What should the price of gold be in any new gold standard ?
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Understanding the Old Gold Standard Basics
The 18th century gold standard system that so many people view as a free market alternative to central banks determining credit conditions, money supply, etc., was not really a free market. The system was dependent on the central bank, in this case the Bank of England and later the U.S. Government, offering to buy all gold tendered to it at a price established by the government. Moreover, that price had to be far above any foreseeable market clearing price. If it was less than any foreseeable market clearing price the banking system could not accumulate the gold stocks necessary for the system to work. If the price was too low private individuals would see it as a one way bet to accumulate gold stocks, much as they did in the 1960s.
The Effect Of the Old Gold Standard Price On the Great Depression
Many economists believe that the supply of gold at the price of $21/oz. was too low and that this, together with the French and the U.S. holding too large a share of the gold stocks, was the fundamental driving force behind the 1929-33 world wide depression. Yes, Bernanke blamed the depression on the central banks, but they were just following the rules the gold system imposed on them. The depression ended in each advanced countries soon after each left the gold standard. Moreover, Roosevelt did much to end the depression when he arbitrarily raised the price of gold to $35, increasing the world supply of gold by two-thirds.
In the 1960s the problems of an inadequate supply of gold reemerged and Nixon solved the problem by [having] the price of gold free to be set by the market. In 1969 there were no significant central bank purchases or sales of gold so the 1969 price of around $39 probably was a good market clearing price that balanced the supply of gold and the non-monetary demand for gold.
What the Real Price of Gold Should Be These Days
Of course in a free market there is no reason for the price to remain stable and in the early 1970s I conducted a major study of the supply and non-monetary demand for gold –industrial, jewelery and hoarding–… [and concluded that,] given the price elasticities of demand and supply, to balance the supply and non-monetary demand for gold the real price of gold would have to rise at a 3% to 5% annual rate…The real price of gold, rising at a 3% annual rate since 1969, would [have generated] a current price of some $900 and if the trend growth rate had been 5% the current price would be about $2,225 as compared to the current market price of [marginally less than] $1400.
Given the trends outlined above I would conclude that to re-establish a new gold exchange standard would probably require a gold price of about $5,000…[and that begs the question:] What would re-establishing a $5,000 gold standard mean for inflation?
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