Thursday, March 30, 2017

Gold Miners and the Gold Standard

Gold Miners and the Gold Standard
Thomas Allen

    One of the many arguments used against the gold standard is that gold is at the mercy and whim of a single industry: the gold mining industry. The gold mining industry decides how much gold is available. This argument that gold miners decide the amount of gold available for money fails on at least four accounts.
    First, current mining of gold provides only a small fraction of gold available for monetary use. Nearly all the gold ever mined is available. Gold miners typically provide about 2500 tons of gold per year to a world stock of around 155,000 tons.
    Second, when the real bills doctrine and decentralized banking accompany the gold standard, the quantity of paper money (credit money) available does not correspond to the quantity of gold available. Bank notes and checkable deposits can expand and contract to meet the needs of commerce independently of the quantity of gold. Gold mining does not have a monopoly on gold-based money.
    Third, gold’s monetary value depends on the integrity of the monetary unit and its issuer and not just the quantity of money. Having a definite fixed monetary unit is more important than the actions of gold miners.
    Fourth, the profit motive guides gold miners. They have an incentive to provide their customers as much gold as they demand in a cost-effective way. Profits of gold mining increases as output increases and production cost decreases. The desire for profit drives gold miners and not the monetary needs of the country or the desire of gold miners to manipulate the money supply.
    Opponents of the gold standard claim that the markets do not regulate the gold supply. Gold miners usually mine gold as fast as they can. Smart miners do not necessarily mine all that they can as fast as they can. They mine at a rate that maximizes their return. Furthermore, the consumer is the final determinant in the quantity of gold mined by his consumption of gold and gold products.
    Under the gold standard, the markets regulated the quantity of gold coins and gold bullion used as money. If the markets demand more coins, jewelry, flatware, and other items of gold are converted to coins. Gold dealers and others melt gold products into bullion bars and present this gold to the mint for coinage. If the markets decide that too much gold is being used for money, people melt the excess gold coins and use the gold for other purposes, such as gold teeth and jewelry.
    One feature of the gold standard is that it is self-regulating and automatically adjusts to meet the demand for metallic money. Some opponents of the gold standard are convinced that gold miners regulate the supply of gold by how much gold they mine. Gold miners do add to the supply of gold by the amount that they mine. However, unless they are coining their gold, they are not adding to the monetary stock. (The exception is the Rothbard school, which claims that all gold regardless of form — the weight of the metal and not its form makes the money — is part of the monetary stock.) The markets decide how much gold is being used as money. They decide that by the quantity of gold brought to the mint for coinage and by how many coins are melted for other uses. If the value of gold in jewelry, for example, begins to rise in relationship to the value of gold in coins, people will melt the coins and convert them to the more valuable jewelry until the value of the two are brought back in line. If the value of gold in coins begins to rise in relationship to gold in jewelry, people will convert the gold in jewelry into coins until the value of the two are brought back in line. Gold miners may influence the quantity of gold available, but they do not decide how much of the available gold is used as money.       
    Some opponents seem to believe that the gold standard operates like the current fiat-paper-monetary standard where bankers lend new money into circulation. They fear gold miners lending new gold money into circulation. Gold miners could do this, but it is highly unlikely. They would only be lending about 2 percent of the world gold stock. The other 98 percent is available for monetary use without borrowing or lending. Are people really going to borrow that 2 percent?
    Gold miners do not lend newly mined gold into circulation. They spend newly mined gold into circulation by paying their employees, stockholders, bondholders, creditors, and suppliers and also by paying their taxes and utilities.
    Contrary to the claims of opponents of the gold standard, gold miners do not control the quantity of gold available for monetary use. They merely add a small percent to the global gold supply each year. The markets decide how much gold is to be used as money in the form of  gold coins and monetary bullion.

Copyright © 2013 by Thomas Coley Allen.

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