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Lance M
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Making Change: The Simplest Practical Gold Standard System - Nathan Lewis - New World Economics

All fine and dandy UNTIL you realize that you have just crippled the average resident of Belize by destroying its economy.

Let me explain. If gold increases in value as measured in USD (or GDP, etc.), then the B$ fixed to gold will become worth more USD (or GBP, etc.). This means that any exports from Belize are now more expensive for the US, etc. to buy, hence less competitive. People in Belize will not want a pay cut, so there is only so much prices can drop to accomodate. Keep the process going, and eventually, Belize will be a country with a B$ that is just too expensive.

Yes, imports will be cheaper, but the economic output of Belize will suffer, as will its balance of payments. People will be out of work, so cannot buy the fantastically cheap imports. Yet, the B$ will not drop to reflect this mass unemployment, as it is pegged to gold (which does not eat, nor does it need housing...).

So the B$ will become a financial instrument of the bankers only.

Increase the number of B$ per oz. of gold then? Ahh, but every B$ holder would have just taken a gold-exchangeability haircut. Think they will wait around and trust you to forgo further haircuts? Fat chance! They will abandon the B$ immediately, causing a run on the bank's gold reserves (how much do you want to store in the banks themselves? the stuff is heavy and a bank-robber magnet).

The only people that can reasonably try this are the Swiss. Lots of gold, huge financial sector, relatively recently depegged the Franc from gold.... However, even they have important non-gold-based economic sectors that would be similarly destroyed.

However, there is a solution. A non-state actor MAY be able to create a viable currency that can parallel the existing currency systems, much like many countries have two prices, one for local currency and one for USD. (A few have tried and are trying this even now.) Then the local currency or the gold-currency can fluctuate all they want and no uninvolved bystanders are hurt.

Lance Macho
lancemacho@rock.com
(write to me and I'll send you an invite when my website is up and running) :-)

Commented 4817 days ago

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Beginning of the headline : Before you get into the complex, it is good to start with the simple.What would be the simplest possible gold standard system for practical use today? "Just use gold coins!" comes the immediate reply.Ummmm ...nope.The smallest practical gold coin is about a tenth of an ounce.That would be worth $160 today... Read More

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