Best of the Week
Most Popular
1. TESLA! Cathy Wood ARK Funds Bubble BURSTS! - 12th May 21
2.Stock Market Entering Early Summer Correction Trend Forecast - 10th May 21
3.GOLD GDX, HUI Stocks - Will Paradise Turn into a Dystopia? - 11th May 21
4.Crypto Bubble Bursts! Nicehash Suspends Coinbase Withdrawals, Bitcoin, Ethereum Bear Market Begins - 16th May 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.Cathy Wood Ark Invest Funds Bubble BURSTS! ARKK, ARKG, Tesla Entering Severe Bear Market - 13th May 21
7.Stock Market - Should You Be In Cash Right Now? - 17th May 21
8.Gold to Benefit from Mounting US Debt Pile - 14th May 21
9.Coronavius Covid-19 in Italy in August 2019! - 13th May 21
10.How to Invest in HIGH RISK Tech Stocks for 2021 and Beyond - Part 2 of 2 - 18th May 21
Last 7 days
UK Energy Firms Scamming Customers Out of Their Best Fixed Rate Gas Tariffs - 23rd Sep 21
Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Should School Children be Jabbed with Pfizer Covid-19 Vaccine To Foster Herd Immunity? - UK - 23rd Sep 21
HOW TO SAVE MONEY ON CAR INSURANCE - 23rd Sep 21
Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
Trading Crude Oil ETFs in Foreign Currencies: What to Focus On - 22nd Sep 21
URGENT - Crypto-trader event - 'Bitcoin... back to $65,000?' - 22nd Sep 21
Stock Market Time to Buy the Dip? - 22nd Sep 21
US Dollar Bears Are Fresh Out of Honey Pots - 22nd Sep 21
MetaTrader 5 Features Every Trader Should Know - 22nd Sep 21
Evergrande China's Lehman's Moment, Tip of the Ice Berg in Financial Crisis 2.0 - 21st Sep 21
The Fed Is Playing The Biggest Game Of Chicken In History - 21st Sep 21
Focus on Stock Market Short-term Cycle - 21st Sep 21
Lands End Cornwall In VR360 - UK Holidays, Staycations - 21st Sep 21
Stock Market FOMO Hits September CRASH Brick Wall - Dow Trend Forecast 2021 Review - 20th Sep 21
Two Huge, Overlooked Drains on Global Silver Supplies - 20th Sep 21
Gold gets hammered but Copper fails to seize the moment - 20th Sep 21
New arms race and nuclear risks could spell End to the Asian Century - 20th Sep 21
Stock Market FOMO Hits September Brick Wall - Dow Trend Forecast 2021 Review - 19th Sep 21
Dow Forecasting Neural Nets, Crossing the Rubicon With Three High Risk Chinese Tech Stocks - 18th Sep 21
If Post-1971 Monetary System Is Bad, Why Isn’t Gold Higher? - 18th Sep 21
Stock Market Shaking Off the Taper Blues - 18th Sep 21
So... This Happened! One Crypto Goes From "Little-Known" -to- "Top 10" in 6 Weeks - 18th Sep 21
Why a Financial Markets "Panic" May Be Just Around the Corner - 18th Sep 21
An Update on the End of College… and a New Way to Profit - 16th Sep 21
What Kind of Support and Services Can Your Accountant Provide? Your Main Questions Answered - 16th Sep 21
Consistent performance makes waste a good place to buy stocks - 16th Sep 21
Dow Stock Market Trend Forecasting Neural Nets Pattern Recognition - 15th Sep 21
Eurozone Impact on Gold: The ECB and the Phantom Taper - 15th Sep 21
Fed To Taper into Weakening Economy - 15th Sep 21
Gold Miners: Last of the Summer Wine - 15th Sep 21
How does product development affect a company’s market value? - 15th Sep 21
Types of Investment Property to Become Familiar with - 15th Sep 21
Is This the "Kiss of Death" for the Stocks Bull Market? - 14th Sep 21
Where Are the Stock Market Fireworks? - 14th Sep 21
Play-To-Earn Cryptocurrency Games Gain More and Is Set to Expand - 14th Sep 21
The CashFX TAP Platform - Catering to Bull Investors and Bear Investors Alike - 14th Sep 21
Why every serious investor should be focused on blockchain technology - 13th Sep 21
SPX Base Projection Reached – End of the Line? - 13th Sep 21
There are diverse ways to finance the purchase of a car - 13th Sep 21
6 Tips For Wise Investment - 13th Sep 21 - Mark_Adan

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

New Gold Standard, Gold Bugs Love It, But is Just a Dream

Commodities / Gold and Silver 2012 Sep 11, 2012 - 11:48 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticleMartin Hutchinson writes: Thanks largely to Ron Paul, the Republicans have suddenly become enamored of gold.

And why not?...It is real money.

These newly-born gold bugs have even gone so far as to include a call for a commission to examine a return to the gold standard in the party platform.


Needless to say, we've come a long way since President Richard Nixon "closed the gold window" in 1971. Forty-one years, and a few financial disasters later, the debate has begun anew.

But it begs the question: How would the gold standard work?

What's more, what would the economic implications be, and is it likely to happen or is it all just a gold bug's dream?

In ancient and medieval times the answers were quite a bit more simple. Since there was no real banking system, there was also no argument.

Kings coined money with gold, silver, or copper, and the people accepted the money at a price based on its metal content. The idea of taking paper instead would have been thought of as sheer madness.

Only in China, an isolated and stable society, was paper money used during the Song Dynasty of the 10th through 13th centuries, but even there the Mongol invasion and fall of the Song regime caused the paper money system to collapse.

Paper money backed by gold only became possible once modern banking got going in Europe in the 16th and 17th centuries.

In fact, the British Gold Standard was devised in 1717 by no less than Isaac Newton, then Master of the Mint. Other countries soon joined Britain in linking their currencies to gold, including the United States from 1878 until its abandonment in 1933.

Of course, countries claimed to be on a gold standard under the Bretton Woods Agreement from 1944-71, but gold was only exchangeable between governments. Indeed, holding gold was prohibited in the U.S. for private individuals.

But inevitably, the Bretton Woods monetary system itself became manipulated and collapsed in inflation.

That brings us to today....

The Problem With the Gold Standard

As I see it there are two problems with instituting a new gold standard.

First, gold supplies can only be increased by around 1% annually, if that. Currently, the annual new supply of gold is around $200 billion worth, compared to a gold "stock" of about $9 trillion worth. That means the expansion rate of gold in circulation is only about 0.22%.

However if world population increases by 1% annually and global economic growth averages even 2%, the need for money expands by 3%, minus any increase in its "velocity."

That makes a gold standard impossibly deflationary - which is why the system collapsed after 1900, as population growth accelerated. Currently annual global population growth is around 1.1%, far too fast for a renewed gold standard.

The good news is that population growth is slowing. By about 2039 it will fall below 0.5% annually, the growth rate in the second half of the nineteenth century. So if we want a gold standard we may have to wait for it.

The second problem with a gold standard is the existence of central banks and the banks themselves.

This is best illustrated by the pitiful performance of the Fed from its 1913 inception until 1933, when it is generally held to have greatly worsened the Great Depression by getting the money supply completely wrong.

Banks overleveraged during the 1920s (while the Fed kept interest rates too low) then were forced to deleverage after 1930, which reduced the money supply sharply even while the volume of gold in circulation was constant.

The Bank of England, in existence since 1694, from time to time caused similar problems, but tight British regulation of bank leverage during the nineteenth century kept crises under control.

The solution is to run a "free banking" system with no central bank (or bank deposit insurance), which existed in the United States only between 1837 and 1862 (after 1862 the Treasury-issued banknotes and leverage rose.)

After a few panics and crashes, this would put the fear of God into the likes of Citigroup (NYSE: C) and JP Morgan Chase (NYSE: JPM) and leverage throughout the banking system would decline to a level at which crashes did not occur.

However, given the current U.S. demand for loans and transactions, this would be extremely expensive in capital - the banks would have to keep at least 10 times their current capital ratio of roughly 3% of assets.

Meanwhile, loan rates would also need to increase, as would the fees for credit card payments, etc. Some of this excess demand could be accommodated by "shadow banks," such as money market funds and securitization vehicles, but these, too, would have to be run much more conservatively than at present.

Better Than a Gold Standard

So realistically, it's pretty unlikely that the U.S. will ever re-adopt the gold standard, both because of the cost and because of the vested interests opposed to it.

Only after a currency collapse like that of Germany's Weimar Republic would confidence in paper money be shaken to such an extent that gold might be the only alternative.

However most of the benefits of a gold standard can be attained without actually moving to one.

The Fed's dual mandate to control both inflation and unemployment should be narrowed to a single mandate, to control inflation. A Fed chairman like Paul Volcker should be chosen who manages monetary policy through allowing only a low rate of increase in the major money supply measures - a policy Alan Greenspan abandoned in 1993.

By this means, interest rates would be forced up until they were comfortably above the inflation level, so that savers achieved a proper reward for the time value of their money.

As a result, U.S. savings would be rebuilt, the current drain of U.S. capital overseas would be reversed, there would once again be more capital available to support the U.S. workforce, and true prosperity and full employment would return.

If Republicans were serious about sound money, that would be the place to start.

But first, we have to get rid of Ben Bernanke!

Source :http://moneymorning.com/2012/09/11/gold-bugs-love-it-but-a-new-gold-standard-is-just-a-dream-for-now/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in