Before this question is answered, it is important to understand what the proper ‘supply’ of money means.
As many Western economists incorrectly point out, the benefits of fiat currency is the ability to for the money supply to ‘expand’ or ‘grow’. Many sorts of criteria have been put forward: that money should move in accordance with the population, with the ‘volume of trade’, with the ‘increase in GDP’, so as to keep the ‘price level’ constant etc. The reason for this rests on the understanding that when the supply of any other goods in society increases, this will generally confer a societal benefit. But money differs from other commodities in one essential fact. Grasping this difference furnishes the key to understanding monetary matters.
When the supply of consumer goods increase, there is general rejoicing. When new natural resources are discovered, there is the promise of increased living standards, present and future. But the same does not apply to the supply of money. Consumer goods are used up the consumer; capital goods and natural resources are used up in the process of producing consumer goods. But money is not ‘used’ up; its function is to act as a medium of exchange – to enable goods and services to travel more expeditiously from one person to another. It is a startling fact to some, but money is only useful for its exchange value. Other goods have various ‘real’ utilities, so that an increase in their supply satisfies the consumers’ wants. Money though is valued according to its ‘purchasing power’. Where increasing the supply of money acts on reducing the effective purchasing power of money itself, meaning that no societal benefit is conferred. It said we all want more money, but it really means is that we want more money that has more value. After all, I can give you a billion Dollars in Zimbabwean currency, but you are not richer than if you were holding a hundred Dollars in US currency.
So to answer the question ‘is there enough supply of gold and silver to establish a gold and silver standard?’ The answer is not an issue of constantly increasingly supply to match the growth of societies (in attempting to do so, we would likely mine all of the earth’s stock of gold and silver), but in seeing whether the current stocks of gold and silver are sufficient for currency to be effective. This means whether there is enough gold and silver to be utilised in trade by a nation. Importantly the consideration here is gold and silver. Both metals globally exist as large stocks and should be used in the form of a parallel or bimetallic standard. In fact, it was the British in the 1800s, who in an effort to placate the independence of the US, banned the use of silver dollars, making it easier for them to monopolise the gold in circulation.
Both gold and silver by their nature are durable metals that are rarely consumed. Largely the same amount of gold and silver that was first mined many thousands of years ago still exists today. Both gold and silver do not only exist as bullion stored away in the vaults of central banks, but also in various guises of jewellery and ornaments. It is only the form of gold and silver that changes.
August 21st, 2009 at 11:33 AM
In a bimetallic standard or for that sake a pure goldstandard, the question is not whether there is enough gold to cover all transactions. Because the price of gold, since it is a commodity itself, would adjust in prices. So you actually do not need much gold to have an effective currency. This means that 10 apples could cost 1 gold piece one day and change to 2 or 1/2 gold piece in the future, and this is actually not a problem, therefore when much gold is poured into society prices on other goods compared to gold would change.
So the problem is not regarding the amount of gold, even though there is a lot of gold in the world.
August 23rd, 2010 at 7:58 PM
A question I have is, how would we finance imports and receive for exports? Suppose a nation has twice the amount of imports than exports under the gold standard. Would it not exhaust all the gold it would have in the nation in future going at this rate?
August 23rd, 2010 at 7:59 PM
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December 22nd, 2010 at 3:35 PM
I agree with Yusef – and furthermore, as I understand it the primary requirement for something to be used means of exchange is scarcity. As soon as you want to move away from barter, this is the obvious need. Instead of this we use fraudulent warehouse tickets.
Seems to me that the main reason for fiat currencies, fractional reserve banking systems etc. is that it allows a privileged class to quietly mop up real increases in wealth that would have otherwise resulted in falling prices and better living conditions for the population at large. Keynes provided “intellectual” justification for this. But let’s face it, is it a good idea to run a country on the advice of a man who would reply “In the long term, we’re all dead” ?
The idea that falling prices wreck the economy appears to me to be a falsehood. From simple observation – on the basis of what happens in the IT sector. It grows rapidly, the goods, as it were, improve and increase, and despite constant increases in the money supply as well, the prices still manage to fall. Yet it is thriving.
This provides an illustration of how wealth can actually increase for the majority as a result of productive economic activity. The idea that the less well off are going to stash wads under their mattresses as soon as they have anything spare is one of the most ridiculous justifications for keeping people down ever made.