Banking 17: What happened to the gold?

TL;DR

Gold played a role in the past as a backing for currency, but its value and function have changed over time.

Transcript

I think now might be a good time to address another question that is probably circulating in your head-- and that is, what happened to the gold? Remember when we started this reserve bank, all of these national banks or whatever we want to call them, they had gold as a reserve. And then at some point, they said, well, why are we each holding gold? ... Read More

Key Insights

• 🛟 Gold served as a reserve backing for banknotes but became less relevant as banknotes themselves became the reserves.
• 🏅 The gold standard imposed an arbitrary reserve ratio requirement based on gold availability, hindering money supply expansion.
• 😒 Gold's value is derived from human perception and historical use, while a government's ability to extract rents from the economy represents real wealth.
• 🏅 Going off the gold standard didn't lead to hyperinflation, and economies have witnessed significant innovation and growth since then.

Questions & Answers

Q: Why did national banks concentrate their gold in a reserve bank?

By centralizing gold reserves, national banks could issue banknotes that were tradeable into gold, simplifying the system and enhancing confidence.

Q: Did the gold standard require central banks to hold more gold than they had banknotes?

Yes, both in fractional reserve systems and during the gold standard, banks had more banknotes in circulation than the actual amount of gold they held, but they needed to retain some gold to address potential requests for gold exchange.

Q: How did the gold standard affect the money supply?

As the economy grew and needed more money supply, the gold standard required an increase in gold reserves, which was arbitrary and not necessarily linked to technological progress or productivity.

Q: Why is a currency backed by a government more valuable than one backed by gold?

A currency backed by a government represents the nation's ability to generate wealth through labor, ideas, resources, and productivity, which are more valuable than gold's inherent qualities.

Summary & Key Takeaways

• National banks used to hold gold as a reserve, but they eventually concentrated it in a reserve bank that issued tradeable banknotes.

• Over time, banknotes themselves became the reserves, and gold served as a confidence booster.

• The gold standard required central banks to hold a certain amount of gold, but it didn't have any direct impact on the economy.