The present quantity of gold would be adequate to support a global gold standard.
The ratio of gold held by banks to bank deposits can give an indication of the adequacy of gold. If the gold held by banks was 50 000 tonnes and the 5 000 000 tonnes, that is a metal reserve ratio of 1%. If the optimal ratio was 4%, the system will adjust as I describe later. However before we get there, it should be understood why there should be any demand for bank reserves of bullion. The bullion under a gold standard acts as the ultimate monetary base, a non-financial substitute for bank deposits as a store of value and means of payment. Some proprtion of gold bullion is therefore kept outside the financial system in direct ownership of individuals and non-financial entities. The demand for these holdings is to reduce transaction costs. At the margin, gold can be moved into and out of the financial system at low cost, and so the equilibrium is set be equalisation of the marginal utility or return from both forms. The financial system pays interest, the direct ownership does not, so gold is only kept outside the financial system if it offers a return in terms of lower transaction costs equal to or greater than the interest rate. If you think the scope for these savings is slim in a modern economy, I would not dispute it. If the reserve ratio is less than optimal, the banks offer more attractive interest rates. This bids more gold into the banks. The transmission mechanis is as follows: The shortage elevates the interest rate is above the long run equilibrium set by capital markets Demand for loans is diminished by the higher cost of borrowing, and equity investment is less rewarding due to higher borrowing costs and better returns from banks. Demand for construction of new capital (i.e. buildings, structures and plant) is reduced, as is demand for consumer goods financed by consumer borrowing. Aggregate demand is therefore weak, leading to deflation. Deflation increases the price of gold reletive to other goods, resources move from production of gold from production of other goods. The increase in supply and reduction in demand (gold consumption is positively corelated to general consumption) leads to an increase in surplus or closing of the deficit of gold. The surplus of gold increases the reserve ratio of the banks towards, to or past the optimal ratio. The interest rate elevation ends. If the reserve ratio is more than optimal, the banks will have excess reserves and wont be interested to pay high interest for more deposits and will be interested to lend out excess reserves for any interest rather than have them lie unproductive and unwanted in their vaults. The cost of holding gold outside the financial system is decreased and gold moves out of the banks. Interest rates are lowered. Lower interest rates reduce the price of both debt and equity making investments more economic. Strong demand for construction of capital, and strong demand for debt financed consumer spending make aggregate demand strong and lead to inflation. Inflation decreases the price of gold, resources move away from gold production to production of other goods. The demand for gold is increased along with general demand. Gold production is increased, gold consumption is increased, the surplus of gold is reduced or eliminated and a deficit of gold may result. The deficit of gold depleates bank reserves and eliminates the excess of reserves. So the process of adjustment would be deflation and higher interest rates if there was a shortage of gold reserves. If indeed there were to be a shortage. Additional note: most banks would hold no gold. Banks would hold accounts with settlement banks who would hold gold and bank/government bonds as liquid reserves. The settlement banks would handle the redemptions and deposits. If they run short of gold they simply sell bonds (small bank in big market) or raise interest rates (large bank having large proportion of total physical gold). David Hillary --- You are currently subscribed to e-gold-list as: archive@jab.org To unsubscribe send a blank email to [EMAIL PROTECTED] Use e-gold's Secure Randomized Keyboard (SRK) when accessing your e-gold account(s) via the web and shopping cart interfaces to help thwart keystroke loggers and common viruses.