Chapter 2: The High cost of Production: Specie as a Waste of Production - National Reserve Currency

2.11   The High cost of Production: Specie as a Waste of Production

Gold

Some influential economists produced estimates that the resource costs of gold (mining, refining, assaying, storing and guarding) could be up to 4% of GDP. As such it is a needless misallocation of resources if token coins or fiat money can do the job of being a medium of exchange at a negligible resource cost. Before discussing the costs of the gold standard, it is important to keep in perspective the costs of the Fiat standard and more importantly the costs of the consequences of implementing the Fiat standard. One well-known consequence is the cost of bailing out the economy. A rather modest older example is given below.

Studying the resource costs of gold production in isolation is a poor proxy of total costs. Comparing the resource costs of gold against the resources costs of paper does not settle the issue. We have to look at the opportunity costs from not having the Gold Standard, in essence this means realizing the missed opportunities to the economy from the benefits that entail a stable and sound currency. So whilst the production costs of paper may be regarded as negligible compared to the costs of extracting, mining and transporting gold, it’s the total costs to society of Fiat money that must be considered, which are:

• The costs of inflation-induced misallocation of resources from a Fiat standard. In essence paper money is the key facilitator of creating inequity between the rich and poor by being the engine for inflation growth.
• The costs of political factions vying for the power of the printing press.
• The costs imposed by special-interest groups in their attempt to persuade the authorities to misuse the printing press.

Thus the isolation in which the costs of gold are compared to the costs of Fiat, are in effect analogous to saying sand is cheaper than concrete, and therefore should be used to lay the foundation of a structure. The very edifice of Capitalist markets has been crumbling before our eyes – all based on Fiat currency, so who would argue against paying for a strong foundation.

Another line from the critics of the Gold Standard is that they assume that the activities of mining gold, refining it, casting it into bars or minting it into coins, storing it and guarding it are collectively wasteful activities – which are all under the implicit assumption that with the Fiat standard such activities would cease. But that case assumes that the imposition of the paper standard will cause gold to lose its monetary value. Whereas gold continues to mined, refined, minted, stored and guarded – and still incurs a resource cost. In the case of irresponsible monetary management the resource costs of gold under the paper standard may indeed be driven higher than just the Gold Standard alone.

Finally, there are some false assumptions that lead to the high estimated costs for the resource costs of gold, namely assuming that gold supply is perfectly elastic. In truth gold supply is relatively inelastic. In an expanding economy, an increasing demand for money would lead to additional resources being devoted to gold mining. But given the inelasticity of supply, the dominant effect of the increase in the demand for gold would be a price effect rather than a quantity effect. There would be some increase in the quantity of gold supplied, but due to the price effect, this increase would be small in comparison with the increase in demand. The resource costs of extracting the additional gold would be correspondingly small.

It must be noted that advocating the Gold Standard does not necessarily mean hiving bars gold to engage in everyday commercial transactions. A Gold Standard works perfectly well as long as any paper money in circulation is equivalent to the valued quantity of gold in the economy.

 

Cost of Bank Bailouts as % of GDP