Wait a minute – the cost of switching to the gold standard
Over the last couple of days, I have been pondering over different aspects of what would happen if the united stats switched back to the gold standard. Especially I have played around with the thought experiment: ”What would the cost be to switch back to the gold standard?” So in this post, I will not past judgment on whether it would be a good idea for the united stats or the world economy if we where to go back to a gold standard, I am purely focused on identifying the practical perspective of the cost of such a switch. These reflections are prompted by the fact that Ron Paul presently is doing better, then ever before in the republican primaries. Meaning that for the first time there is actually a realistic probability that the united stats could consider a return to the gold standard.
In doing this, I first have to identifying the two pars of this analysis: How much gold and how much US-currency are there in the world? According to howstuffworks.com there is extracted around 1.555.210 kilograms of gold every year, and if we assume that this correlates to an average every year and that we have extracted gold for 400 years there would be 622.084.000 kilograms of gold currently in the world. With the current gold price at 53.133,61 US$/kilogram the current marked value of all the gold currently above ground would then be US$ 33.053.568.643.240. If we then compare that to the latest data from the US Federal Reserve Statistical Releases there are US$ 9.641.700.000.000 in circulation. Let me just quickly says that I am using the seasonally adjusted M2 numbers from November 2011. So what does this tells us?
First of all if the united stats where on the gold standard right now they would have to control 29% of all the gold existing. To my knowledge, there has never been any given country that at any single time in human history that has dominated almost a third of the world gold reserves. I might be wrong in this, but in any case to say anything significant about the cost we need to look at how much gold the U.S. Treasury presently holds. According to the U.S. Treasury’s Resource Center the U.S. International Reserve Position in gold is 7.413.372 kilogram, which means that they presently only covers 4,1% of their gold need, should they switch back to the gold standard.
I the end if, we for a moment actually ignore the overt dilemma buying up all that gold or where the money to do this would come from, without having to devaluate the US$, it would take the US 112 years to extracting enough gold to implement the gold standard, without suffering any currency penalties in doing so. So even if Ron Paul where to become 45th President of the United States, it is unlikely that the US would return to the gold standard, the cost is simply to high.
In doing this, I first have to identifying the two pars of this analysis: How much gold and how much US-currency are there in the world? According to howstuffworks.com there is extracted around 1.555.210 kilograms of gold every year, and if we assume that this correlates to an average every year and that we have extracted gold for 400 years there would be 622.084.000 kilograms of gold currently in the world. With the current gold price at 53.133,61 US$/kilogram the current marked value of all the gold currently above ground would then be US$ 33.053.568.643.240. If we then compare that to the latest data from the US Federal Reserve Statistical Releases there are US$ 9.641.700.000.000 in circulation. Let me just quickly says that I am using the seasonally adjusted M2 numbers from November 2011. So what does this tells us?
First of all if the united stats where on the gold standard right now they would have to control 29% of all the gold existing. To my knowledge, there has never been any given country that at any single time in human history that has dominated almost a third of the world gold reserves. I might be wrong in this, but in any case to say anything significant about the cost we need to look at how much gold the U.S. Treasury presently holds. According to the U.S. Treasury’s Resource Center the U.S. International Reserve Position in gold is 7.413.372 kilogram, which means that they presently only covers 4,1% of their gold need, should they switch back to the gold standard.
I the end if, we for a moment actually ignore the overt dilemma buying up all that gold or where the money to do this would come from, without having to devaluate the US$, it would take the US 112 years to extracting enough gold to implement the gold standard, without suffering any currency penalties in doing so. So even if Ron Paul where to become 45th President of the United States, it is unlikely that the US would return to the gold standard, the cost is simply to high.
