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calendar   Wednesday - March 11, 2009

Why we got off the gold standard

Because there simply isn’t enough gold. Or silver. Or platinum. Or all of them combined. And there never was, even if you could gather every bit ever smelted. There is far more money in various accounts than there is money coined, and there is more money coined than there are precious metals to support them. The mints can only print money. Capitalism creates money, and the mints can’t even come close to keeping up.

So what supports the world’s currencies? Faith. And dreams. And the promise of Free Beer Tomorrow, but Tomorrow never comes. And if enough people share a dream then everyone is afraid to wake up. So don’t look too too closely at the man behind the curtain.

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At times I find myself thinking that our money ought to be backed by precious metals. Usually those times are when I see that the price of something I want to buy has gone up, the value of gold has gone up, but the value of my money has gone down. That’s rather irritating. But what if it were? What if we still based our money on silver and gold? I know, let’s play with some math and a bit of history ...

sterling silver is 92.5% silver, 7.5% copper. Pure silver is just too soft to use for coinage. So is pure gold. But sterling silver is much tougher. Think of it as 22 carat silver.

A Troy ounce weighs 480 grains. 12 Troy ounces = 1 Troy pound, or 5760 grains.

[ An Avoirdupois ounce weighs 437.5 grains, 16 oz = 1lb or 7000 grains. This is the basis for American weights, even though precious metals use the Troy system. So yes, a pound of feathers actually does weigh more than a pound of gold, because they use different weighing systems. Grains are grains regardless of the weighing system. ]

In the money system started by England’s Henry II (d 1189), an old English penny had a pennyweight of silver in it, 24 grains. 20 pennies was a shilling, 1 Troy ounce. 12 shillings made a pound. Of Silver. One Pound, Sterling. Pretty subtle name, what what?

Today, silver is selling for $12.80 per troy ounce. Gold is right around $910 per troy ounce. Copper is selling for $1.612 per Avoirdupois pound.

$12.80/480= $0.026667 per grain.
480*0.925 = 444 grains, value of that much silver in a Troy ounce of sterling silver = $11.840148

$1.612/7000 = $0.000230 per grain
480*0.075 = 36 grains, value of that much copper in a Troy ounce of sterling silver = $0.00828

One Troy ounce of sterling silver, ie one Shilling = $11.84828.

Thus one pound sterling silver, 12 Troy ounces = $142.181136.

Add in a tiny amount of value for the making of the alloy itself.

One British Pound Sterling, £1, based on the precious metals standard, ought to be worth $142.25, not the $1.39 it’s going for today.

But the UK would need several mountains of gold, silver, and platinum to back it up; a standard American ton of 2000 pounds (Avoirdupois) is a mere 2430.5556 Troy pounds; even at gold price of $910/Troy ounce a US ton of gold is only worth $26,541,666.67. So Bill Gates and his $13 billion fortune are worth 490 US tons of the stuff, about 1/3 of worldwide annual total gold production. But that’s the real point: if currencies were based on precious metals, the world economy could only grow by the amount of them smelted per year. For gold, that’s about 50 million ounces: $46 billion, which is a drop in the bucket of international finance.

Speaking of mountains of precious metals ...
1 Troy oz = 373.2417216 grams
density of gold = 19.3 gm/cc
volume of 1 Toz gold = 19.338949cc
volume of 1 US ton of gold = 564079.246907cc, = 19.92027 cubic feet, a cube 2.710806 feet per side (a hair over 2 feet 8 1/2 inches). Your basic $26 million, 2000lb side table.

100’x100’x100’ = 1 million cubic feet, which holds 50,200.1279 US tons of gold, worth $1,322,457,662,471.44; a bit less than 1 1/3 trillion dollars. This is almost twice as much gold than has ever been mined in all of human history. But it’s far less than Obama’s Stimulus Package plus Bush’s Bank Bailout combined.  There simply is not that much gold to go around, there never was, and there probably never will be.

The Stimulus Package plus the Bank Bailout plus this new Federal Budget plus the existing National Debt adds up to about $16 trillion, which is a gold brick 100’x100’x1025’. If you had a box that size you could hide an ocean liner inside.

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A few weeks ago Peiper sent me a book called The Moneymaker. It’s the story of John Law, a Scotsman from 300 years ago who managed to put France on a paper currency money system, because there wasn’t enough metal coinage in circulation. This worked great for a while, and the economy of France bloomed. But nobody listened to him when he said that the brakes should be kept on; he never wanted to print more than 4 times as much paper cash as the banks had gold on hand to cover. Plus he got involved in a major Ponzi scheme called the Mississippi Company, and while it made him and many other people a vast fortune, when that bubble broke it crashed the economy and madness ensued for a while. And the paper money went belly up as well. And the banks. And then the dear little froggies spent the rest of Law’s life getting even with him, in the nastiest ways imaginable, as only true liberals can. Because they had all been greedy, and had lost out when the bubble burst, so it was all Law’s fault. It’s a great little book, and large parts of it seem to be a warning that is still applicable today.

Of course, I couldn’t get past the title without thinking of Terry Pratchett’s recent novel Making Money. It’s nearly the same story, but turned inside out because it’s Pratchett after all. Somewhat reformed con man Moist Van Lipwig puts the city on a fiat currency because there isn’t enough money in circulation, and then it turns out that there isn’t even any gold when there should have been. Except in the end there is, but it’s the kind of gold that really works for you, providing you know the secret. And the Glooper is bi-directional. And the promise of the old currency under the gold standard was great: We promise that this paper dollar is worth a dollar in gold, as long as you promise never to try to make that exchange. Perfection!

Both are very good reads, highly recommended. But both show that to become modern and to grow, any economy has to be based on the productivity and worth of the citizenry. It is a dream, and none of us can wake up, because that would crash the house of cards. Perhaps we should try a currency based on things of real worth, like food. Which would make the US, Canada, Australia, and Argentina the richest nations in the world. But you couldn’t really save it - not enough Mason jars by far - although you could always trade in your paper dollar for a dollar’s worth of food. We call that act “going to the grocery store”.


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Posted by Drew458   United States  on 03/11/2009 at 07:40 PM   
Filed Under: • Finance and InvestingInflation and High Prices •  
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