Gold Standard Resource Costs

Historically, one of the pre-dominant arguments against the gold standard was the supposed waste of resources involved in mining gold and then storing it in a vault somewhere.

With only some disagreement, it is the Austrian view that any amount of money can provide all of the services that money is capable of providing, with prices adjusting as required to quantity changes. Thus, the question comes up as to why not just allow government to prohibit the mining of gold to increase the supply of gold money if the expenditure of resources is just a waste, as far as society is concerned.

While this post is not meant to be more than an incomplete indication of an approach to this question, and is serving the purpose of testing the new WP blog format, the analogy below may be useful in other questions of benefit to society as well.

A far-fetched analogy --

For some unknown reason, the government decides that it wants to add an impact crater to the total count of impact craters on the far side of the moon.

It uses up a bunch of resources in secretly developing a rocket and a temporary lunar orbit communications relay satellite and sends them off to successfully create a new impact crater on the far side of the moon. Nothing else was intended or accomplished by the program. It would be really hard to conclude that society was benefited in any way by the program and that it was not injured by the useless waste of resources.

Now assume that the same exact set of resources were used by a joint venture of Disney and the Discovery Channel to do the exact same thing with the single exception that it intended to exhibit a movie made from the images captured by the nose camera of the impacting rocket and transmitted back to earth by way of the communications relay satellite AND generate a net profit by doing so. What is the effect on society of this alternative? If the subjective use-values of the movie to its audiences were sufficiently large to result in a net profit, it is hard to claim an injury to society as opposed to a benefit. Would some more economical use of resources have been of more benefit to society? Of course, even though the net profit might be larger or smaller depending on the movie demand schedule of consumers and competition.

What if the communications satellite had failed and there were no images to exhibit? Here the waste of resources would be exactly be the same as for the secret government program. Would this be a reason to prohibit the venture altogether in advance? No more than for any other risky profit-seeking venture.

The key point is the intent. When the government uses up the resources, no real benefit results even if the program completely meets its goal of adding an impact crater. When the commercial program uses up the same resources and creates the same impact crater, the crater is merely a side effect of trying to create a profitable movie.

The analogy is that the count of impact craters is similar to the quantity of money. When the government increases the quantity of money, it has the responsibility to justify its fantasy that a benefit to society is the result. When individuals convert non-monetary gold to gold coins, they are acting to satisfy their demand for increased purchasing power. When miners extract gold and mint gold coins they are responding to a demand that allows them a profit for doing so. In the process, the total quantity of gold coin money held by all individuals and firms is increased, but only as a side effect of individuals trying to balance their future purchasing power against their current consumption. I think that this has to be counted as a benefit to society. Not the increase in the quantity of gold coin money itself, but the re-adjustment of purchasing power, even fully accounting for the resources expended by means of market prices. Might it be a greater benefit to society if some other form of money were used that required less in the way of resources to create? Possibly, but this is not clear, depending on the overall circumstances. But, by analogy to the impact craters, prohibiting the mining of gold for coins makes no sense.

Similarly, if Bill Gates wanted to spend his own money on the rocket without any profit intent or pictures, just to create the crater, it would be no more of a waste than any other act of consumption for which he might employ his money in commanding resources. Of course, when the government does the same thing, it is using money that it has coerced from taxpayers, for purposes which they likely would not freely approve.

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AHHHH, Comments at the

AHHHH, Comments at the bottom, see it worked.

Don, In an amusing


In an amusing synchronicity, I wrote about this a couple days ago. And I link to an article in the QJAE you'll find interesting, which you can download for free.

I have 2 observations, maybe

I have 2 observations, maybe naiive and if so please correct me... but 1) if we look at the total volume of gold on earth, it is far short in purchasing power parity terms to satisfy the role of money... i.e. moving to a gold standard now would lead to a stratospheric move in its price and a vast diversion of resources to gold mining, so, wouldn't it be a lot simpler to
2) Consitutionally bind the government to issue a fixed amount of 'money' and ban fractional reserve banking. All those resources that would have gone into gold production now can be put to alternative uses and we have a medium of exchange that is provided AS WELL.

Jonathan, The main problem


The main problem is that governments are rarely truly restrained by law, but rather typically create laws as control tools. It has been a long time since any written constitution was worth the parchment that it was scratched on. The resource cost of gold is real, but not significant when compared to the economic costs that result from out-of-thin-air money. Greenspan has noted in the distant past that the resource cost of using a penny in a fuse box IS lower than using a fuse, but that the risk of fire overwhelms the savings.

Regards, Don

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