1/ Gold Standard 101
With the accelerating pace of money printing globally, interest in gold has boomed. If you’re following along, you’ve probably heard or read about the “Gold Standard” system.
But what is a “Gold Standard” and how does it work?
Here’s Gold Standard 101!
With the accelerating pace of money printing globally, interest in gold has boomed. If you’re following along, you’ve probably heard or read about the “Gold Standard” system.
But what is a “Gold Standard” and how does it work?
Here’s Gold Standard 101!
2/ In simple terms, the Gold Standard is a monetary system where paper currency has a value tied directly to gold.
Under this system, paper currency is a claim on gold at a set exchange rate.
So if I had a $100 bill, I could go to a bank and redeem it for a quantity of gold.
Under this system, paper currency is a claim on gold at a set exchange rate.
So if I had a $100 bill, I could go to a bank and redeem it for a quantity of gold.
3/ The basic appeal here is that the system restricts the creation of new money. The physical quantity of gold is a limiter on paper money creation.
You can trust in your paper currency, as it is backed by hard money.
Let’s look at a simple society to illustrate how it works...
You can trust in your paper currency, as it is backed by hard money.
Let’s look at a simple society to illustrate how it works...
4/ Imagine an island society - Goldland. Goldlanders are a fiscally prudent bunch!
The Goldland Central Bank has 1,000oz of gold. It issues 1,000,000 in paper currency - called Golders - backed by the gold.
Goldlanders can thus exchange 1,000 Golders for 1 oz of gold.
The Goldland Central Bank has 1,000oz of gold. It issues 1,000,000 in paper currency - called Golders - backed by the gold.
Goldlanders can thus exchange 1,000 Golders for 1 oz of gold.
5/ Goldland mines only surface about 25oz of new gold each year.
So the Central Bank can only issue 25,000 in new Golders each year. It must maintain its ability to meet gold exchanges!
Therefore, money supply increases at 2.5% max (less over time if the 25oz remains constant).
So the Central Bank can only issue 25,000 in new Golders each year. It must maintain its ability to meet gold exchanges!
Therefore, money supply increases at 2.5% max (less over time if the 25oz remains constant).
6/ This system gives Goldlanders comfort.
They can exchange their paper currency for hard money gold, which has real, tangible value (it is durable, scarce, etc.).
They can trust their paper currency. It cannot be endlessly created!
This is a pure form Gold Standard system.
They can exchange their paper currency for hard money gold, which has real, tangible value (it is durable, scarce, etc.).
They can trust their paper currency. It cannot be endlessly created!
This is a pure form Gold Standard system.
7/ Now I’ve intentionally used a very simple example to highlight the basics in 101.
There are further complexities to this - reserve requirements, multiple countries, shocks - but we can save those for later.
I hope this was a helpful primer on the topic. Follow me for more!
There are further complexities to this - reserve requirements, multiple countries, shocks - but we can save those for later.
I hope this was a helpful primer on the topic. Follow me for more!
