On the Supply Objection to the Gold Standard
Since the gold standard was abandoned in 1971, many people have sought to return to such a standard in order to combat inflation and rein in central banks. Keynesians and others who support fiat currency and central banking present several criticisms of this approach. One of these criticisms is particularly nonsensical, but occurs with increasing frequency: that there is not enough gold in the world to back the quantity of currency in existence, and thus returning to gold would set off a deflationary spiral while destroying several industries that depend on gold. Let us address this question from a scientific standpoint, return to economic matters, and address the claimed effects.
Let us begin by finding the absolute limit of what gold can do for a monetary system. As the United States dollar is the world reserve currency at the time of this writing, it makes sense to use it as the currency to peg to gold. The smallest unit of gold is the atom, and the smallest unit of dollars is the penny. The most extreme possible case would be to set one penny equal to one atom of gold. What would this look like in practice? Any basic text on chemistry can lead us to the answer. The only stable isotope of gold is Au-197, and its molar mass is 196.967. This means that in about 197 grams of gold, or 6⅓ troy ounce coins of the type minted by many governments and private mints, there will be Avogadro’s constant of atoms, which is 6.022140857×10^23. Setting one penny equal to one atom of gold, this is $6.022×10^21 or $6.022 sextillion easily fitting in one’s hand.
This amount of money is so large that people cannot truly understand it due to the lack of a frame of reference for it. Few people will handle anything beyond millions of dollars at any point in their lives. Large businesses may deal with billions of dollars. The most powerful governments have budgets in the trillions of dollars. According to a History Channel documentary, the dollar value of the entire planet is in the quadrillions of dollars, checking in at $6,873,951,620,979,800, and subtracting Earth’s gold content leaves $6,862,465,304,321,880. As the limit of one penny per atom allows one to hold the current market value of a million Earths in one’s hand, it is clear that science imposes no physical limit to make a gold standard infeasible.
Another useful exercise is to try setting the value of all available gold equal to the value of the rest of the planet. The total available gold content at present amounts to 186,700 metric tons. Defining this amount of gold to be worth the above figure of $6,862,465,304,321,880 gives a gold price of $36,756.64 per gram or $1,143,259.40 per troy ounce. This is very expensive by current standards, but current standards do not come close to economizing the entire planet. The actual price would therefore be far lower than this, but this exercise is useful for setting an upper bound.
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