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Is a gold standard practical?

Read a short piece from Paul van Eeden yesterday called, "Musing on a Gold Standard". In it, Paul looks at the practicality of reestablishing a gold backed currency system and whether or not such a system would last. Reviewing the lessons of the past, in conjunction with the realities of current money and credit use, he decides that the real question is "do we want fractional reserve banking, and if so how can it be changed?" (paraphrasing).

Here are Paul's own words on the possible dollar value of gold should it retain its place in the currency system:

Many hardcore believers in the gold standard feel that fractional banking has to be demolished. I personally never liked the idea of fractional banking, but I also don't think the population at large is ready to do without it. And, even if fractional banking were eliminated and a pure gold standard recreated, the temptation to issue receipts in excess of gold on deposit would just exert itself again.

So instead of the most conservative extreme of a gold standard without the ability of debt creation, let's consider what would happen if we accepted fractional banking, but just took away governments' right to seigniorage.

If we add together all the currency in circulation (notes and coins) in the US, Japan, China, Britain, Canada, Russia, Australia and the European Union, converted to US dollars for simplicity, we arrive at $2.6 trillion. These countries represent roughly 80% of the world's GDP so by extrapolation we can estimate that all the currency in circulation in the world today is approximately $3.25 trillion.

Total historical gold production is about 5 billion ounces and most of it is still around. If all the gold in the world were converted to money to replace existing notes and coins, it would imply a gold price of $650 an ounce.

There may be some ensuing disagreement over van Eeden's methods with regards to his definition of money outstanding. While I'm sure that Paul has thought of the problem in terms that seem rational to him, I have the feeling that some gold and silver bugs might argue with his estimation as being too conservative.

This is just personal speculation, but I think that some gold and silver bugs would want to expand the definition of outstanding currency to include certain forms of debt, bank holdings, etc. Some are obviously using different rationale for their gold price targets. James Turk has recently reiterated his call of $2,000-$8,000 an oz. gold and silver bug Jason Hommel has done some reasoning of his own and came up with a $36,000 gold price target.

Price targets aside, the reason I've included a link to Paul's essay is because of the clarity with which he addresses this topic. I think that if you read "Musings on a Gold Standard" and the 2003 "Gold Price" article linked within, you'll have an understanding of gold and money that is sadly lacking among most Americans. If you don't believe me, go to your local bank and quiz them on these points if you like.

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