Wouldn't the gold standard present problems when it comes to the international trade of currency?

2 Answers

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   simplicitus on May 20, 2011

   1. Why are you connecting how much is produced with how much gold a country has? Gold produces nothing. What counts are factors of production such as:
   http://en.wikipedia.org/wiki/Factors_of_production

   - labor – the number of workers in the country, their skills, etc.

   - capital – the tools, machinery, etc. that the workers can use to produce things.

   - raw materials – domestic or imported

   - infrastructure – how easy it is to bring the raw materials together with the workers and capital in order to produce the goods.

   Even if all of these are the same, there are differences such as quality of management that determine just what the productivity and hence the production of a society would be.

   Furthermore, gold in your vaults represents money that you haven’t invested in buying capital, raw materials, etc. so the more gold you have the less goods you are producing, all other things being equal.

   2. Even if you are going with the "quantity theory of money" you have to include the velocity factor, and this is NOT constant so you can’t pretend it is:
   http://en.wikipedia.org/wiki/Velocity_of_money

   3. If you are going with oversimplified theory, the price of a tradable object is the same all over the world.
   http://en.wikipedia.org/wiki/Law_of_one_price
   So how the gold moves from country to country is determined by the real costs of production, as goods are produced where they have comparative advantage and sold to other countries:
   http://en.wikipedia.org/wiki/Comparative_advantage
   In this over-simplified world, it will be the pattern of trade that will determine the prices in the long term. And in the short term, it will be the trade that determines where the gold will flow in the short term.

   3. How you move gold around depends on the context. There have been major gold shipments between countries in the past.
   http://chestofbooks.com/finance/banking/Banking-Credits-And-Finance/How-Gold-Shipments-Are-Handled.html
   but more often, it is just an exchange of certificates for bars sitting in some vault.

   4. There are at least three different gold standards and you are not distinguishing between them.
   http://en.wikipedia.org/wiki/Gold_standard
   When you are dealing with gold coins (the specie standard), the money supply is equal to the amount of gold, but with the bullion standard, the government can create more money than it has gold. (In the U.S. up to 2.5X)
   http://www.jstor.org/pss/1807996

   In the extreme cases, such as that of the American colonies, the official currency was gold but since there wasn’t enough, the colonies came up with their currencies – colonial scrip
   http://en.wikipedia.org/wiki/Early_American_currency

   5. As for rich vs. poor, would you rather be an average person in China or an average person in Canada? China has more money in all, but Canada has more money per person. Which do you think of as richer?

   That isn’t to say there aren’t major problems with the gold standard. There are many who argue that it was the gold standard that cause a minor stock market crash to become the Great Depression
   http://en.wikipedia.org/wiki/Great_Depression#Gold_standard
   http://isites.harvard.edu/fs/docs/icb.topic467999.files/October%2022%20and%2027%20-%20Trade%20Money%20and%20Finance/Eichengreen.pdf

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   Prototype on May 20, 2011

   Figure out how WE did for all those years and you’ll solve your problam!