The Vet

Treasuries' True Risk

Paco, congratulations on an excellent piece.

Many cannot understand the difference between fiat money and gold as a means of representing value because they have only been exposed to fiat as the basic unit of valuation and store of value.

The argument that the world could not advance economically due to the obvious limit in annual production of new gold is a fallacy. Under a gold standard the price (expressed as a weight of fine gold) for every good or service would adjust according to the ease or difficulty (expense in labour and energy) of producing that good or service relative to the expense incurred in producing the price of that quantity of gold.

As a result an increase of demand for a commodity or service which could not be easily met by an increase of supply at a particular price (expressed as a weight of fine gold) would result in an increase in the price of that item until the supply could meet the demand. As this increase could exceed the increase in the supply of gold the prices of all other commodities and services would have to fall slightly to maintain reasonable relative values.

Increases of demand for all commodities and services (growth) over and above increases in the supply of gold in turn would result in an increase in the "price" of gold relative to everything else but supply would always remain relatively stable, so as a result the economic system and prices would also be stable.