I don’t claim to fully understand the economic rationale behind the fierce arguments in the US at the moment regarding gold-backed currencies. A number of very smart people have weighed in on each side. The point I wanted to make is a bit different though; it likely is not original, but I can’t find a source right now.
The following info is from Wikipedia, and is from 2009 (I updated some of the math for the current – May 2011 – price of gold):
- Total gold mined in the entirety of human history – 250,000 tons
- Amount still in existence – around 85% of that (212,500 tons)
- Percentage used in jewellery – 52% (110, 500 tons)
- Percentage held (in 2009) by all central banks – 18% (38,250 tons)
- Quantity of proven reserves in the ground, world-wide – roughly 50,000 tons
- Current value of all of the gold in the world (at $1500/oz) – $7.5 trillion USD (somebody please check my math – I only do metric measures!)
These are from a variety of places:
- US GDP in 2011 – approx $15 trillion USD
- World GDP in 2011 – approx $68 trillion
- Total US currency in circulation (M1 value, excluding things like Euro-dollars etc etc) – approx $2 trillion (as of April 2011)
- Total value of everything in the world – highly subjective, but estimates range from the low quadrillions of dollars up to hundreds of quadrillions of dollars
- Assuming a proportion like that of GDP, the total value of everything in the US is probably at least one quadrillion dollars, possibly a lot more
The point of the above – there just isn’t sufficient quantity of gold (or any other “valuable” metal) to even come close to securing the implicit value of “stuff”. It would be like trying to anchor a cruise liner using a small brick tied to a string.
I get the reasoning of the people who want to return to the gold standard. They’re looking for security – a port in the storm, if you will. There’s a certain nostalgia involved as well. An image of grizzled miners carrying bags of gold dust, and prosperous horse-and-buggy lined streets where business was done on a handshake and personal trust.
There’s really only two ways this could be accomplished though:
a) reduce the amount of value in the world (by several orders of magnitude);
b) dramatically increase the value of gold (which would be extremely annoying for anybody trying to use it for one of its commodity purposes – like circuitry or jewellery or gold teeth). Option “b” likely also implies going around the world and forcibly relieving it of its decorations.
I’m leaving option “c” (somehow create a lot more gold) out of the picture for now. There’s ways that can happen, but not any time soon.
With regards to the first point above – I would argue that the size of the global economy (and particularly our markets) is actually much too small, rather than too large. You can visibly see the effect of this scaling issue any time a institution of any real size decides to unwind one of their equity positions – all the Wall Street traders run for cover until the elephant has left the room. The only way we’re going to ever get beyond this is with much larger existing markets, more equity, more companies, orders of magnitude more trades, and – one of my favourite topics – new markets entirely.
Oh c’mon… do you have some secert of alchemy (option “c”) you’re holding out on?
Not that I’m willing to disclose publicly, no. nnI think making more gold for any reason other than to use it for commodity purposes is a fool’s game in any case. No point coming up with thousands of tons of the stuff if somebody is just going to lock it away anyhow. Much better to pave the streets with it.
If you could make enough to pave the streets then people would just pick some other resource to back currencies… platinum, maybe, or something rare and not cost-efficient to synthesize (if even possible).
That’s sort of the point that the BitCoin crowd are trying to make – they’re using CPU cycles (in the form of heavy encryption) as their basis. nnHowever, CPU cycles are terribly wasteful too – both in the electricity cost and in the opportunity cost of the other useful things that the CPUs could be using. In addition, the quantity of electricity involved (and number of CPUs or GPUs needed) in order to make quadrillions of BitCoins is probably an indication that it doesn’t scale.nnAs an experiment it clearly shows that there’s validity to the notion that the fundamental basis of value could be many things though. nnI’m intending to write more on this topic, so stay tuned. I want to lay down a challenge to the cryptocurrency crowd, because I think they’re onto something.
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