100 percent gold backed system

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Brainless's picture
Brainless
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100 percent gold backed system

I am reading about Austrian economics and found this piece i find intruiging. It might be a method to calculate what then price of gold should be when a 100 percent gold system is implemented.

Could someone more knowledgable subsitute the current numbers in the following quote?

The quote comes from http://mises.org/rothbard/genuine.asp 

How might the United States go over to a 100 percent gold system? At the end of December 1981, total demand liabilities issued by the entire commercial banking system (that is, M-1), equaled $445 billion (including Federal Reserve notes and demand, or rather checkable, deposits). To go over immediately to 100 percent gold, the dollar would be newly defined at 1/1/696 gold ounce. Total gold stock at the Federal Reserve would then be valued at $445 billion, and the gold could be transferred to the individual holders of Federal Reserve notes as well as to the banks, the banks' assets now equaling and balancing their total demand deposits outstanding. They would then be automatically on a 100 percent gold system.

From the standpoint of the free market, there is admittedly a problem with this transition to 100 percent gold. For the Federal Reserve's gold would be transferred to the commercial banks up to the value of their demand deposits by the Federal Reserve's granting a free gift of capital to the banks by that amount. Thus, overall, commercial banks, at the end of December 1981, had demand deposits of $317 billion, offset by reserves of $47 billion. A return to gold at $1,696 an ounce would have meant that gold transferred to the banks in exchange for their reserve at the Federal Reserve would also have increased their reserves from $47 to $317 billion, via a writing up of bank capital by $270 billion. The criticism would be that the banks scarcely deserve such a free gift, deserving instead to take their chances like all other firms on the free market. The rebuttal argument, however, would stress that, if a 100 percent gold requirement were now imposed on the banks, their free gift would do no more than insure the banking system against a potential holocaust of deflation, contraction, and bankruptcies.

 

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Re: 100 percent gold backed system
Brainless wrote:

I am reading about Austrian economics and found this piece i find intruiging. It might be a method to calculate what then price of gold should be when a 100 percent gold system is implemented.

Could someone more knowledgable subsitute the current numbers in the following quote?

 Can't help with the numbers, but Professor Antal E Fekete is a proponent of separate gold and fiat currencies in the expectation that fiat money would perish pretty quick in such an environment, see here and read all his stuff. 'tis truly amazing, but heavy (as befits gold) going. He says that linking gold directly with USD will simply not work.

In another post, I mentioned a step in the Prof's direction: the use of gold itself as currency, Wiki DGC (digital gold currency). The Prof extends the simple use of coin to the creation of 91-day bills that  are, literally, "as good as gold".

 Ted.

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Re: 100 percent gold backed system

Professor Antal E Fekete takeon things makes sense and is real scary.

Thanks for the link Ted

Ron Fink

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Re: 100 percent gold backed system
Brainless,
If you are interested in the Austrian School of economics, you can try these sites.  The first has a forum and the second is a blog. Ludwig von Mises Institute, http://mises.org/ and The Austrian Economists, http://austrianeconomists.typepad.com/
Thinking there is someone there more than willing to answer your question. A good read is The Trillion Dollar Melt Down, by Charles Milton.  He will points out  among other things most economist don't have a clue what they are talking about (What a surprise).  Please let me know when you find an economist who really knows what is going on, I am sticking with Chris and the CC in the meantime.
Would love to know the answer to your question about gold if you ever find one.
Cat
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Re: 100 percent gold backed system

To get deep into these theories in my opinion is counterproductive to your task at hand .. Mises (Rothbard) and Fekete were at odds on their views (ARTICLE) on calculating gold values. It will have you going back and forth trying to figure things out, and reminds me of an old poem ..

The centipede was happy quite
Until the toad, in fun,
Said, pray, which leg moves after which?
This raised her doubts to such a pitch
She fell distracted in the ditch,
Not knowing how to run.

My point is, buy as much physical gold as you can possibly afford, (Krugerrands seem the easiest to acquire right now) if you can't afford any .. buy silver.

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FEKETE vs MISES

On the other hand, if you would like to read some Fekete's opinions on gold values, try

Where Mises went wrong

Where Friedman went wrong

If you really want to curl up for a couple weeks, I uploaded all Fekete's articles a few days ago. You can make copies from my files.

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Re: 100 percent gold backed system

I have read Feteke's articles and now am reading on mises.org.

In the mean time every single euro i have left is in gold. I buy in Thailand so physical gold is very easy, just walk to the shop on the corner and buy it.Smile 

The reason i asked is to have an idea of what is going to happen after the collapse of the dollar. A dollar that is worth 1/10000 oz or a dollar worth 1/1000 oz is quit a big difference. You can ask also will it even matter? But having an idea of how the number will be can help in judging if the reserves of the bank at this moment will be sufficient to keep a strangehold, or if they are going to loose it.

 

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Re: 100 percent gold backed system
Tom Loftus wrote:

To get deep into these theories in my opinion is counterproductive to your task at hand .. Mises (Rothbard) and Fekete were at odds on their views (ARTICLE) on calculating gold values.

Thanks, Tom. A fine article which hurt my brain but appeared to make good sense.  The fractional reserve system, as opposed to 100% gold, made sense too.  However, I did get stuck when "bank notes" appeared.

 I can see that a bill of exchange would be directly linked to gold, irrespective of the fraction of the reserve; and did I get it right that the fraction of gold reserve need not be mandated by any law or regulation?

 Reason I ask is that I'm having difficulty imagining the value of a banknote vs. goods and services. Is our dollar "bill" the equivalent of a banknote i.e. are banknotes "fiat"?

Item of trivia: Paper money in England (where I'm from) is called "notes" as opposed to "bills" here in the USA.

 Cheers all,

 Ted

 

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Re: 100 percent gold backed system

OK Ted, we have two adversaries, both of which are for a gold backed economy, fighting among each other, each one determined to prove the absolute purity of their doctrine. Ten minutes into either ideology I am already lost in the language of financial science & unfamiliar acronyms ... then along come what I call the groupies for Fekete and Rothbard who try to simplify things for the not so scientific (me). Some of their links are bad now, so I have to try to find where they are ...

I lean toward Fekete, just because he seems to think more logarithmic than linear, such as his acceptance of the "fullerton effect" which he describes in "Where Mises Went Wrong".

Long story short.. I feel like I'm wasting my time quibbling over which gold backed economy I am for or against. The central banks hate them both .. that's good enough for me.

 

 

"The limits of my language are the limits of my mind. All I know is what I have words for."

-- Ludwig Wittgenstein

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Re: 100 percent gold backed system

GOLD NEWS

ASSET OF LAST RESORT

Swiss gold bullion in huge demand as trust in banks dives

Swiss
gold refiners are having great difficulty in keeping up with demand for
gold bullion leading to long delivery times as investors wary of other
stores of wealth.


Author: Arnd Wiegmann and Lisa Jucca
Posted: 
Wednesday
,
17 Dec 2008

MENDRISIO/ZURICH, Switzerland (Reuters) - 

Sealed
off by grey concrete walls and barbed wire, the workmen in protective
glasses and steel-toed boots at this smelter cannot work fast enough to
meet demand from the nervous rich for gold.

This refinery near Lake Lugano in the Alps is running day and night
as people worried about recession rush to switch their assets into
something that may hold its value.

"I have been in the gold business for 30 years and I have never
experienced anything like this," said Bernhard Schnellmann, director
for precious metal services at the refiner Argor-Heraeus, one of the
world's three largest.

"Production has dramatically increased since the middle of the year.
We cannot cope with demand," said Schnellman, wearing a gold watch on
his wrist.

Spot gold hit a record $1,030.80 an ounce on March 17. It fell below
$700 in late October, partly because investors sold their holdings to
cover losses in equity and bond markets hit by the credit crisis, and
is now around $830 an ounce.

link to the rest of the article.....

http://www.mineweb.co.za/mineweb/view/mineweb/en/page34?oid=75294&sn=Detail

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Re: 100 percent gold backed system
Tom and Ted... I found Henry C.K. Liu's web site.  He appears to know what he is talking about, if you read his past articles you can see he knew what coming.  Article that talks of Friedman.  I thought you might be interested.
Cat
  
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Re: 100 percent gold backed system won't work

I don't see how the US national currency can be backed by gold. First, we don't own enough gold and second, even if we did, it would quickly vanish along with our cash. For example, consider the following (1 Tonne of Gold = 32,150 Troy Ounces, and assume a Troy Ounce is selling at $1,000 to make the math easy). The annual global gold supply has been around 4,000 Tonnes/Year (Mining + Scrap + Reserve Sales). 

1)  US Trade Deficit around $800 Billion/Year = 25,000 Tonnes of Gold

2)  Annual Interest on National Debt (2007) over $400 Billion = 12,500 Tonnes of Gold

This is only part of our effective annual currency losses but it's enough to make the point. These two items alone would zap our gold reserves by around 37,000 Tonnes/Year while supply has only been around 4,000 Tonnes/Year.

Even if we could buy enough gold to "back" our currency - it wouldn't work because we don't have any money - it would have to be borrowed which would effectively back the currency by debt - which is where we are now.

What about our huge existing gold reserves? At one time, the US owned the biggest gold reserves in the world, by a large amount. But, much of that was redeemed by trading partners.

The 1982 "Gold Commission" reported that the US and the Federal Reserve combined, held close to 19,000,000 Troy Ounces ($19 Billion) which would only be around 600 Tonnes. Of our 600 Tonnes of gold, my understanding is that most of that is being held as collateral by the Federal Reserve Bank as collateral.

When, you look at the numbers, I don't see how a gold standard can work. Please feel free to correct my math.

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Re: 100 percent gold backed system

Why would you need to buy gold back? Why not just devalue to the gold standard? After all you are only trading your productivity, real estate, tools, whatever you have of physical value, and trying to base it on something concrete.

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Re: 100 percent gold backed system

Tom Loftus wrote:
Why would you need to buy gold back? Why not just devalue to the gold standard? After all you are only trading your productivity, real estate, tools, whatever you have of physical value, and trying to base it on something concrete.

You make an interesting point - if I understand you correctly - why back a currency with gold when its function is to provide a fair medium for trade? If this is what you are saying then I fully agree and don't think any commodity is needed to back a national currency.

Our "fiat" system has been largely judged and convicted by external factors that may be eliminated. More specifically, I think the big problem is not what backs the currency but rather how it is implemented. The US, and most modern nations, use a private central banking system to create and issue money. They charge us interest on money that we alone have the power to create and guarantee.

There is another option - why not eliminate the parasitic central bank, in our case the Federal Reserve Bank, and create our currency with absolutely no interest? Why not abolish the Federal Reserve and directly issue a free currency (by free, I mean free from interest)?

There are other factors that would need to be addressed to make such a system dependable and equitable but I think this is possible and the positive impact on our commerce and savings could be monumental. For example, how do we restrain the government from spending us into oblivion (our current system in action). How and what do we balance in order to prevent inflation and deflation? Again, these considerations can be taken into account in designing a much better system.

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Re: 100 percent gold backed system

DrKirby, Here's a nice little indicator I found & I like to try to anticipate how the gold index will do (I bet you'll like it) .. it's called the T-Bone Indicator, by Michael Rozeff. You look up the T-Bone Steak Price per pound & multiply by 40 .. this looks fairly bulletproof according to Mike's records. I also started using the TBI for billing purposes myself (I have my own set ratio) In these ever-changing times. I figure maybe in the next couple or ten years there will be a lot of confusion over what is worth what. Yes, there will be some swing to this indicator, especially if you subscribe to Fekete's "Fullerton Effect" 

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Re: 100 percent gold backed system

Thanks Tom, I savored the T-Bone Indicator -  a tasty economic nugget for sure!

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Re: 100 percent gold backed system

All of this talk of a 100% gold backed currency misses several key points in monetary theory.  I'll discuss a few.

One, without eliminating fractional reserve lending, there is no way to enforce a 100% gold backing.  This would require a complete overall of the modern banking systems, of which fractional reserve lending is the key feature.  For example, a reserve ratio of 9:1 would mean banks must hold on deposit $1 in gold for every $9 dollars lent.  By definition, those $9 are NOT backed by gold.

Two, there is no way to realistically value the stock of gold to back the $50 trillion or so in public and and private debt.

Three, the practice of charging/paying compound interest would still remain and still drive people to abandon saving in favor of speculation.  This creates huge bubbles of risk which, as we can now see, inevitably collapse.

Four, there is no way to prevent the cornering of the gold.  Those who currently have the power of money will convert that power in to gold.  The bosses will remain the bosses.  The money power is in private hands.  Changing the money to gold doesn't change that.

Five, gold backed currency worked when the population was much smaller and the rate of growth was more stable.  There are simply too many people on the Earth for everyone to count their wealth in gold.  Who would you exclude from weath or ask to commit suicide?

The world is what it is.  The best chance for monetary reform is to be patient and wait for the US empire to collapse into smaller units.  Then you can be the local Thomas Payne a write the new constitution that specifically puts the currency in democratic control with constitutional safeguards.  Not perfect, but perhaps workable. If you leave it to the bankers, they'll just put us into another mess as soon as the current one has finished its collapse.

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Re: 100 percent gold backed system
DurangoKid wrote:

All of this talk of a 100% gold backed currency misses several key points in monetary theory.  I'll discuss a few.

One, without eliminating fractional reserve lending, there is no way to enforce a 100% gold backing.  This would require a complete overall of the modern banking systems, of which fractional reserve lending is the key feature.  For example, a reserve ratio of 9:1 would mean banks must hold on deposit $1 in gold for every $9 dollars lent.  By definition, those $9 are NOT backed by gold.

Two, there is no way to realistically value the stock of gold to back the $50 trillion or so in public and and private debt.

Three, the practice of charging/paying compound interest would still remain and still drive people to abandon saving in favor of speculation.  This creates huge bubbles of risk which, as we can now see, inevitably collapse.

Four, there is no way to prevent the cornering of the gold.  Those who currently have the power of money will convert that power in to gold.  The bosses will remain the bosses.  The money power is in private hands.  Changing the money to gold doesn't change that.

Five, gold backed currency worked when the population was much smaller and the rate of growth was more stable.  There are simply too many people on the Earth for everyone to count their wealth in gold.  Who would you exclude from wealth or ask to commit suicide?

The world is what it is.  The best chance for monetary reform is to be patient and wait for the US empire to collapse into smaller units.  Then you can be the local Thomas Payne a write the new constitution that specifically puts the currency in democratic control with constitutional safeguards.  Not perfect, but perhaps workable. If you leave it to the bankers, they'll just put us into another mess as soon as the current one has finished its collapse.

Very good observations there Durango, and patiently wait for the empire to collapse is just about all anyone can do right now. Personally, I like to share what gives me more incentive to think positively. I love to hear things like the T-Bone Indicator ... also I would love to hear more discourse on Fekete's Fullerton Effect, which looks extremely under recognized for most of the future predictions I see flying around.

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Re: 100 percent gold backed system

DurangoKid - your 5 points are both relevent and accurate - which is an indirect way of saying I agree with all. Then you come to the end:

DurangoKid wrote:
The world is what it is.  The best chance for monetary reform is to be patient and wait for the US empire to collapse into smaller units.  Then you can be the local Thomas Payne a write the new constitution that specifically puts the currency in democratic control with constitutional safeguards. 

I totally disagree with this premise. We are not merely spectators, we are participants with the power to help define our future.

Simply waiting for things to fail seems irresponsible. Yes, we are heading for a financial collapse but we have the opportunity to help create what follows. We need to be ready and we need to actively educate ourselves and others as much as possible - a better world is more likely to emerge if people understand the problems.

I have a voice and I plan on using it more than I ever had in the past. I will dissent against the status-quo that has caused the financial collapse; in my opinion by design and not incompetence. You have an articulate understanding of economics - we need you. When I say we I mean the people and equally as important, future generations. You don't have to dissent but please, help educate.

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Re: 100 percent gold backed system
DrKrbyLuv wrote:

DurangoKid - your 5 points are both relevent and accurate - which is an indirect way of saying I agree with all. Then you come to the end:

DurangoKid wrote:
The world is what it is.  The best chance for monetary reform is to bepatient and wait for the US empire to collapse into smaller units. Then you can be the local Thomas Payne a write the new constitutionthat specifically puts the currency in democratic control withconstitutional safeguards. 

I totally disagree with this premise. We are not merely spectators, we are participants with the power to help define our future.

Simply waiting for things to fail seems irresponsible. Yes, we are heading for a financial collapse but we have the opportunity to help create what follows. We need to be ready and we need to actively educate ourselves and others as much as possible - a better world is more likely to emerge if people understand the problems.

I have a voice and I plan on using it more than I ever had in the past. I will dissent against the status-quo that has caused the financial collapse; in my opinion by design and not incompetence. You have an articulate understanding of economics - we need you. When I say we I mean the people and equally as important, future generations. You don't have to dissent but please, help educate.

My premise is that the collapse is already in motion and there will be nothing us little people can do to prevent it.  Things will get stirred up during the process.  That is our time.  When the current elites are out of power it's possible to fill that vacuum with someone else.  I don't have much hope for saving this mess.  The current agregate of constituencies are still too powerful.  Better to let it fail completely then build something new.  It will be easier on a smaller scale, too.

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