What Price Gold in a Gold Standard?|
September 28, 2010
This article was originally printed in Numismatic News.
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Asking whether the U.S. dollar should be backed by gold prompted many reader responses to our poll. Dealer Steve Album very thoughtfully did some calculations. He concluded there isn’t enough gold.
“According to the Federal Reserve M1, current number of dollars is about 1.75 trillion. After doing the calculation, I found that at the current gold price of about $1,280 per ounce, we would need about 48,000 to 50,000 tons of gold to back up all the dollars. That is about one-third of the amount of gold that has been mined since ancient times, about 150,000 tons according to an article that appeared in The Economist a few months ago.
“There is absolutely no way any government could acquire that much gold. The alternative would be for the price of gold to rise to something like $5,000 per ounce, at which point only about 350 million ounces would have to be stashed in Fort Knox. No wonder the goldbugs are hungry for the gold standard. But if we take the M2, then we are talking about 8.65 trillion dollars.” Those are very large numbers.
Readers who suggest there is enough gold do so on the basis that we simply set gold’s price at $10,000, or even $30,000, as one reader did. Certainly anyone who buys gold at today’s $1,280 would love to see an official price set at $30,000.
I’ve decided to jump into the numbers game this week, too.
During the classic operation of the gold standard before World War I, what was required was that all government paper money be exchanged on demand for the official amount of gold each note represented.
Now the economy of the period was almost as sophisticated as the current economy. Banks made loans. People wrote checks. Credit was extended (maybe not with modern debit and credit cards) but certainly with merchants running tabs for customers that were settled later. Bank loans were not backed by gold in the sense that there was gold sitting in a vault covering the money lent. Checks were not backed by gold. Private credit was not backed by gold. Only paper money was backed by gold.
Currrent U.S. paper money outstanding totals $952 billion (M1 includes checking accounts). Whatever gold there is has to add up to $952 billion with 100 percent gold backing. The U.S. official gold reserves are 261 million troy ounces. To make them worth $952 billion would mean an official price of $3,647.51.
In 1968, near the last point that the gold standard was functioning, it was called the gold exchange standard because of all countries, only the U.S. had to exchange its notes for gold (others exchanged their paper for U.S. paper money).
That was the year the Congress repealed the requirement that there be 25 cents in gold for every $1 note issued. Such a backing requirement implies that a successful gold standard can be operated by the United States with its present resources at an official price of $911.88, though to start off at the lowest point possible probably would not generate confidence that it could work.
However, the $911-$3,600 range shows that whatever reasons there are not to adopt a gold standard, the quantity of gold is not one of them. It is a matter of will and a question of price.
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• Strike It Rich with Pocket Change, 2nd Edition
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On September 29, 2010 Michael Snow
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