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.  Is 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 a huge 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. One problem with the gold standard is that it would require raising taxes because the government would have 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 buy gold when the monetary base needs to be expanded and that is only a small part of the sacrifice of going on a gold standard.  I would rather that our taxes buy useful services and produce public goods rather than buying gold that is destined to sit idly in government vaults as a monetary base when fiat money can be produced for free.

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 alone 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.

On the other hand, the US monetary base was inflated by quantitative easing beginning in 2008 and in normal times, the US monetary base might 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 even if the governments of the world somehow managed to take all the gold away from private owners.

Nevertheless, there are three ways it would still be possible for the entire globe to adopt a gold standard.  First,  governments rarely if ever fully funded their monetary base with gold.  For example, the US generally only kept less than half of the its monetary base in gold.  Under-funding the monetary base would help make a global return to the gold standard feasible, but it also makes a gold standard unstable because it causes financial panics when people start exchanging their paper money for actual gold because they know there isn’t enough gold for everyone and only the first people to exchange money for gold will actually get the gold.  When this happened, the gold standard system collapsed.

Secondly, and more importantly, if the governments of the world started buying up the world’s gold to run our monetary systems, it would dramatically increase the price of gold which would reduce the tonnes of gold that would be needed for running the global monetary system.

Under the gold standard, an increased demand for money would literally create more monetary base out of thin air by raising the value of gold.  That would be great for the world’s gold producers who constantly lobby for a return to the gold standard, but it would still cause a tremendous waste of tax dollars to spend them on gold just to increase the money supply.

Thirdly, under the gold standard, government monetary authorities regularly engineered deflations which lowered the prices of all other goods except money.  That reduces the amount of money which is required to run an economy.  In fact, one of the main problems with a gold standard is that it tends to force periodic deflations which cause recessions that are completely avoidable.

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Posted in Macro

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