If a proposal to move the United States to either a gold, silver, or bi-metal standard passes, we will probably see the biggest economic contraction in history because there is not enough gold or silver in the country’s storage in order to cover the total money supply.
First, in calculating the country’s value of gold and silver holdings, we find that according to the 2010 United States Mint Annual Report [PDF], there are 245,262,897 troy ounces of gold stored in the United States Bullion Depository in Fort Knox, Kentucky. This amount has not changed in recent memory. In the Mint facility at West Point, nicknamed the “Fort Knox of Silver,” the country owns 7,075,171 troy ounces of silver. But what they worth?
Determining the worth of the metals in storage is an interesting exercise. If we valued the government’s total holdings in accordance with statutory requirements, gold is valued at $42.22222 per fine troy ounce (see 31 U.S.C. § 5117(b)) and silver is values at least $1.292929292 per fine troy ounce (see 31 U.S.C. § 5116(b)(2). Although these values are much lower than what the markets value these metals, when the federal government counts its assets, gold and silver is based on numbers written into law.
Valuing these metals based on their market value, gold is worth $1,514.20 per troy ounce and silver is $35.16 per troy ounce (New York prices when the market closed on May 20, 2011). These values significantly raise the value of the government’s holdings. Using these numbers we can calculate the United States’ total holdings as:
| Gold Statutory Value | Gold Market Value | Silver Statutory Value | Silver Market Value | |
|---|---|---|---|---|
| Inventories (troy ounces) | 245,262,897 | 245,262,897 | 7,075,171 | 7,075,171 |
| Valuation per Troy Ounce | 42.2222 | 1,513.20 | 1.292929292 | 35.16 |
| Total Value (in millions) | $ 10,355 | $ 371,205 | $ 9,148 | $ 247,985 |
| Total Statutory Value: | $ 10,365 million |
| Total Market Value: | $371,453 million |
This means that the amount of money the economy can have is over $371 billion. This seems reasonable until we look at the total amount of money that in economy.
Economists have several ways of calculating the money supply in an economy. The Federal Reserve used M1 and M2 as their basis of analysis. M1 is a narrow measure of money’s function as a medium of exchange. In other words, it is the purchase power of all liquid or near liquid assets. M2 is a broader measure that reflects money’s function as a store of value. For the Federal Reserve, M1 is basically the supply of ready cash. M2 consists of M1 plus other deposits that are not as readily available, such as savings and retirement accounts. The economists at the Federal Reserve are constantly updating these numbers to determine how well the economy is doing.
According to the Money Stock Measures published by the Federal Reserve on May 19, 2011, at the end of April 2011, the seasonally adjusted M1 money supply was $1,901 billion meaning that there is just under $2 trillion of ready cash in the economy. The M2 money supply, the count of all cash, is $8,945.7 billion.
When calculating what is needed to back the United States currency with precious metals, this is where basic mathematics shows the potential failure of the policy. If such a policy requires the instant conversion of all ready cash (M1) to be backed by metals, only the first $371 billion of the nearly $2 trillion could be converted. In other words, in order to back every dollar with the country’s store of metals, we are over $1.6 trillion dollars short. To cover the entire money supply (M2), there is a $7.2 trillion shortfall. Simply, there is only enough gold and silver to cover about 5-percent of all cash and equivalents in the United States economy.
In order to break even on the conversion, the country would either have to acquire precious metals on the open market, issue $7.2 trillion in bonds that had to be backed by precious metals to a world that does not have those kind of assets, or find a way to revaluate the dollar so that the total money supply can be covered by the $371 billion in physical assets.
And this only covers current assets. It does not account for any growth!
Regardless of how the metals advocates justify their positions, it would be impossible to back the entire economy with down payment of 5-percent.
2 comments:
A universal standard would certainly benefit economies although I think too many would be afraid of being seen as the causes of turmoil in the short-term to actually do it.
General population would need to be educated as to the need and benefit of this policy as well as having their expectations set for the transitional period.
As Don Boudreaux cautioned at Cafe Hayek on May 25, do not confuse "the economy" with the state. I add that the so-called "money supply" is only a tally of outstanding FRNs and claims on them. As Hayek himself said when criticizing Milton Friedman's "monetists" of Chicago, we do not know all the forms of money. Also, of course, there is no such thing as "the economy" but that is another issue.
What would happen, as coin dealer Patrick A. Heller of Liberty Coins in Lansing has pointed out via Numismaster and other publications is that the US government would have to admit to the true value (or lack thereof) in their obligations: gold would go to $300,000 per ounce, though remaining at about 1500 Swiss Francs.
I pointed out also via the same media that we do, indeed, have a Federal Gold Standard Dollar as long as the US Mint sells its gold coins across the counter for FRNs at the market price for gold.
Hayek explained the errors in the Rothbard/Mises theory of 100% gold backing. It might be nice and might be important, interesting, and valuable, but you can have stable free-market paper money based only on speculative value. Hayek pointed to art dealers who own the plates for making lithos: they cannot inflate the markets and they must buy back high to keep the value up. I point to common stocks, which often have no par value, pay no dividends, and yet rise (or fall) with expected future value.
In short, the conservatives and libertarians are on the right track, perhaps, but, like many numismatists, they miss some important considerations.
Myself, I always bring it back to the bourse floor: we participate in the largest unregulated money market in the world. Considering all the forms of exchange on the bourse floor, the "money supply" is more than just Federal Reserve Notes.
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