?
-Jon
No, that quote demonstrates a lack of understanding. If a gold standard was created then how much each dollar was backed by would be determined by the US government’s gold ownership.
Of course, a gold standard wouldn’t solve anything. Only economic freedom will.
To my understanding a gold standard is still fiat currency. It’s still the government dictating the currency of legal exchange. What would change would probably be the ability to inflate money, as gold is historically hard to produce in large quantities. Ron Paul (who’s probably the most recognized political figure in reguards to “touting” the gold standard, I suppose) doesn’t actually believe in it, or support it. He supports competing currencies, private monies, and, I believe, has proposed legislation on demonopolizing monies from the government, however I havn’t been able to pinpoint the exact proposal, so all I can offer is word of mouth. Tangent asside, it [gold] is a “sounder” form of currency, but it’s not at all desireable, as the monetary system (be it gold or paper) would still in the hands of the government.
Gold is no longer used as currency. If it was suddenly used as currency again, the extra demand for it would increase its value drastically, up to the point where it would replace the current money supply.
What would it take for the economic system to be free? (and in gold). What would change then?
The amount of paper dollars and the amount of gold has no relation. You can have 1 gazillion dollars in circulation and still switch over to a gold standard. The value of the dollar is what the dollar will buy and with a gold backed dollar the dollar will naturally buy more. So the exchange rate of dollars for gold would be entirely dependent on how much gold the government held. I’ll deffer the technical aspects of this to more learned members of this board. I understand theory but not numbers. You don’t need an ounce of gold to replace a dollar, five dollars, ten dollars or even a hundred dollars. An ounce of gold might be used to replaced $5,000 dollars – it doesn’t matter since the paper dollars have no value anyway.
A gold standard isn’t the solution anyway (though a step in the right direction). In order to rid us of this worthless paper we are forced to accept we would have to do away with legal tender laws and allow the market to create independent private currencies. I assume gold or silver would be the more preferred method of payment under this type of system.
Setting $4000 to be freely redeemable for an ounce of gold wouldn’t let the dollar buy anything more than it could now - it would, however, provide an upper limit to inflation.
(Conspiracy theories notwithstanding, the US has 8,133 metric tons of gold in its reserves, that’s 261.5 million troy ounces, and if there are one trillion printed dollars, that’s roughly $4,000 per ounce. However, if you go by M3, around $11 trillion, you’d have to set an ounce of gold to be equal to around $40,000.)
One advantage of a gold standard is that real interest rates can’t fall below 0%. In the present, if I keep my savings in a money market account, I get 2% interest but inflation is 7%-30% (depending on what measure of inflation you use). This makes it hard for me to raise money to start a business. If I try to accumulate capital via saving wages, I’m fighting an uphill battle against inflation.
Negative real interest rates subsidize banks and large corporations. They can borrow at 5%-6%, while inflation is 7%-30%. Using leverage, they earn huge profits, just from their extensive use of debt.
For example, Freeport McMoran bought out Phelps Dodge. They loaded up on debt to fund the purchase. Two years later, copper prices have been rising 20%-30% per year. The debt that funded the purchase was around 6%. Freeport McMoran’s management and shareholders profited from leverage and negative real interest rates. This profit isn’t free; it came from somewhere. When my dollars lose their value to inflation, part of the proceeds go to corporations like Freeport McMoran. In this manner, negative real interest rates encourage consolidation of industries.
Under a gold standard, you would see a lot more small businesses and fewer megacorporations. Suppose a small business owner wants to raise capital. Reinvested profits works very slowly, because of the inflation problem. A small business owner can only borrow at very high rates, or not at all. The small business owners is at a competitive disadvantage relative to large corporations. Management of a large corporation can borrow a lot of money, use the proceeds to bankrupt smaller competitors, lobby the State for regulations that shield it from competition, and then wait for inflation to make the borrowing profitable.
There’s also a common fallacy you’re using. The total value of the economy is a lot greater than all the gold there is. Therefore, a return to a gold standard is infeasible. That assumes that someone, after receiving gold, puts it under their mattress. In practice, a gold coin will change hands many times during a year. In this manner, the size of the economy can be a lot greater than the supply of physical gold.
A gold standard is a fair benchmark for determining price. You can have on a gold standard without shipping physical gold. For example, if imports equal exports, you’re on a gold standard but you aren’t shipping any gold around.
If you follow Austrian-style “time deposit banking” or the “Bills of Exchange” system, then you can have trustworthy paper promises for gold that trade at parity with gold.
However, if the government issued a declaration that the US was on a gold standard again, that would be a windfall profit for anyone currently holding gold.
You may ask “If gold is such wonderful money, why aren’t people using it?” People don’t use gold as money due to taxes and regulations. If I use gold as money, I pay a GREATER taxation rate than if I use Federal Reserve Notes as money. I can’t go to my bank and make a deposit of gold. Taxes and regulations make it impractical to operate a gold-denominated warehouse receipt bank. I can’t easily trade back and forth between gold and Federal Reserve Notes because taxes and regulations make it hard to operate a gold dealer business.
The correct way to return to a gold standard is to repeal all the taxes and regulations that prevent people from using gold as money. That isn’t going to happen.
M3 is not appropriate because it includes time deposits, which are actually loans to the bank. M2 also includes time deposits under $100K. MZM would be a better measure, but then much of MZM probably consists of money that is not actually required on demand, but is held there because it earns almost as much interest as time deposits.
Under a gold standard, no interest would be paid on any deposits which were withdrawable on demand. On the contrary, you would have to pay the bank’s safe-keeping costs. So, much of MZM might be transferred to time deposits under a gold standard. You might end up with little more than M1 (currency + demand deposits) that is actually required for withdrawal on demand.
Now M1 isn’t so bad - just $1.5 T.
And M0 (i.e. currency + bank reserves) would be even smaller - just $840B. And that 840B is already backed by approx $240B of gold and $600B of securities. Over time, the securities could be sold for gold.
So - best case scenario, you could back M0 with gold for just $1000/oz. But if you leave it at that, bank runs would probably force all the banks to close. To avoid that, you’d have to back M1 rather than just M0. But that’s still only $2000/oz.
$2000/oz isn’t too bad. $40K/oz, in contrast, would be a huge gift to existing gold-holders.
You could just leave it to the market to create competing currencies instead. But the outcome of that might be a mass exodus from fiat currencies, and then many people would lose their life savings. That’s pretty harsh. Rothbard and de Soto preferred to convert existing money to a gold standard.
There is a way to convert existing money to a gold standard. Go to a coin shop or Internet store and buy some!
I saw a very interesting post elsewhere. If you’re planning for a SHTF scenario, physical gold will be practically useless during a severe crisis. Assuming you can survive the crisis and safeguard your gold, then metal is a way to preserve wealth across the collapse of an economic system. You can buy gold now, store it someplace safe and survive, and then sell it when the SHTF has subsided and a sense of normalcy has returned.
During a collapse of a monetary system, the people who convert to hard assets first profit the most! I feel slightly hypocritical saying that, because I don’t own any silver or gold yet. There’s no need to rush (yet). I’ll buy some in the next few years.
Since no one seems to have answered the direct question, I will. A gold standard is the shorthand way to denominate a Laissez-faire/market-anarchist monetary system. Which in all likelihood would be gold with possibly some silver. It probably would not be Pringles (unless they are still in the can since then they’d last as long as gold lasts), but hypothetically it could be Pringles.
With a gold standard you lose:
War, Democide, Fammine - civil unrest, torture camps, genocide, religious persecution, etc. These events on the massive 20’th century historical scale could not happen. Dinosaur killing asteroids not-withstanding.
With a gold standard you gain:
World Peace (and very inexpensive whirled peas too), Prosperity, Liberty - health, longevity, benign neglect from tribes who don’t like you (a.k.a. genuine tolerance, not P.C. tolerance), art, music, food, energy, transportation. Basically you gain civilization instead of destruction.
Would there be different currencies (like we now have: $, Euro, Yen, etc), or that will be irelevant since they’d all be calculated in terms of gold?
I guess there won’t be any currency trade either. No more EUR/USD exchange rate, etc. Right?
I would find it more helpful if you would expand this statement to include why you think gold and dollars are not relevant to each other.
It seems to me that gold has been of value as a media of exchange more due to its NOT being manipulated (created out of air or printed on paper) which is in great contrast to other money ‘systems’ - especially printed money. Even electronic accounting (bank accounts, credit cards) has no limiting factors if it is not tied to something that can be ‘expanded’ at whim.
Jain
I don’t see why there is this fascination with using gold. Why not something more valuable, like platinum, so there is less to store? Or go with something like palladium? I prefer the idea of a platinum standard, myself.
This is not just a reply to Jonas, but an overall remark on this topic -
The reason gold has any ‘value’ is either in its use - jewelery (which is wearable storage basically) or for its great electrical conductivity (think computer chips) or such realities as it being so malable and pure vs. weight and alternatives. I believe that the reason it has had historic value as ‘money’ (media of exchange) is due to its ‘fudge factor’ being so difficult. Mankind seems to love to fool and fake each other out and this ‘game’ gets real serious when it comes to values like ‘wealth’!! So gold became the default ‘benchmark/standard’ by which one could measure exchange ‘values’. One could argue the use of the # of hours that a person has available to offer as a value exchange media, but we all know that such a measurement would be ‘flexible’ by several factors - age of person, that person’s ability AND willingness to produce etc. So gold, as a scarce and non-fake-able item developed into ‘THE’ benchmark by which the fudge factors could be minimized.
Jain
All these values can be attributed to any of the other precious metals. Most people talk about a “Gold Standard” just because of the history behind gold.
But I will conceed that there is more of a “mystique” around gold than something like palladium or rhodium. While rhodium is a LOT more expensive than gold on the global markets, you just try trading a troy ounce of it to some chicken farmer in the middle of nowhere.
Yep. Currencies used to be simply gold measurements, like miles versus kilometers.
Gold and silver are what the free market selected as money, before government became strong enough to force people to use unbacked fiat paper instead.
Other metals are just as usable as gold. If you owed me 1 ounce of gold, I’d accept 0.8 ounces of platinum instead (or whatever the appropraite ratio is).
When there are a few people hoarding nearly all the gold AND government violence demands people only use gold as money, then you can have distortions. It’s one thing to say “gold is my preferred method of payment”. It’s another to say “I DEMAND payment in gold and will use violence to prevent people from using other forms of money.”
If you don’t have a centralized authority controlling money, then money MUST be backed by tangible goods. Metal coins have advantages over other forms of money. Metal doesn’t spoil. Metal is fungible; every .999 purity one ounce coin is equivalent to every other such coin. If you trust the mint, metal coins can be quickly counted or weighed.
Also, hoarding gold is pointless, if you trust that the economic system isn’t going to collapse. You’re better off investing in tangible, revenue-producing assets instead of gold. In the present, all other forms of investment are heavily taxed, making gold very attractive. You can’t invest in land due to property taxes; you don’t get full allodial title. You can’t invest in stocks, because you can’t prevent the CEO from granting himself a lot of stock options or mismanaging the corporation. Metal coins are the ONLY investment where you can get true full allodial title.
It’s really simple - the current price of gold is not the parity it would trade at were a gold standard to be reinstated.
-Jon