James Leroy Wilson's blog

Monday, November 20, 2006

How To Get a Gold Standard?

In our fiat currency system, the value of the dollar is what the people imagine it to be. Even in this system, gold serves as a "back-up." When people begin to doubt the future and the dollar's value, they start to buy gold and other hard assets. The price of gold goes up. When the economy is on a sounder footing, the price of gold goes down as people would rather have the dollars to spend and invest than the gold to horde.

Gold is now selling at $622 an ounce. According to Wikipedia, however, "the quantity of gold available for reserves, even if all of it were confiscated and used as the unit of account, would put the value of gold upwards of 5,000 dollars an ounce on a purchasing-parity basis."

Fixing the value of the dollar at a certain fraction of a gold ounce would be ideal. The value of the dollar would remain the same, and the price of goods and services would go up or down based on supply and demand. Whereas today, the dollar increasingly loses value (inflation) relative to goods and services. And this "cost of living" usually rises before wages rise, which means the people fall behind.

But if we had a gold standard, should the dollar be worth 1/622 of an ounce? 1/5000 of an ounce? Should the government buy up all the gold it can? At what price?

Until that's determined, we'll probably have to rely on gold as the back-up. Even though it is not the "official" standard, the gold price indicates the strength of the economy. If the price of gold goes down, the government and economy are probably doing something right. Or at least the investors think so.

1 comment:

  1. IMHO when hyperinflation happens, i.e., when prices of goods and services double daily, the Fed will probably issue a fiat "superdollar" to replace, say, 5,000 present fiat dollars. This will no doubt be followed by a fiat "superduperdollar," etc. ad infinitum.