# Thread: What happens when you run out of gold?

1. Originally Posted by Black Flag
You do not understand the difference between:

A gold standard
and
A fiat standard.

To you, they are the same thing.

Thus, you have serious conceptual problems in understanding monetary theory.
No, you're wrong, and that is why instead of explaining what you are saying, you are resorting to ad hominem attacks. If you actually had an argument, you would not need to do that.

Regardless of whether a currency is backed or not, you still need to decide how much of that currency you should physically produce. If you are dealing directly in gold, you have to decide how many coins to mint. If you are gold-backed but not actual gold, you need to decide how much currency your market demands. Then you buy that much gold, stick it in your vault, and then you produce the bank notes. If it's purely fiat, you do exactly the same thing but skip the part where you buy the gold.

Originally Posted by Black Flag
Where is this magical formula?
You quite obviously have never studied advanced economics. It's a rather complex regression, which no doubt many people have already derived, but I've never seen it published. Depending on the size of your market, it could range from rather simple to extremely difficult. I understand how to do it but I'm not knowledgeable enough to do it myself; if you were opening up a seriously currency-issuing bank/mint, you would want to hire an econ PHD to do this and other things for you.

Originally Posted by Black Flag
But you pretend the cook "knows" what the sales will be that day, yet, there are many days when they are way behind in their orders and many when there is waste - yet, you think this should not happen because you have a magic math calculation.
Estimates are not always perfect, but they are better than no estimate at all. You're agreeing with me, by the way, and countering your earlier argument. I don't mind.

• I heard the world was running out of gold so I took personal responsibility and raised the price to \$100K/oz. Fixed!

• Originally Posted by Domalais
This would force users of the currency to move to smaller and smaller denominations of the currency, and eventually cause the currency issuer to issue coins or bills that were smaller and smaller fractions of the currency. Millipennies and micropennies.
If the market found it inconvenient to trade with millipennies (of gold), there are other forms of money that could be more convenient like a penny of silver or whatever people find convenient to trade with that is easily divisible and holds value.

• Originally Posted by Domalais
No, you're wrong, and that is why instead of explaining what you are saying, you are resorting to ad hominem attacks. If you actually had an argument, you would not need to do that.
You do not understand what "ad hominem".

It is obvious you do not understand the difference between a gold standard and a fiat standard, either - as demonstrated by the offending post to which I responded .

Regardless of whether a currency is backed or not, you still need to decide how much of that currency you should physically produce.
No, you do not.

You have no idea at all to "how much"

You still have not produces a shred of calculation for you to know such a thing.
Since such knowledge is necessary for you to do such a thing, how you possibly can suggest something that is impossible be, indeed, plausible is beyond me.

If you are dealing directly in gold, you have to decide how many coins to mint.
It matters no one bit.

Products are priced with a reference to a quantity of gold - added a layer of abstraction, such as a certificate, does not change this.

The prices of goods as it is referenced to gold goes up and down based on the supply of gold in the market - again, layer of abstraction notwithstanding.

If gold supply is tight, the prices of goods will go down

If gold supply is plentiful, the prices of goods will go up.

If you are gold-backed but not actual gold, you need to decide how much currency your market demands.
Where is this math formula for you to make this calculation?

You quite obviously have never studied advanced economics.
hahahahahah - nice joke!

It's a rather complex regression, which no doubt many people have already derived, but I've never seen it published.
Yep, it is infinitely complex, but -according to you- some one figured it out, but *wow* they don't want to win the Nobel Prize in Math and Economics, so they haven't published it...!!!

Amazing you know that it exists, yet, have never seen it.....

Depending on the size of your market, it could range from rather simple to extremely difficult. I understand how to do it but I'm not knowledgeable enough to do it myself; if you were opening up a seriously currency-issuing bank/mint, you would want to hire an econ PHD to do this and other things for you.
...and with all his PhD worthless education, he couldn't do it either.

Estimates are not always perfect, but they are better than no estimate at all. You're agreeing with me, by the way, and countering your earlier argument. I don't mind.
You are confused.

You believe you have a formula - but you don't.

I demonstrate that no formula exists, that using feedback mechanisms, based on statistics, is a guess - but each and every business will produce as much as they can, profitably.

To you, me showing that your point is nonsense by showing how the system works (profit/loss) is me proving your point....

*gasp*

• Originally Posted by harikaried
If the market found it inconvenient to trade with millipennies (of gold), there are other forms of money that could be more convenient like a penny of silver or whatever people find convenient to trade with that is easily divisible and holds value.
There is no economic theory that demands there exist only one money at a time.

(PS: Do not confuse a quality -such as divisibility- with being "money". Salt is easily divisible, but not money. Rai stones are not divisible, but are money.
Further nothing "hold's value" - but things are "valuable to hold")

• Originally Posted by WilliamC
Yes and the fact that China essentially controls the rare-earth elements (they sit on by far the largest known concentrations, over 90% of the known deposits) is quite interesting for the long-term future of technology in general.

But the asteroid belt has them a plenty...
Incorrect. Rare earth metals are not rare by any means.

http://www.reuters.com/article/2011/...76300320110704

• Originally Posted by Black Flag
It is obvious you do not understand the difference between a gold standard and a fiat standard, either - as demonstrated by the offending post to which I responded.
Which is, of course, why you repeat yourself rather than elaborating. I understand.

Originally Posted by Black Flag
It matters no one bit.
In a market directly using gold as currency, you will still have minted coins, rounds, fractions, whatever you want to call them. This provides a third party verification of the purity and weight of that gold. Again, the manufacturers of those products will decide how much to produce.

Depending on the reliability, trustworthiness, and renown of that third party, people may or may not pay a premium for their gold - or accept it only at a discounted rate. In other words, it would be very similar to the current gold market, wherein mints are able to make a profit by certifying the purity and weight of gold. There is no reason to think this would change.

It also means that there is both a market for gold and a market for gold products suitable for use as currency. Call them whatever you wish. These two markets will be highly related but it's unlikely that the two prices would ever be the same.

• Originally Posted by Domalais
Which is, of course, why you repeat yourself rather than elaborating. I understand.
What do you want elaborated - you said you knew, so I'm waiting for you to demonstrate it.

In a market directly using gold as currency, you will still have minted coins, rounds, fractions, whatever you want to call them.
So what?

It is irrelevant.

You have a 1,000 tonnes of gold.

Whether you print 10 million little pieces of paper, each worth 1/1000 of an oz, or 1 million pieces of paper worth 1/100, etc.....

...you still...only...have....1,000 tonnes of gold.

This provides a third party verification of the purity and weight of that gold.
So you don't trust guy number one because.....?
But you trust guy number two because....?

Again, the manufacturers of those products will decide how much to produce.
They will produce as much as they can do, profitably. Otherwise you are arguing that they are in business NOT to make a profit

Ok, I see you may not know what "fiat" means.

Fiat: Fiat money is money that derives its value from government regulation or law

A "fiat" standard is FRBN, where by merely its existence as a Note, is money.

A "gold" standard is not fiat, since it derives its value from the desire of people wanting gold.

You can make gold fiat by making the price of gold fixed at a price determined by government. Legal tender laws do this, where a \$50 gold coin is worth \$50 in fiat, but worth \$1600 as a commodity.

As you can see, with fiat, you can pretty much manufacture as much "money" as you wish, either by printing digits (FRBN) or by changing the fixed value (\$32 to \$42.50/oz.AU)

Regardless, the price of the goods in the market systemic rise and fall based solely on the supply and demand of money.

• Here is a good paper on the subject of competing currencies:

http://www.cato.org/publications/pol...e-better-money
http://www.cato.org/pubs/pas/pa017.pdf

What Commodity?
So far I have ignored the question of what commodity a private system should base its money on. Such systems haveused gold or silver. In my opinion, either would be a poor choice in the modern world. Gold and silver are well suited
for a simple commodity money, since they have a high value to weight ratio (making them portable), are easilysubdivided and recombined, and relatively easy to measure and evaluate. In a modern society none of thesecharacteristics is important, since the circulating medium is not the commodity itself but claims upon it. On the otherhand, silver and gold have very inelastic supplies and relatively inelastic demands. Judging by recent history the valueof both (in terms of most other commodities) can and does vary erratically even without the additional instabilities thatwould be introduced by a fractional reserve system based on them.
The ideal commodity backing for a modern system would not be any single commodity, but a commodity bundle. Thebank would guarantee to provide anyone bringing in, say, 100,000 of its dollars with a bundle consisting of a ton ofsteel of a specified grade, 100 bushels of wheat, an ounce of gold, and a number of other items. The goods making upthe bundle would be chosen to make its value correlate as closely as possible with the general price level. While achange in production technology or non-monetary demand might alter the value of one good in the bundle, it wouldhave only a small effect on the value of the bundle as a whole. Since the quantity of such goods being used formonetary purposes would be a tiny fraction of the total quantity of steel, wheat, gold, etc., changes in monetarydemand would have negligible influence on the value of the bundle, and hence on the value of money.
It is worth noting that the system I have described would work, in practice, very much like the ideally stable fiatsystem described earlier. If the money supply increased to the point where the commodity bundle was worth more than100,000 "dollars," holders of dollars would turn them in for commodities, bringing the money supply and the pricelevel back down. If the money supply fell so that the commodities were worth less than the money, banks would findthat they could issue additional money without any of it being turned in for commodities, and the money supply wouldrise. The system as a whole would therefore stabilize prices in such a way as to make the price of the bundle (a crudeprice index) stable at its "face value." And it would do this through the private interest of the competing banking firmsissuing the money, without relying on the wisdom or benevolence of any public employees appointed to manage thesystem. Since the nature of the reserves in this system makes it unnecessary for the banks to hold any significantquantity of them, such a system is essentially equivalent to a "tabular standard"--a system under which the issuer ofmoney is not obliged to redeem it, but is committed to maintain that money supply, which keeps a specified priceindex a particular value. The only difference is that under a fractional reserve system based on a commodity bundle theobligation to redeem the currency in commodities is a mechanism for enforcing that commitment.

• Originally Posted by Harald
what commodity a private system should base its money on.
It doesn't matter - the People will choose what ever they want to use.

Attempting to "force feed" some sort of standard upon them merely replaces what is with exactly the same thing - another fiat money.

...and thus, will fail like all fiat money.

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