Under Gold standard, Rothbard says that the value of dollar will be defined in terms of Gold, and will be fixed for ever. What will happen when new gold is mined out? Won’t the value of dollar in terms of gold come down?
(Read “The Case for A genuine gold dollar” in “The Gold Standard”, and Gold Vs. Fluctuating Fiat Exchange Rates")
JIm Cox says : “No, the ratio, say $20 / 1 oz gold would continue but more gold brought forth would just mean gold would be less valuable compared to all other goods. So a gold necklace would be cheaper, for instance.”
It is not “fixed” in that sense. The dollar just becomes an equivalent to a measure of weight. Instead of talking in ounces or grams, we’ll talk in dollars but then the dollar must be defined at some fixed amount of ounces.
Yes, but the “dollars” now represent a quantity of weight. So if you define $1=10 oz of gold, and you dig out 1000 oz of new gold, then the money supply will increase by $100. That is all.
If, say, $ 1000 equates to 1 oz of gold, that’s it, no matter how much gold is circulating. You can walk into any bank with $1000 in bills and they will give you 1 oz of gold. Now, quite a bit of gold is mined each year all over the world. Not all of it would be used as a currency and not all of it would end up in Uncle Sam’s hands. The US government would need to purchase more gold from mining companies, privates and/or other countries to increase its own stockpile/money supply. It would have to compete for it with privates, other governments, jewelers etc. The yearly increase would probably be minute, if any.
And that’s precisely the point of a 100% gold standard. Gold cannot be created out of thin air. Yes, stocks are bound to increase over time but they increase so slowly and so minutely as to make gold an inherently stable store of wealth.
Yes, but mining gold is costly. Instead printing paper or even better adding electronic 0’s to an account is very cheap and easy.
Using a commodity as money you make sure you are not under the control of any person who decides randomly (or not so randomly) the value of your money. If you go to history you will see that the money people start use is a rare commodity, because they are sure it will keep the value. Everytime the goverments takes over the money supply and tries to impose a non-commodity standar its because it wants to inflate. That is why a fiat standar will allways be a lot more inflationary than any commodity standar. In fact, a commodity standar inflates so slowly (because mining is hard) that prices goes down because of increase of productivity. And the contrary under a fiat standar, prices go up.
The value of banknotes and the value of the commodity backing the banknotes will fluctuate independently (but would remain almost exactly 1:1 in a free banking system). Banknotes can increase in value while the commodity decreases in value and vice-versa. The reason is that the purchasing power of the banknotes and the commodity are functions of their respective supply and demand curves. People can have a decrease in demand for the backing commodity with a simultaneous increase in demand for banknotes backed by that commodity… i.e. a flight from hard money to paper. The reverse can also happen (e.g. during bank runs). Also, the supply of banknotes and the commodity backing are independent… if I supply 1,000,000 banknotes which represent 1 oz. of gold each and never print another note (and have 1,000,000 ounces of gold backing them), as the gold supply increases, the supply of these notes remains fixed so that increases in demand for the banknotes will not be offset by the increase in the supply of gold. This would be reflected by a discount rate on the notes so that 100 1-oz. banknotes buy 101 gold coins, for example. This discount rate is what gives banks an incentive to issue more notes… after all, they can exchange the notes for more than 1:1 backing*. Conversely, if the supply of gold falls or demand for gold soars (relative to demand for gold banknotes), one banknote may not exchange for a full ounce of gold, leading the (honest) bank to have an incentive to buy back its notes since it will have gold on hand to buy more of its notes than it issued in the first place, with the same amount of gold. This would be like a bank-sponsored bank run, where the bank is going into the market to buy up its own notes with gold. Since more notes would be taken out of circulation than gold backing would be removed, the bank would always be in a right-side-up status regarding backing for its banknotes.
Clayton -
*I am assuming there exists a paper-commodities market where the bank can go and exchange the backing commodity with newly printed notes - the bank is not, strictly speaking, “buying” the commodity. The bank is really arbitraging its own currency and expanding or shrinking its reserves in response to market demand for its notes. Since each note is a title to one ounce of gold, the bank is free to hold its increases from arbitrage as profits.