by Jon Roland, cross-posted from Obitur Dictum

With increasing talk about the infirmity of fiat currencies, more people are talking about a return to the gold standard, but is that a feasible option? It is said that it does not matter that growth in the supply of gold has not kept up with growth in the world economy, because gold can always be divided into tokens small enough for small transactions. But would that work? Of course we could embed a single grain of gold into a piece or transparent plastic or glass that would permit testing of the grain to make sure it was genuine, but would this really be convenient or cost-effective for a working daily currency?

According to the Coinage Act of April 2, 1792, the original gold coin, the Eagle, denominated at “ten dollars”, contained 247.5 grains of pure gold. A troy ounce is 480 grains. As of this date 1 troy ounce of gold is trading for 1,854.25 $US, or about 3.86 $US per grain of gold. That is about the price of a gallon of gasoline at the pump, so to purchase a gallon you would need a token containing a single grain of gold, which is about the size of a grain of sand. It could be embedded into glass or plastic and verified using something like a spectrum analyzer, but that is an expensive piece of equipment and takes several minutes to get an evaluation. Not practical.

The way around the verification problem would be to embed something in the token with the grain of gold, such as a hologram that encoded a digital signature from the mint, in much the way we are moving to do for verifying paper money. It would even be possible to spread the gold grain into a digital code that would allow verification of it.

As an aside, note that in 1792 a “dollar” was 24.75 grains of gold, which would be 95.54 $US today, so we can say that in some sense the “dollar” has lost about 99% of its value in 219 years, over what it would have if we continued to use eagles as currency. Of course, the only reason gold is only trading at 1854.25 $US is because it is not used as currency. If it were it could easily be 20-100 times that amount.

Backing currency with gold today would make it so valuable it might become profitable to extract it from sea water, at the same time it is desalinated for drinking water. However, it would also become so valuable that it would be profitable to mine asteroids for gold (and other metals). A spectrum analysis of a large Earth-crossing asteroid given the propitious name 2010AU79 indicates it may be composed of as much as 10% gold, 20 million metric tons, more than 100 times as much gold as has ever been mined on Earth. That much gold could easily pay the cost of setting up a mining operation on the asteroid, and whatever country did it would rule the Earth. The mining operations could be largely automated, reducing their costs, and the extracted metals formed into solid foam blocks like pumice that could be put into a descent trajectory into the Earth’s atmosphere, and land on an ocean, where they would float and could be picked up by ships.

Now of course injecting so much gold into the world market would devalue the existing gold holdings of everyone, as did such an injection of gold from the New World into Europe by Spain in the 1500s, but the country that does the injection would retain the advantage with respect to the currencies of other nations. It might become possible for the U.S., if it mined the asteroid, to once again mint gold coins (and coins made of other metals) that could each purchase a gallon of gas, albeit they might only be the size of a dime.

For more on this see Money Matters.

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