Gold (and silver and other precious metals) was selected by the market (i.e. people) originally because it was divisible, durable, people liked it, store of value, etc. Paper currency came along to represent a weight of gold and in every example I can think of, the units were some fraction of gold (the dollar was about 1/20) so it was even more divisible. In this case, the dollar isn’t its own currency, but a representation of an equal amount of gold. I’m sure you know this I’m just pointing to the fact that precious metals were chosen as the best medium of exchange specifically because they facilitated trade best. I’ll get back to that in a moment.
As you correctly pointed out, in order to back the world economy (using $65T) with gold, it would be $6,500 an ounce. It’s not obviously though. IMO this is because gold is not legal tender. As valuable as it is, the government won’t accept it in taxes to my knowledge and that alone is the cause of a huge demand for dollars; dollars simply must be held and used.
Going back to gold being selected by the market, let’s say the economy grows by 10X but relative to gold, all other things being equal. If there were truly a free market in money I suppose 2 things could happen.
Case 1, gold would continue to be used, but the currency representing gold would be used much more and the government might even issue a new standard of weight even more divisible than the dollar. Instead of 1/20 of an ounce of gold, this new weight might be 1/1000 or something like that, so that way you still have gold backed currency but you keep divisibility. In practice, redeeming gold would probably be rare (even more so than now), and what may end up happening is that the gold coins would be devalued so that they could produce more of them (this is not inflationary since the metal in the coin is presumed to be of little value and the important part is the weight of gold in the coin). I suppose this is kind of a case within a case but to illustrate what I’m saying, if you debased gold coins so that they were only 10% gold instead of 100%, you would have 10 times as many but presumably at the same size as the other coins and worth 1/10. The whole point here is that there are ways of getting around the scarcity of gold IMO.
Case 2, the market phases out the use of gold for a more abundant commodity such as silver. Silver has typically been used in smaller transactions anyway, so it may take gold’s place as the leader of the pack so to speak, with let’s say copper taking silver’s old place, with perhaps an even more abundant and less valuable metal taking very small denomination transactions. The market will respond to whatever problems exist with a money by replacing it with something more efficient. In turn, government would accept in taxes (and pay out to employees and military personnel) whatever metal or commodity was most popular in the market place, rather than setting the money unit as it does now, and forcing the market to use it.
I absolutely believe that more than one asset or commodity should be included as legal tender, but not under the same unit of weight. For instance the dollar shouldn’t be defined as 1/20 of an ounce of gold and say 1/200 of an ounce of silver because these two metals fluctuate against each other, causing one to be overvalued at times and the other to be undervalued. In this case, the undervalued one (the inherently more valuable) would be driven out of circulation because people would recognize its value and not want to use it. You sell gold to the government at the government’s exchange ratio of $42.22. Instead, you would have “silver-dollars” and “gold-dollars” (we’ll assume a dollar represents 1/20 of the weight of something), thus as gold and silver fluctuate, by definition so gold-dollars and silver-dollars would fluctuate in exactly the same manner. silver-dollars would certainly be less valuable than gold-dollars, but they would each represent (always) 1/20 of an ounce of their respective metal.
I’m in favor of the government expanding legal tender laws to include precious metals and perhaps other valuable commodities and assets. I hope I’ve addressed most or all of your concerns. If anything doesn’t make sense obviously feel free to respond.
I think we could come up with a weighted basket of goods, actually backed by commodities on hand in a controlled environment. That would be more stable too, since any one commodity’s secular situation would not completely upset the entire monetary system (discovering 3X the gold in one go; Goldfinger irradiating it all, etc.)
I think we’re heading in the same direction. I just don’t want to end up in a world where I’m paid 1/10th of an ounce of gold for my year’s productivity. That is an unsustainable medium of exchange.
Dad? Is that you?
You sound just like my Goldbug Dad, who raised this Goldbug Girl. :)
Good reading, Thanks! :)