Gold
Standard Gold
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Precious
metals will always be the world's reserve currency. Even though nations
do not define their currency by their by their worth in, say, gold,
individuals will still buy gold to protect themselves from inflation.
The more money a nation's central bank pours into the economy, the less
valuable the dollar is, which means the price of everything else rises.
Seeing that the dollar is cheap, many individuals start to distrust the
national economy and instead of investing in dollar-making
opportunities like business expansion, they will buy gold. Unlike paper
dollars, gold isn't that easy to find or produce. When the central bank
prints so many dollars as to be nearly worthless, those who are able
will start to use gold as their currency. A gold standard would seemingly prevent inflation and a dollar collapse; more dollars would be printed up only as more gold is found. Greater production through the division of labor would cause prices of goods and services to fall, which makes them more affordable to more people, which expands markets. Each dollar we earn would make us wealthier, and each dollar we spend would get us more stuff. I don't know how we would restore a gold standard. Do we just start using the current world market price - a dollar is worth 1/730th an ounce of gold? What if that price is actually too low, and there's not enough supply of gold to meet the demand at that price? If you had $730 and wanted to buy an ounce of gold, but all the gold was already bought up, then gold is really worth more than $730/oz. This wouldn't be a gold standard, it would be gold price-fixing. And it does appear the price of gold is too low relative to supply and available currency. What if we divided the current supply of gold in Fort Knox and other U.S. government-owned gold, and divide it by the total number of dollars in circulation? Let's round the numbers and say the U.S. has over 8,000 metric tons of gold. That's around 17,500,000 pounds, and around 280,000,000 ounces. There are around $12,500,000,000,000 U.S. dollars in the world. That's around 45,000 U.S. dollars for every ounce of U.S. gold. Giving myself wide latitude for rounding numbers, any way you look at it gold would be worth tens of thousands of dollars per ounce, not $730. Let's consider instead all the gold ever mined, 125,000 tonnes. That's about 15 times more than the U.S. stock alone, so measuring the standard by the world supply would lead to about $3000/oz - four times the current market price. No wonder mainstream politicians aren't interested in going back to the gold standard. There's a tremendous discrepancy between the value of gold in the market, compared to the available currency and gold supply. While gold standard advocates say that our paper money is worthless, this isn't really true as long as almost everyone relies on it. If anything, going to the gold standard would destroy the dollar in fact; prices could "correct" themselves by rising 400%, 1200%, or more. If there is a smooth way to go back to the gold standard, I'd go for it. Short of that, government budgetary policy should a) prevent inflation, and b) make owning dollars more desirable than owning gold or other hard asset. Even if it remains a fiat currency attached to nothing but the faith of the people in it, it is still in everyone's interest to value the dollar. If we see the gold price go down, we will see greater investor confidence and a stronger economy. 9/24/07 |