Myth 1: There isn’t Enough Gold to Operate a Gold Standard Today

Personal finance columnist John Waggoner (2012) recently claimed in USA Today that “there's not enough gold in the world to return to a gold standard.”  He explained:

In the gold standard, the amount of currency issued is tied to the government's gold holdings. The price of gold would have to soar to accommodate U.S. trade in goods and services.  … Total gold owned by the [United States] government — including the Federal Reserve and the U.S. Mint— is 248 million ounces. That's about $405 billion dollars at today's prices, hardly enough to support a $15 trillion economy.

The government could use a kind of semi-gold standard, limiting the amount of money printed to a percentage of its gold reserves. For example, it could say that at least 40% of all currency outstanding be backed by gold. This would limit the money supply, but be vulnerable to government manipulation — revising the limit downward to 5%, for example.

Waggoner’s figures of 248 million ounces and $405 billion are approximately correct, but his inference that the price of gold would have to soar to make that an adequate stock of gold reserves is not.  The current Status Report of U.S. Treasury-Owned Gold (31 August 2012) puts the US government’s total holdings at 261.5 million ounces.(The source of Waggoner’s lower figure is unclear.)  At a market price of $1,700 per fine Troy oz. (to choose a recently realized round number), those holdings are worth $444.6 billion.  Current required bank reserves (August 2012) are less than one fourth as large, $104.4 billion. Looked at another way, $444.6 billion is 19 percent of current M1 ($23278 billion, the sum of currency in circulation and checking account balances), which is a more than healthy reserve ratio by historical standards.

Waggoner labors under several misconceptions.  First, fractional reserves are the usual case.  So long as redeemability on demand is maintained de facto, they do not make a gold standard into a “kind of semi-gold standard.”  Second, it is not generally true that “the amount of currency issued is tied to the government's gold holdings.” It is true only if the government monopolizes the issue of gold-redeemable currency and the holding of gold reserves, which was not the case in sixty-plus cases of competitive private note-issue under historical gold and silver standards (Schuler 1992).  Third, the vulnerability of the average reserve ratio to government manipulation is not inevitable.  It can readily be avoided by leaving commercial banks to determine their own reserve ratios, as in historical free banking systems.


Kathleen M. Packard, Publisher
Ralph J. Benko, Editor

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Professor Jacques Rueff

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