At 07:12 PM 1/8/2003 +1100, David Hillary wrote:
The approach of comparing gold reserves and money is so totally wrong I can't understand why it would afflict so many people on this list.
I was wondering when somebody was going to say something like this.
... Ho boy here we go. :-) David, I'll get back to you on your math and concepts, but let me ask you this.The value money held at a bank must be the lesser of its redemption value and the value of the bank's total assets to total liabilities (assuming all liabilities are equal). ...
I thought that in a strict gold standard you had to maintain a constant ratio between the number of monetary units in circulation and the amount of gold in reserve (i.e., deposited by people who accept your units in return).
GoldMoney and e-gold maintain this ratio at exactly 1 digital gram / 1 physical gram. The old US gold standard maintained this ratio at exactly 1 dollar / 23.22 physical grains.
Now you seem to be saying that these kinds of ratios are too simplistic. In particular, the reserve requirements are too strict. You are saying that a bank can just borrow the gold when it needs it by just issuing bonds. Ah yes, good old debt!
Let's just go ahead right now and give GoldMoney and E-gold permission to do that too. Why should they have strict reserve requirements? When they get more successful and can float bonds, we'll let them spend some of the physical gold for their own business needs and then if there's a massive redemption they can just borrow the gold back.
Problem is, if there's a massive redemption, who's going to buy the bonds? I say that any issuer of digital gold currency should be prepared for a full-scale "run on the bank," with 100% redemption of every gold bar in reserve. If that happens, they should graciously and politely fork over all the gold, and then graciously and politely go out of business if that's necessary.
Please remember that in a gold standard, the gold in reserve does not belong to the bank. It belongs to those who deposited it there in return for currency units. The bank is not free to use that gold for any purpose other than redemption of currency units. I know, DGCs are not banks, but the principle is the same.
-- Patrick
http://fexl.com
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