The Gold Standard, Part 6

This entry is part 50 of 50 in the series 2011A

One thing I have not seen addressed by gold standard advocates is all the repercussions it would have on modern living if we went back on it in one form or another.

They look back at the supposed halcyon good old days and pick the best parts of historical periods as good things to return to, but often overlooked is the fact that many ingredients of modern civilization just did not exist back then.

In the days of the gold standard we lived pretty much like the Amish as far as technology goes.  Now the Amish have some positive ingredients to their way of life, but how many of us want to live the way they do with horse and buggies and no electricity or Internet?  If we were only prepared for the Amish ingredients of living then it would be tough living in New York City.

Even so, any monetary standard we have today must accommodate modern day living standards and conveniences unless we are planning to join the Amish standard of living.

To see the point here let us examine different gold standard plans and see if they could fit in modern civilization.

Plan One
Some are proposing a private money system based on gold or other metals or commodities. Many want a gold only standard to eliminate the past problems associated with bimetallism. They want no fiat money whatsoever and every dollar to represent a dollar’s worth of pure gold.

Under this plan anyone could coin or issue their own money if they had some gold.  It seems pretty simple.  If you want to buy something from a merchant you just give him some gold.  Now the problem with this is many purchases are for small amounts.  If you wanted to buy $5.00 worth of goods you would only need to exchange a 280th of an ounce of gold, about the size of a grain of sand.

Since this is very impractical they recommend private warehousing of the metal.  The warehouse would work something like a bank except they do not issue fiat money nor do they make loans secured by your gold deposits.  They would make money by charging you for storing your physical gold and providing warehouse receipts that you basically use as paper money secured by gold.  You can use these receipts like a checking account and thus you can write a $5.00 check to purchase a small amount of merchandise. Another idea is to set up gold accounts on the Internet that work something like Paypal.

I haven’t seen a plan for using small change.  Maybe they would suggest private companies create their own coins of cooper or silver for this purpose.   The trouble with this is several hundred private issuers of diverse coins could create confusion, especially for elderly people who may be easily confused by the complexity of the many types of coins.

So, if we put the coinage problem on the table would the use of either gold coins/bullion or warehouse receipts work in today’s world?

First, let us look at the practicality of using pure gold coins or bullion.

In the days that the U.S. coined gold we had four denominations.  There was the Quarter Eagle worth $2.50, the Half Eagle at $5.00, the Eagle at $10.00 and the Double Eagle, containing just over one ounce of gold, valued at $20.00.

As of this writing with the value of an ounce of gold at over $1400 the face value would be 70 times these amounts so the $2.50 coin would be valued at $175 and the one ounce coin would be $1400.

If we used actual gold coins as a major source of exchange we would have the same problems that we did in our early history, but more so.  Here are some of them.

(1) Theft.  Anyone known to be carrying around any amount of gold on his person was in danger of being attacked and robbed and those known to have a stash in their homes were in danger of being burglarized. Even putting it in a bank wasn’t safe for there was no deposit insurance in the old days and a bank robber could take your life savings. Most everyone who carried gold on his person or stored it in his home was armed and prepared to defend himself – even in England and Europe.

If we went back to this gold standard today and most people carried gold on their person or stored it would they be any safer?  With the crime rate as high as it is the danger would probably be much more.  Currently, with the use of credit cards and banks the average person only needs a few dollars on his person.  Imagine the danger if a large percentage started carrying around thousands of dollars worth of gold so they could transact business. It doesn’t take a university study to conclude that would be a problem waiting to explode.

The modern banking world is far from perfect, but one of the benefits it has given us is a reduction in danger from personal robbery due to carrying or storing large amounts of money.

Imagine the danger today if a couple thugs caught wind that some little old lady had $50,000 worth of gold stored in her basement?  Her life would be in danger whether the story was true or not.

(2) Inconvenience. If you didn’t trust a warehouse to store your gold you would be forced to store it yourself and carry it with you for shopping. As we said, making the correct change would be a nightmare and buying something from the Internet would be almost impossible.  You’d have to mail a piece of gold to pay for an item.  This is not only time consuming but you’d have to pay for insurance with each order just in case your gold got lost I the mail.

(3) Wear & tear on the coins.  When gold coins were in use they often went through a lot of wear over time.  This caused some coins to lose as much as 10% of the gold just through the friction of use. Many merchants would not accept a worn coin at face value so they weighed the coin and would value the coin according to how much gold remained.

This was a huge inconvenience in the past which would be amplified today with our faster pace of living.

(4) Coin clipping. In the era of gold coins thieves figured out ingenious ways to take gold out of coins.  Sometimes they would shave gold filings from the outside of the coin and other times they would hollow out part of it and fill it in with lead and plate over the top.  Still others would create forgeries out of lead and plate them with gold.

Those who were fooled by these shenanigans were usually the ones who could least afford to lose their money.

Most gold standard advocates want some kind of warehouse system to store gold and make transactions easier.  Actually, we do not have to wait for a gold standard to be enacted for a warehousing system is evolving at the present time.

There are companies which will sell you gold (and collect a commission) or other precious metals and store them for you for a yearly fee.  The online gold services can pay with gold credits of most any denomination to those who are willing to accept. Gold used as online money is called Digital Gold Currency, or DGC.

Currently all warehoused gold is paid for with regular currency, but if we switched to a pure gold standard then there would be no fiat money with which to purchase warehoused gold.  One would just have to deliver his gold physically to the warehouse.  It doesn’t make sense to buy gold with gold.

The warehouses today make a good portion of their money through commissions of customers buying and selling gold.  This helps them keep the prices for their services low.  But if we were on a pure gold standard and there were no sales of gold for fiat money, and hence no commissions, then the cost of the services would go up.

Today’s banks have the advantage of being able to create money out of thin air when a deposit is made and then loan that money out and collect interest.  Despite this tremendous advantage many still go out of business.

A company that warehouses gold has the disadvantage of relying on charging for services to make money.  They would not be allowed to loan money on the gold reserves so this prime source of income must be made up with other charges if the company is to be profitable.

If a pure gold or metallic standard were implemented through privatization then some type of warehousing would be essential.  By the use of the web transactions could be as smooth and seamless as credit card purchases… IF the warehouser is a trusted entity and its transactions are accepted by the public at large as is VISA and MasterCard today.

Would there be disadvantages to a warehouse system on a pure gold standard?  Here are a few.

(1) Since their profit is limited to storage and transaction fees they are likely to be fairly high – especially if they do not make money through gold sales.

(2) Currently there is no insurance on any type of gold transaction and the government would be reluctant to create an insurance program.  Why?  Currently, if they need funds for back up insurance claims they can borrow or print it.  If they had to back up insurance claims in pure gold such insurance may be an impossibility.

If someone warehouses gold today, has their identity stolen and their gold spent then it is just lost.  This may also be a problem on a pure gold standard.

(3) The possibility of fraud or bankruptcy. A few years ago in my hometown of Boise one particular company became very respected and trusted as a gold dealer. Customers trusted the owner to warehouse the gold they purchased. Then the guy had a bright idea.  He saw that there were some great investments available so he just “borrowed” the gold assets and invested them in some sure deals.

Of course his gambles eventually failed, his customers lost most of their money and were about ready to lynch the guy.  Fortunately for him he only went to jail.

Among the companies that warehouse gold today most are honest but some have committed fraud or went out of business due to poor management.  If we have a pure gold standard this problem would continue to exist.

(4) Limited accessibility.  One of the main reasons that people buy gold today is to protect themselves if there should be world chaos or an economic breakdown.  If all your gold is in some warehouse thousands of miles away – could you access it if there was some type of collapse?

One of the most reputable companies today that warehouses gold is from New Jersey. Many do not realize that their gold is stored in vaults in Switzerland.  Now this works fine in normal times but suppose we had a breakdown that made these vaults inaccessible.  In this case the guy who stored physical gold under his floorboard has usable gold and the guy who warehoused it is out of luck.

While I strongly believe we should be free to coin our own legal money and exchange or warehouse it as seems fit, there are disadvantages to attempting to return to a government decreed pure gold or metallic standard as our only money in this day.

Read This entire series. Here are the links.

Copyright 2011 by J J Dewey

Copyright by J J Dewey

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6 thoughts on “The Gold Standard, Part 6

  1. JJ Quote from the Archives for Today

    Examining Ray 4

    “Generally a true knowledge of the future will be seen along lines of developing
    principles and cycles. Rarely will an individual be given dates of specific
    future events as this could interfere with free will.”

    Copyright 2002 by J.J. Dewey, All Rights Reserved

  2. You write:

    “While I strongly believe we should be free to coin our own legal money and exchange or warehouse it as seems fit, there are disadvantages to attempting to return to a government decreed pure gold or metallic standard as our only money in this day.”

    Well, yes if you focus only on the perceived problems with gold and ignore the problems with government creating fiat money by the trainload then I suppose you would be be reluctant to support something like a gold standard. The fact is that we can never go back to the 19th century – times have changed and technology has changed. What would actually happen is that people would invent a new system that blended modern technology with hard asset protection afforded by gold.


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