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Gold and the Penny

Should we return to a Gold standard?  What about a Copper one?

In my posting about the Gold Standard, I pointed out that people who think this is a cure-all for our economy or whatever, are blithering idiots.  In addition to the idea just not working, this is also a classic example of Externalizing - people who want to blame all their personal woes on greater social issues or world causes - the gold standard, legalization of pot, voting Bush out of office, whatever.  "If only" we are told, these sweeping changes could be made, the world would become a Shangri-La.

If you still think a Gold Standard is a swell idea, consider the Penny.   You've read all the articles in the news, or heard them on TeeVee (if you believe in the gold standard, or buying gold, I suspect you watch a LOT of TeeVee) about how the U.S. Penny costs nearly two cents to make - and how our Canadian neighbors (always a wee bit smarter than us) have done the obvious thing, and gone off the Copper standard.

What was that?  The Copper Standard? 

Well, yea.  If a penny is worth more as copper than it is as a penny, then people are motivated to buy pennies for one cent, and then melt them down for copper, and make two cents.   And in the past, people did this, until the U.S. Mint alloyed pennies more and more so that the copper content was not as usable.

But this mirrors the same thing that happened with Gold back in 1973.  At the $32-an-ounce fixed price we dictated as the "gold standard", gold was a freaking bargain in the USA.   And while, back then, Citizens could not keep large amounts of gold personally, or trade in it (what would be the point, it was worth $32, all the time!) foreigners, particularly traders, could ask for payment in gold, rather than paper money.

And in fact, back in the day, so-called "trading coins" were kept in vaults under the streets of New York for use in paying foreign debts.   But as international commerce developed and the dollar became the de facto currency of exchange (and still is, despite inroads of the Yen, the Euro, and the Yuan) the idea that you would have to exchange dollars for physical gold was nonsense.   And in fact, exchanges of money ceased being physical at all, but rather entries in computer systems.

But, by 1973, the official exchange rate of $32 an ounce (the official rate, according to the brochure linked above, was only $42 an ounce, as of 2008!) was ridiculous, and foreigners started a run on gold, as the world price for gold was higher.
If Nixon had not acted and let gold "float" then we would have been drained of gold reserves in short order.

Simply stated, if you made a gold coin back in 1973, it would have cost far more than its face value to make, just like the penny.

And therein lies the problem with tying a currency to a mineral.    You are not "backing the dollar with gold" but rather tying the value of your currency to a commodity - and commodities change in value over time.

And the value of the commodity is determined by supply and demand.  Supply increases when the price goes up - hence all the mining activity in Elko and other places, which is increasing the supply.   As a country, you have no control of your currency, but instead have ceded control to the world markets.

And demand?  People get nervous - like they are today - they hoard gold.   And that is why, prior to 1973, Americans were not allowed to own significant amounts of gold - to prevent hoarding.   People hoard gold, and your currency is tied to gold, then it affects the value of your currency.

So no, going to a gold standard won't "fix the economy" - it would be a nightmare.  And folks who pine for the "good old days" of the gold standard really need to crack some history books, big time.

The early 1900's were not the "good old days", financially.  And people who tell you this are blithering idiots who slept through history class.