So, I am trying to come up with a solid explanation of why there will always be enough gold to have a pure gold standard. Mostly I’m finding answers that say things like “prices will adjust to the level of gold in the economy”. This seems a little lacking to me.
There surely must be a certain number of units of currency in circulation for an economy to survive, whatever their value. If say, gold were divisible down to the atom, we would be fine. However, I can imagine an island with 100 people and only say 2 units of currency in circulation. The “flow rate” of this currency would be very slow. You would have to wait for one person to spend a unit of currency, before someone else could spend it. Yes other commodity currencies would pop up, but then it wouldn’t be a gold standard economy. It might be a sea shell based economy.
Well how about 10,000 units of currency for those 100 people? Even if those 10,000 units of new currency had the same value as the 2 units of the old currency, there would be better “flow” right?
So what is the middle ground? I don’t care about the “well we could switch to additional metals” answer. I know that. My point is, are there enough divisible units of gold to maintain some flow in our economy?
I, too, would like to know why you believe an adjustment to purchasing power seems a little lacking. A market can choose any commodity as money, you’ve pointed that out. But gold is a proven winner. It meets all the necessary criteria of money, and it meets each of these criteria in an excellent manner.
If gold’s purchasing power was reduced to two atoms in exchange for, say, a new car, then gold would have been rejected as money long before becoming that “scarce”.
So what is the basis of your rejection of market adjustments to purchasing power (or exchange value)?
“My point is, are there enough divisible units of gold to maintain some flow in our economy?”
have you looked to get an estimate of current bullion and cons stocks???
the 73-year-old Fort Knox vault. Its glittering gold bricks, totaling 147.3 million ounces…
i think that would be about 4.5 billion grams of gold there alone. quite a bit of gold in peoples homes and safe deposit boxes etc.
if a 2.5 gram coin, about teh weight of a dime was created that would mean about 2 billion coins at about a 2.5 gram mass.
they could probably be made wiht less gold and more alloy…maybe 3 billion coins as a happy medium.
i gues there are about 350 million people in the us. about 8.5 coins per person…and many people, infants etc dont even use money.
to teh extent that the coins would actually trade hands it is probably doable. to the extent that the gold would mostly sit in bank vaults scattered across the vast us and electronic claims of digi-grams that coudl also occur i suppose.
but i dont think gold by itself has ever been the only money.
i dont know how you calculate the current dollar supply. if you think it is 5 trillion dollars …at 4.5 billion grams i guess you might have the gram at near 1200 dollars of current purchasing power.
Yes, Liberty Student, I am asking for an answer but i’m not sure what I want.
My view with the “prices will adjust” answer is that it seems like a bunch of hand waving to a non-austrian. I understand how prices will adjust based on the scarsity of gold or other commodities. I’m also not interested in what will happen if we switch to a gold standard from a fiat currency. I’m interested what will happen year after year if we already are on a gold standard. What happens as the population increases? What happens as the economy grows?
I’m looking for a “so you have this desert island, and you have 10 people on this island…” kind of walk-me-through-it answer. =P
Or you could stop worrying about what “we” would/could do and let the market decide? Repeal legal tender laws and capital gains taxes today and see what media emerges in the market to compete with fiat money. The practicality of gold has been there BEFORE it was legitimized by kings and empires as a “currency”. If gold ever becomes problematic, other media will certainly arise from the market. If enough market agents liked the beach, even a day’s rental of a beach condo could also become a currency. If security becomes scarce (valued), bullets could also become a currency. If food becomes scarce (valued), wheat could also become a currency. If internet access becomes scarce (valued), 1hr internet access may also become currency.
Why even bother predicting what would/could/should become a medium of exchange when markets can do that job much, much better? And what exactly is the “risk” in letting them do so?
What happens as a population increases and the economy grows? First I would like to make the point that the burden of proof on the issue of hard v. fiat currency is own those advocating fiat currency since their failing experiment is still very young. But on to the discussion…
The issue of population increase relative to the money supply is not an argument that really holds water, but stick with me on this for a second… The population of Europe began to greatly expand in the 14th and 15th centuries due to advances in the productive capacity of farms. With this increase in farm productivity it meant less people had to farm so cities became larger as people moved in search of a higher standard of living. This brought about a growth in the division of labor bringing more efficiencies to the economy leading eventually to the explosion of science, and to the industrial revolution. These increases in productivity and the advancements of science brought about a healthier and wealthier population. It is very important to realize that the population was not wealthier because they necessarily had more gold and silver. They were wealthier because of the gains in productivity that were brought about by the industrial revolution. People now had access to goods and services that perhaps a few decades earlier only kings had access to. The industrial revolution brought huge productivity gains to areas of the economy including mining and this trend is still carrying itself out as we are still discovering new mines and even retapping old mines to access precious metals (and industrial metals) that we could not access 100 year ago with the technology of the time.
According to USAgold.com total gold production per year is 80 million oz. per year. According to the Mineral Information Institute there is an estimated 100,000 tons of gold yet to be extracted. Who knows how much gold is yet to be discovered yet! Keep in mind that only 160,000 tons is estimated to have been mined in all of human history of which the vast majority is still in existence since it is not consumed like most other metals are.
Basically I would say you could expect gold production to remain stable as productivity in general increases. Remember it is gains in productivity and efficiency that contributes to the wealth and health of a society and not the amount of gold/silver in existence. So the amount in existence really isn’t that critical of an issue. Gold is simply the medium of exchange. Nothing more, nothing less. But a medium of exchange is useless if it cannot be held with confidence as is the case with fiat currencies. When there is fear of a currency plunging in value then people will began to throw their money into various ventures to grow the money faster then inflation leading much money to be thrown into wasteful unproductive ventures and speculative investments. Like I said, when it comes to money history is on our side and the burden of proof is on the advocates of fiat money.
That was the most explanative answer yet. It got my brain thinking and I made up a little chart to help me out. As a group becomes more efficient at production year after year, a fixed money supply ensures that everyone within the group becomes more wealthy. In other words, prices are allowed to decrease, as they should, as people become more efficient and can produce more goods. This in turn makes the “money” worth more. Anyone holding this money (in any quantity) becomes richer (i.e. can buy more goods than he can before).