Dispelling the insufficient quantity of gold myth

This post will be necessarily incomplete. The topic of money, of a medium of exchange, of how money comes to be, what transforms a good into a medium of exchange (or money, these words are interchangeable) etc. is not something that is taught or understood by most, and I can not give it a proper treatment in one blog post. I do want to attempt to address one specific fallacy, namely that a gold standard would not work because there is not enough gold available, or it does not grow rapidly enough to support our modern economy.

The quantity of a good is totally irrelevant (within reason) to it being feasible as a medium of exchange. Especially given the technology of the present day, quantity is even less relevant than it was previously. All that is necessary to deal with a static supply of money and an ever growing economy (and the corresponding goods & services that it produces) is the use of a decimal point. If today 1 gram of gold ($60) is sufficient to buy a week’s worth of groceries, with a growing economy and a frozen supply of money, over time the cost of goods fall. Or to say the same thing, the purchasing power of money rises. So instead of needing 1 gram, let’s say in 50 years time it only costs 0.1 gram to buy the same amount. And so on.

By the way, this is what led to the advent of silver as a money alongside with gold. As the supply of gold is much smaller than that of silver, it has significantly greater exchange-value as money than does silver. For our purposes let us say that silver has 0.01 the value of gold. This pushes the decimal point back in the sense that a good that costs 0.01 grams of gold can now be purchased with 1 gram of silver. Or a good that costs 0.0001 grams of gold, a more manageable 0.01 gram of silver gets the job done. But all these physical problems of chopping an amount of gold or silver to a small enough level to deal with daily purchases as the price level continues to decline, due to a static supply of money, are immediately eliminated with the technology available to us today.

Naturally, in physical transactions it is likely that gold certificates (or paper dollars) would most likely be used, as opposed to carrying the actual gold around with you. So banks or gold warehouses could store the bulk of your gold and you could issue paper gold receipts in any denomination you like, which that party can exchange for gold from the warehouse. Online transactions make things even easier and to demonstrate the application of this theory, you need only visit http://www.goldmoney.com/ which facilitates the use of gold as money – all digitally.

We tend to have a hard time visualizing this because we have all lived under an aggressively inflationary monetary policy that continually increases the supply of money faster than the corresponding demand for cash balances and/or economic growth. This has produced the continual and perpetual rise in prices year in and year out. Or again, has decreased the purchasing power of our money. The more dollars created, the less value each one has. The less goods and services one can obtain when trying to exchange these recently-diluted dollars. For roughly the first 150 years or so this country was on a gold standard, the price level tended to remain stable, despite occasional fluctuations. This is because the supply of gold is not frozen, it actually grows by about 2-3% a year, which offset the decrease in prices a growing economy bestows upon the people, and resulted in a roughly stable price level.

I mean to really drive the point home, we can imagine everything as the same. Forgot gold, let’s keep everything in US dollars. The only difference is the printing-press is permanently broken, or even better, 90% of all dollars disappear overnight! And there is no way to increase the supply of dollars. (Yes I know this is crazy, but it will demonstrate my point) So in this scenario where the supply of money has literally been decreased by 90% and there is no way to increase it, how will dollars function as a workable medium of exchange going forward? Well, all that has happened with this tiny stock of money is that each unit has increased its purchasing power by a factor of 10. So pennies (which is just another way of saying 0.01 dollars) will have the purchasing power of what dimes did the night before.

Let’s fast forward 100 years and the economy has grown so much more but our tiny supply of US dollars hasn’t grown one bit since that night we destroyed 90% of all dollars. Well as economies grow, they get more efficient at producing stuff and prices fall. So now we are in a situation where let’s say pennies have gained so much more purchasing power they are equivalent to what $100 can buy today. So how will someone buy something small, like say a bottle of water that costs only the equivalent of $1 today? They’d simply pay 0.01 pennies. Perhaps they would create a new denomination of dollars called “super-pennies” that instead of being worth 0.01 dollars, are worth 0.0001 dollars, instead.

All we are doing is going the opposite direction of needing a $10 bill to buy what $1 could 20 years ago, or a billion dollars to buy what a million could 50 years ago. So hopefully, I’ve demonstrated that with either a commodity money (gold) or a fiat money (US dollars) the total stock of money does not have any bearing on whether or not it makes for a suitable money. I mean if gold was workable as a money for 5000 years before computers and electronic banking made possible a virtually limitless ability to produce ever smaller and smaller denominations, whether or not you are in a favor of a return to gold, or a free market in money more generally (much better choice), one argument that can not be used against gold as a medium of exchange is that there simply isn’t enough of it to go around.

(I would be remiss to not include resources for a proper explanation of money. It is one of the most important and most misunderstood concepts in society today. The greatest thing ever written on money remains Ludwig Von Mises’ The Theory of Money & Credit. As that work is rather difficult to approach, I would recommend What Has Government Done to Our Money? by Murray Rothbard as a more suitable introduction.)

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