I think people love to look for silver bullets (pardon the pun)—simple
policy prescriptions which have only benefits and no drawbacks. And the
reality is that if any such policies were actually even remotely viable
the “System” would inevitably begin to incorporate them. The fact is
that no major economies in the world use a gold or other precious metal
standard and for good reason. The primary reason is because precious
metals do not exist in the quantities required to offer a serious
alternative to paper currencies for the volume of financial
transactions that occur on the planet on a daily basis. There is NOT
enough gold on the planet.
There is about 1 trillion US dollar bills in circulation. The US annual economic activity (gross domestic product) is around 15 trillion US dollars. That’s right, the vast majority of all US economic activity is electronic. Even though printing money is relatively cheap there is simply no way to print enough money to make every transaction paper even if practically speaking, you desired to do so. Can you imagine buying a $1M house with $100 bills?
The amount of gold in the world is finite. Production simply has not grown in relation to the size of the world's economies. The annual worldwide production of gold is something like 50 million troy ounces per year. At recent record prices that is only 50 billion US dollars. The volume of new gold worldwide is no where near enough to support even US annual economic growth.
Now compare both of these numbers (US dollar bills and annual gold production) with annual worldwide economic growth. It is complicated to make an apples and oranges comparison but the world probably produces between 50 to 75 trillion USD per year in economic growth. I think you get the picture. There is neither enough gold nor paper currency on the planet to come anywhere close to accommodating global economic activity.
So then what if all nations returning to the Gold Standard drove up the price of gold to accommodate increased demand? In that event, then the value of gold has become less determined by its inherent store of value (e.g., use in manufacturing etc. which would soon be suspended due to the increased price) and more based on its arbitrary use as a currency. In effect, the new price would essentially render gold as a proxy for a very highly denominated paper currency. No you couldn't just print more of it, but you could revalue the gold you had by simply increasing demand. This demand would most often take the form of electronic gold-denominated loans. In effect we would be trading imaginary gold credits. And the primary determination of price would be based on your ability to repay. This is exactly the same situation we have today in US dollars.
And of course the Federal Reserve could issue trillions of dollars in gold-denominated bonds the same as they issue trillions of dollars in dollar-denominated bonds. This would be something similar to what is happening in Greece today where it is racking up otherwise sound Euro-denominated debt. If you want to reduce the country's ability to borrow money, switching to the gold standard seems a fairly convoluted way to accomplish that assuming that such was desirable in the first place--better to just pass new regulations for the Federal Reserve. In practice, countries should borrow money when times are tough as Obama in now and save money in times of plenty as the Republicans failed to do during the Bush II years.
There is about 1 trillion US dollar bills in circulation. The US annual economic activity (gross domestic product) is around 15 trillion US dollars. That’s right, the vast majority of all US economic activity is electronic. Even though printing money is relatively cheap there is simply no way to print enough money to make every transaction paper even if practically speaking, you desired to do so. Can you imagine buying a $1M house with $100 bills?
The amount of gold in the world is finite. Production simply has not grown in relation to the size of the world's economies. The annual worldwide production of gold is something like 50 million troy ounces per year. At recent record prices that is only 50 billion US dollars. The volume of new gold worldwide is no where near enough to support even US annual economic growth.
Now compare both of these numbers (US dollar bills and annual gold production) with annual worldwide economic growth. It is complicated to make an apples and oranges comparison but the world probably produces between 50 to 75 trillion USD per year in economic growth. I think you get the picture. There is neither enough gold nor paper currency on the planet to come anywhere close to accommodating global economic activity.
So then what if all nations returning to the Gold Standard drove up the price of gold to accommodate increased demand? In that event, then the value of gold has become less determined by its inherent store of value (e.g., use in manufacturing etc. which would soon be suspended due to the increased price) and more based on its arbitrary use as a currency. In effect, the new price would essentially render gold as a proxy for a very highly denominated paper currency. No you couldn't just print more of it, but you could revalue the gold you had by simply increasing demand. This demand would most often take the form of electronic gold-denominated loans. In effect we would be trading imaginary gold credits. And the primary determination of price would be based on your ability to repay. This is exactly the same situation we have today in US dollars.
And of course the Federal Reserve could issue trillions of dollars in gold-denominated bonds the same as they issue trillions of dollars in dollar-denominated bonds. This would be something similar to what is happening in Greece today where it is racking up otherwise sound Euro-denominated debt. If you want to reduce the country's ability to borrow money, switching to the gold standard seems a fairly convoluted way to accomplish that assuming that such was desirable in the first place--better to just pass new regulations for the Federal Reserve. In practice, countries should borrow money when times are tough as Obama in now and save money in times of plenty as the Republicans failed to do during the Bush II years.
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