One Hundred Bucks of Gold, Please
November 3rd 2006 15:58
For someone who has always felt puzzlement for the reign of the Gold Standard, extinguished around 1930, the possibility of approaching the central bank and demanding gold for one hundred dollars seems incredible.
These days, the central bank, at least in word, would be prepared to match every dollar in circulation with a particular amount of gold kept in its vaults. And, not surprisingly, their currency, whether American, English or German or Swiss, was seen to be “as good as gold”.
As a last recourse, and all international traders knew this, you could present a bunch of money at the counter of the central bank and get its value in gold. What I always ask myself is this: what was then the market price of gold? What happened if the price of gold went up? And what if it went down? I wonder.
The way I found to understand the gold standard was to go back to basics. Let us, me and you, the reader, go back to the medieval ages and do some bartering.
You have a goat to trade and I have 10 kg of maize. We reach an agreement and make the deal. So, at least for us one goat equals 10 kg of maize.
But when you want to trade your fattest cow, you do not accept maize, you, justifiably, ask for gold. So, I reach for the purse and give you 100gr of gold.
Again, and at least for us, a fat cow equals 100gr of gold. Other people got to know of our trade and also paid 100gr of gold for a fat cow. So, somehow, 100gr of gold became a currency with which you could buy fat cows.
And then, generalizing, a few other things became buyable for the same currency. So far, so good, since all are happy.
Now suppose that the Lord in the castle was not happy with the way taxes were collected and passage fees were charged and decided to put a stamp on top of rounded pieces of 100gr of gold, like the ones we used. And that stamp was “100 bucks”, the Lord's currency for the 100gr of gold.
What I ask at this stage is simply: what is happening here? Because you could reasonably ask: is the value of 100gr of gold a fat cow or 100 bucks?
Notice that, what happens here is that on top of the value of gold, which was at the time one fat cow for 100gr of gold, you have now the measure of the Lord of the Castle: 100 bucks.
You would have to ask yourself how much can 100 bucks buy and, ultimately, whether it would buy a fat cow, to be sure about it.
If the answer were yes, then the Lord of the Castle had established a Gold Standard, but if it were no then you had been robbed because you got from me 100gr of gold for your last fat cow and now could not get it back for 100 bucks. What could have caused this?
One cause is inflation: you become greedy and ask for 101 bucks for you next fat cow. So, my current 100 bucks which embodies 100gr of gold, is no good anymore to buy a fat cow from you.
This makes me think of a possible solution, which I would prefer to keep private: what if I melt the 100 bucks' physical gold coin and sell it in the precious metals trader for 101 bucks, assuming that gold had gone up in value. Then I could buy your fat cow. How funny, I think to myself.
Another cause of the above problem is deflation: you, like Roman soldiers, just shave the coin's precious metal and trade it shaved and lighter. That way, less than one whole coin buys the same amount of merchandise. All you have to do is leave the face of the coin—the face value.
I suppose that the protagonists of the gold standard understood the limitations of the system and, at a certain stage, the central banks were covering with gold, not all currency value in circulation, but only for a part of it. This probably begged the question: then why not covering an even smaller part and if so, then why not abolishing the Gold Standard altogether?
In fact, stamping 100 bucks in the face of a worthless piece of paper is a lot more logical and removes the prior potentially ridicule which is the duality between the face value of currency and its gold value.
Provided that the state ensures the trading value of money and its universal acceptance, all should be alright.
Not surprisingly, most central banks are today selling their gold reserves and gold is now said to be useful for industrial uses only, or so. I sort of doubt this affirmation and know that everywhere around the world, and especially in Asia, common people put their life savings in the form of gold bullion and also buy jewelry for the same purpose.
Besides this, there is one currency that the entire world trades and stores and which is seen as having the same value as gold, and that's the greenback. More interestingly, the Americans still keep huge deposits of gold to back their dollar and their currency has historically been quite stable in terms of exchange value.
So much and so little for gold and money.
These days, the central bank, at least in word, would be prepared to match every dollar in circulation with a particular amount of gold kept in its vaults. And, not surprisingly, their currency, whether American, English or German or Swiss, was seen to be “as good as gold”.
As a last recourse, and all international traders knew this, you could present a bunch of money at the counter of the central bank and get its value in gold. What I always ask myself is this: what was then the market price of gold? What happened if the price of gold went up? And what if it went down? I wonder.
The way I found to understand the gold standard was to go back to basics. Let us, me and you, the reader, go back to the medieval ages and do some bartering.
You have a goat to trade and I have 10 kg of maize. We reach an agreement and make the deal. So, at least for us one goat equals 10 kg of maize.
But when you want to trade your fattest cow, you do not accept maize, you, justifiably, ask for gold. So, I reach for the purse and give you 100gr of gold.
Again, and at least for us, a fat cow equals 100gr of gold. Other people got to know of our trade and also paid 100gr of gold for a fat cow. So, somehow, 100gr of gold became a currency with which you could buy fat cows.
And then, generalizing, a few other things became buyable for the same currency. So far, so good, since all are happy.
Now suppose that the Lord in the castle was not happy with the way taxes were collected and passage fees were charged and decided to put a stamp on top of rounded pieces of 100gr of gold, like the ones we used. And that stamp was “100 bucks”, the Lord's currency for the 100gr of gold.
What I ask at this stage is simply: what is happening here? Because you could reasonably ask: is the value of 100gr of gold a fat cow or 100 bucks?
Notice that, what happens here is that on top of the value of gold, which was at the time one fat cow for 100gr of gold, you have now the measure of the Lord of the Castle: 100 bucks.
You would have to ask yourself how much can 100 bucks buy and, ultimately, whether it would buy a fat cow, to be sure about it.
If the answer were yes, then the Lord of the Castle had established a Gold Standard, but if it were no then you had been robbed because you got from me 100gr of gold for your last fat cow and now could not get it back for 100 bucks. What could have caused this?
One cause is inflation: you become greedy and ask for 101 bucks for you next fat cow. So, my current 100 bucks which embodies 100gr of gold, is no good anymore to buy a fat cow from you.
This makes me think of a possible solution, which I would prefer to keep private: what if I melt the 100 bucks' physical gold coin and sell it in the precious metals trader for 101 bucks, assuming that gold had gone up in value. Then I could buy your fat cow. How funny, I think to myself.
Another cause of the above problem is deflation: you, like Roman soldiers, just shave the coin's precious metal and trade it shaved and lighter. That way, less than one whole coin buys the same amount of merchandise. All you have to do is leave the face of the coin—the face value.
I suppose that the protagonists of the gold standard understood the limitations of the system and, at a certain stage, the central banks were covering with gold, not all currency value in circulation, but only for a part of it. This probably begged the question: then why not covering an even smaller part and if so, then why not abolishing the Gold Standard altogether?
In fact, stamping 100 bucks in the face of a worthless piece of paper is a lot more logical and removes the prior potentially ridicule which is the duality between the face value of currency and its gold value.
Provided that the state ensures the trading value of money and its universal acceptance, all should be alright.
Not surprisingly, most central banks are today selling their gold reserves and gold is now said to be useful for industrial uses only, or so. I sort of doubt this affirmation and know that everywhere around the world, and especially in Asia, common people put their life savings in the form of gold bullion and also buy jewelry for the same purpose.
Besides this, there is one currency that the entire world trades and stores and which is seen as having the same value as gold, and that's the greenback. More interestingly, the Americans still keep huge deposits of gold to back their dollar and their currency has historically been quite stable in terms of exchange value.
So much and so little for gold and money.
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