The True Gold Standard (Second Edition)
We’re not running out of gold. And perhaps one day, we will run out of myths about the gold standard. One of the most prevalent myths is that there is not enough gold around to support a gold standard in today’s complex economic markets.
“Is there enough gold in Fort Knox to return to a god-redeemable dollar at the current price of gold?” asked George Mason Professor of Economics Lawrence H. White at the Cato Monetary Conference in November. “Yes,” he answered. “At a market price of $1600 per fine Troy oz. (To choose the low point of the last 30 days) the US government’s 261.5m ounces of gold are worth $418.4b. Current required bank reserves are only $83b. Looked at another way, $418.4b is 19.9 percent of current MA (the sum of currency and checking account balances), a more than healthy reserve ratio by historical standards.”
White continued: “Combined with the likelihood that US citizens’ hedging demand for gold will shrink by more than banks’ reserve demand will grow with larger real demand for M1 balances, I expect that the denationalization and remonetization of the US bullion stock at the current price would allow the US economy to export some excess gold.”
The production of gold is never constant in any one place. Production in South Africa, for example, has dropped off considerably since the 1980s while production in China has risen dramatically. Indeed, China is now the world’s biggest producer of gold.
But remember, Christopher Columbus left Spain in 1492 hoping to find gold. He landed on the island of Hispaniola where he was disappointed to find no gold. Now, companies like Barrick and Everton Resources are active in gold mining there. It may have taken more than five centuries, but gold is still worth looking for. A new book, Cities of Gold by Bill Yenne, details how the pursuit of gold drove exploration by Europeans of the New World.
Still, there are fits and starts in gold exploration and production. For example, an American company Newmont, which was planning a big gold mine operations in Peru, recently decided to stop the project because of protests.
But the pursuit of gold goes on. Even in the United States, new opportunities for gold mining are appearing. Recently, Harriet McLeod reported for Reuters: “A Canadian mining company and a tiny South Carolina town are leading what could be a modern gold rush to the southeastern United States.” This in a mine where gold was first found in 1827.
Nearly two decades ago, Lewis E. Lehrman gave a speech at Hillsdale College in which he said: “Over the long run, production statistics show that the values of the supply and demand for gold are stable. The alleged volatility of the price of gold is a curious inversion of the truth. It is not gold which is unstable. On the contrary, the steady long-run value of gold is recorded today by the extraordinary and unstable fluctuations in the value of paper and credit and money.”
So true. Still true. We’re not running out of gold. We’re running out of excuses not to return to the gold standard.
Oct 20, 2014
Lawrence H. White is an economics professor at George Mason University who teaches graduate level monetary theory and policy. Lawrence White As described by the Wikipedia, "White earned his BA at Harvard University (1977) and PhD at the University of California at Los Angeles (1982). Before his current role at George Mason...
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Key Monetary Writings
In October, the Royal Swedish Academy of Sciences awarded the Nobel Prize in Economics to Robert A. Mundell.
Why the Gold Standard?