Is there enough gold in the world to go back on a gold standard?

Presidential candidate Ted Cruz wants to return to the gold standard, and a student asked me if there is enough gold to do so.  The short answer: Yes, there is enough gold in the world to go back on a gold standard, but it would require much sacrifice.

Under the gold standard, the monetary base was mostly a stock of gold.  Today, it is fiat money that is created out of thin air. A big problem with the gold standard that most advocates don’t realize is that it would raise taxes because the US government would have to increase spending to be able to buy enough gold to base our monetary system on it.

Whereas under our fiat system, the government makes a profit from creating money and that helps reduce taxes, under a gold standard, the government would have to raise taxes to create more money because it would need tax revenues to buy gold.  I would rather that our taxes buy productive government services rather than buying gold that is destined to sit idly in government vaults.  That cost is only part of the sacrifice of going on a gold standard.

According to BBC, there are about 171,300 tonnes of gold in the world.  At a current price of under $1,100/oz, the total value of all the gold in the world is about $6 trillion.  In comparison, the monetary base of the US is $3.9 trillion, so if the US were to go back on the gold standard, we would need to buy over half of the world’s gold to fully back the US monetary system at current prices.

However, the US monetary base has been inflated by quantitative easing and in normal times, the US monetary base would only be about $1 trillion.  That is more similar to the monetary base of the EU which is $1.7 trillion. Thus, in normal times there would be enough gold in the world for both the US and the EU to go back on the gold standard.  But the US has only 16% of world GDP and the EU has 17%, so the entire world could not fully base the world’s economies using gold as 100% of the global monetary base at the current gold price.

Nevertheless, a global return to the gold standard would still be possible for two reasons.  First,  governments rarely if ever fully funded their monetary base with gold.  For example, the US generally only kept less than half of the the monetary base in gold.  Under-funding the monetary base would help make a global return to the gold standard feasible.

More importantly, if the governments of the world started buying up the world’s gold to run our monetary systems, that would dramatically increase the price of gold which would reduce the tonnes of gold that would be needed in the monetary base for running the global economy.

Under the gold standard, an increased demand for monetary base would literally create more monetary base out of thin air by raising the value of gold as governments buy up more of the metal.  That would be great for the world’s gold producers who constantly lobby for a return to the gold standard, but what a waste of tax dollars.

 

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Posted in Macro

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