EXPLORATION ’94 — Timely proposal: a new gold standard

In 1934, when the U.S. raised the price it would pay for gold from US$20.67 to US$35 per oz., it was deluged by sellers. By 1949, reserves reached 700 million oz. This huge increase put the U.S. in the position of having by far the greatest reserves in the world and led to the dominance of the U.S. as a world financial power.

But things quickly changed. Because of the fixed gold price-floating money supply gold standard, the supply dwindled for the next 22 years. Finally in 1971 the U.S. was forced to go off the gold exchange standard. I suggest the U.S. government bring its reserves back up close to where they were at the peak in 1949. I suggest the U.S. Treasury (through the proper agency) enter the gold market and start buying at current market prices with the goal of doubling U.S. reserves.

The buying would have four consequences: U.S. reserves would increase, the market price of gold would increase, the increased reserves would lower the theoretical price of gold in a new fully backed gold standard, and the increased market price of gold could lead to increased revenues for the U.S. Treasury.

The first three consequences are easily understandable; number four needs some explanation. What I suggest is that the U.S. Treasury put a royalty on all gold production in the country. This royalty would be based on the market price for gold and would not penalize gold mining companies for selling gold at current prices.

However, after the large price increase that would most likely occur after the government entered the market, the gold mining companies would be in position to reap a windfall gain in profits. My contention is that the gold in the ground is not the sole property of the mining companies but is owned by the country as a whole.

Therefore, I suggest a royalty system where the gold mining companies share the price increase with the U.S. Treasury. The royalty system would be generous to the mining companies to encourage them to mine the gold and explore for new reserves but would not result in their reaping of all the benefits of the new price.

As an example, and I want to stress that this is just an example, the royalty system might be a sliding scale based on the market price for gold. It might look like the following:

* 0-US$400 per oz., mining company receives 100% of sale price * US$401-US$750, mining company receives 75%, U.S. Treasury 25% * US$751-US$1,000, mining company receives 50%, U.S. Treasury 50% * US$1,001-US$5,000, mining company receives 25%, U.S. Treasury 75% * US$5,001 – US$10,000, mining company receives 10%, U.S. Treasury 90% * US$10,001- US$50,000, mining company receives 5%, U.S. Treasury 95% * Beyond US$50,001 per oz., mining company receives 2.5%, U.S. Treasury 97.5%. The above amounts would be generous enough to give the mining companies a good profit and at the same time be a source of revenue to help get rid of the U.S. deficit and eventually pay off the U.S. accumulated debt. The amount the U.S. Treasury would receive would of course depend on the market price of gold.

I estimate, and here again I want to stress that this is just an estimate, if the U.S. doubled its gold reserves by buying another 262 million oz. in the open market, the market price might get somewhere near the new theoretical price. The present theoretical price of US$50,672 per oz. would of course come down because there would be twice as many ounces in reserve but the cost of purchase of the new reserves would have to be added to the money supply.

If the government could make the purchases at the current price of US$400 per oz., it would cost US$105 billion. It would be an exchange of newly created dollars for gold and would not increase the deficit or accumulated debt. It would increase the money supply from US$13,268 billion to US$13,373 billion. The gold reserves would increase from 262 million oz. to 524 million oz. and the new theoretical price for each ounce of gold would be US$25,520. Of course it is unlikely that the government could buy that amount of gold without raising the price. I say unlikely rather than impossible because it could happen.

There are economists in positions of authority with some foreign central banks who are so vehemently against increases in gold prices that they might sell all of their countries’ gold reserves to try to keep the price down. They might also try to convince others to do the same. This would require a well organized selling group

The U.S. is by far the largest holder of gold. The other central banks would have to be well organized to keep the price at US$400 if the U.S. decided to double its reserves by buying in the open market.

I believe the foes of gold would be unsuccessful and the price of gold would rise dramatically. This would then result in royalty payments to the U.S. Treasury from U.S. gold mines.

To calculate the amounts to the U.S. Treasury, I will use a price halfway between US$50,672 and US$25,520. The number I get is US$38,096, which I will round to US$38,000 per oz. I will then assume that the market price will have a 10% discount to the theoretical price, which gives a rounded figure of US$34,000.

The amount the U.S. treasury could expect to receive in royalties on the current gold production of 322.2 tonnes can be calculated. A tonne has 32,150.7 troy oz. This means the U.S. production is slightly more than 10 million oz. per year. The U.S. Treasury share of the gold price of US$34,000 would be US$30,512.50 per oz. The mining companies would receive US$3,487.50 per oz.

Therefore, the U.S. Treasury could expect to receive more than US$300 billion per year in gold royalties. Although not enough by itself to wipe out the deficit, it would be a good start and, combined with other programs, it could eventually get the country back on its feet.

From there the U.S., after putting its own house in order and getting back onto the gold standard, could again assume world financial leadership. This would require creating a better banking system at home, no more Saving and Loans blunders, and using that as a building block for a worldwide banking system.

The cornerstone of the new banking system, the new gold standard, would require a world banking system with higher standards and a more accurate reporting system than it has had at anytime in the past. As it now stands, any bank, anywhere in the world, can increase the U.S. money supply by lending U.S. dollars. In some countries banks make loans without reserves, as was well demonstrated by the Bank of Credit and Commerce International. In the new gold standard it would be imperative that the U.S. money supply and official gold reserves be known at all times to calculate the theoretical price for gold. Therefore, it would require a new reporting system and monitoring agency.

I suggest that the Federal Reserve Board be made responsible for all worldwide banking transactions affecting the U.S. dollar. That is, any bank that has any dealings in U.S. dollars, anywhere in the world, must report these dealings to the Fed.

Also, I suggest that Canada support a new gold standard. To begin, Canada could enter the gold market and start buying gold to bring its reserves up to comparable relative figures with the U.S. By comparable relative figures, I mean that Canada has a population and economy about one-tenth that of the U.S. so it should maintain gold reserves and a money supply of about one-tenth that of the U.S.

Currently, Canada has far less than 10% of U.S. gold reserves. Canada has reserves of about 10 million oz. To maintain gold reserves relative to the U.S., Canada would need 26 million oz. at the present U.S. reserves and would have to double that amount when the U.S. doubles its reserves. Canada would have to enter the market and buy 42 million oz.

Although below the U.S. in gold reserves on a relative basis now, Canada would benefit from a new gold standard even more than the U.S. Although only one-tenth the size of the U.S., Canada produced 157.43 metric tonnes gold in 1992, nearly half of what the U.S. produced.

A new gold standard w
ould be good for the U.S., even better for Canada. If Canada used the same royalty system as suggested for the U.S., it would receive US$150 billion dollars a year in royalties, enough to cover the current deficit and pay off the accumulated debt in a few years. But not only the U.S. and Canada would benefit from a new gold standard. The whole world is teetering on financial disaster and badly needs a savior. The U.S., followed by Canada, could lead the world back to the gold standard. Whether because of hyperinflation in Russia, currency problems in Europe, or a need by Third World countries for a banking system the people can trust, a new worldwide banking system is badly needed.

The people of China and other areas of southeast Asia demonstrate the need every day. Because of their booming economies, they have huge inflows of foreign money. Instead of depositing their savings in local banks, or even branches of foreign banks, they go back to tradition. Having been burned time and again by governments that default on debts or issue new currencies that make the old ones worthless, the people buy gold. They know that governments come and go, and currencies come and go, but 5,000 years of history proves that gold holds its value.

After pulling the underpinnings from the economic system in 1971 and flirting with financial disaster ever since, it’s time to rebuild the foundation. Decisive action by the U.S., followed by Canada, can bring stability to a world that badly needs it.

— From the author’s 1993 book “A New Gold Standard.”