Using Gold As Online Currency

JerkyBoy writes "Salon.com has an interesting story about using gold for online transactions. One company that provides the service (goldmoney.com) describes itself as "an online payment system that combines the world's oldest money, gold, with Internet technology to provide a safe, easy and inexpensive way for anyone to transact business 24 hours a day. Payments are made electronically using GoldGrams(TM), which are grams of gold that circulate world-wide through the Internet." I wonder if I can configure the MIME types on my Apache server to send golden email attachments?" Hehe - this is basically the same thing as people have been trying to do with creating new online currency.

Comments

who modded this moron up???

[Anonymous Coward]

this is the one of the stupidest things i've ever heard. if you had ever taken an introductory economics class you would have learned that gold is about as "intrinsically valuable" as tulips. (if you don't believe me, try using gold to buy a coke from a coke machine on an abandoned university campus in the middle of the night. it doesn't matter how much gold you have, if no one is there to exchange it)

if you would like to learn more about economics, go to your local community college and sign up for something called "economics 101".

Gold doesn't have intrinsic value

[samael]

Gold isn't actually intrinsically worth anything. It's a pretty metal, with uses for a few industrial applications, but most of its historic value is down to it being easily workable and looking nice. It's modern value is mostly down to people having been told it's worth a lot (like Diamonds, which again are worth money purely because they're worth money and pretty).
_____

Re:Gold doesn't have intrinsic value

[csbruce]

like Diamonds, which again are worth money purely because they're worth money and pretty

Diamonds, having fewer industrial applications than gold, would be sold by the pound if it wasn't for a marketing campaign. In the 1940's(?), De Beers made deals with the Hollywood studios to have them portray diamonds as symbols of everlasting love. Nowadays, people are brainwashed into spending two months of income to buy a pretty looking rock.

Re:Gold is shiny. So what?

[mindstrm]

The same reason your 10 shares of IBM have value.
They don't add up to squat, but they have value, because there is a market for them.

Same reason money has value; because people accept it.

Yes, Diamonds are actually not rare at all; DeBeers keeps them artificially rare. As far as you or I are concerned; they ARE rare, but factually, DeBeers has an unimaginable number of diamonds locked up in vaults all over the place.

This is not the case for gold.

Re:this seems familiar

[csbruce]

If you're using a credit card, it doesn't cost you anything to "exchange" currency.

Well, the credit-card companies will, of course, charge you for the service of exchanging currency. They don't put this directly on your bill, but there will always be a difference between the rates for exchanging one currency into another and then back.

But there is also another cost. Foreign currency exchange rates are based on supply, demand, and speculation, not on actual "value". "Value" is a nebulous term, but, to take an example, the current exchange rate of Canadian dollars into American dollars is about $0.64 US. However, by a different and more accurate representation of the "value" of money called "purchasing power parity", the Canadian dollar is worth about $0.80 US. That is to say, if a Canadian buys stuff in Canada, he gets about $0.80 US for his money, but if he buys it in the US, he only gets about $0.64 worth of stuff.

Of course, some commodities are less expensive in the US to compensate for the difference, but there is still an additional "cost" to exchanging currencies, caused by supply, demand, and speculation on the supplies and stability of currencies themselves, never minding what they will actually buy for you.

Re:Gold vs the money market ?

[csbruce]

Yes, the U.S. government does have a gold store locked up at Fort Knox, but not enough to make up for the trillions of U.S. dollar value floating around.

Also, the US government would very much like to get rid of the gold that it has in Fort Knox, now that it is financially useless. This is true of most governments that have gold reserves.

It explains (in part) why some currencies can change value compared to others by several percent each year (or in some cases, dozens of percent).

Currencies can change value dramatically overnight entirely because of speculation, the same as stocks. A national economy doesn't fundamentally change overnight; only the perception of it can change that quickly. Also, foreign-exchange traders are given to torpedoing currencies in order to move markets and turn quick-and-dirty profits.

The Ruble (Russian currency) would not be so low in value if there was gold backing up each ruble.

The Ruble has a low value because the Russian government and economy are in political and financial chaos. The Russian government probably has a stockpile of gold somewhere, but it's financially useless in the modern world. Anyone with enough money to buy lots of gold would probably understand how useless it is.

It's a great idea, but...

[jcr]

as I mentioned some months ago in a comment on e-gold, I really don't see this going anywhere until a national government (like, say, South Africa) issues a digital specie currency.

It's going to take a digital Krugerrand, Panda, Maple Leaf, or Eagle, before an online, gold-backed currency will gain enough market penetration that it's worth it to convert our fiat national currencies, and do business strictly with uninflatable, commodity-based currencies.

Someday, I'm sure we'll have all manner of electronic currencies, backed by gold, kilowatt-hours, barrels of Brent North Sea crude oil, or backrub-minutes (redeemable at dozens of outlets in any decent-sized city!), with online clearing markets to easily convert among them, but I'm afraid that any private company short of DeBeers simply won't have the pull to make it happen.

-jcr

Who's the moron?

[Gorimek]

It's worth noting that many prominent economists, including Nobel price winner Milton Friedman, agrees with this "moron".

They have taken economics 101.

Re:Who's the moron?

[Skald]

It's worth noting that many prominent economists, including Nobel price winner Milton Friedman, agrees with this "moron".

They have taken economics 101.

Um... no. Some of us actually have read Milton Friedman. To state Professor Friedman's conclusion first, for the impatient:

'My conclusion is that an automatic commodity standard is neither a feasible nor a desireable solution to the problem of establishing monetary arrangements for a free society.'

The following passages are excerpted from Capitalism and Freedom. It's really an excellent book, if you're into this sort of thing. Keep in mind, though, this was written in 1962, so the 'current situation' isn't very current.

'The fundamenal defect of a commodity standard, from the point of view of the society as a whole, is that it requires the use of real resources to add to the stock of money. People must work hard to dig gold out of the ground in South Africa -- in order to rebury it in Fort Knox or some similar place. The necessity of using real resources for the operation of a commodity standard establishes a strong incentive for people to find ways to achieve the same results without employing these resources.'

[...]

'But, as just noted, such an automatic system has historically never proved feasible.'

[...]

'It should be noted that despite the great amount of talk by many people in favor of the gold standard, almost no one today literally desires an honest-to-goodness, full gold standard. People who say they want a gold standard are almost invariably talking about the present kind of standard, [ed. 1962] or the kind of standard that was maintained in the 1930's; a gold standard managed by a central bank or other governmental bureau, which holds a small amount of gold as "backing" -- to use that very misleading term -- for fiduciary money. Some do go as far as to favor the kind of standard maintained in the 1920's, in which there was literal circulation of gold or gold certificates as hand-to-hand currency -- a gold-coin standard -- but even they favor the co-existence with gold of governmental fiduciary currency plus deposits issued by banks holding fractional reserves in either gold or fiduciary currency. Even during the so-called great days of the gold standard in the nineteenth century, when the Bank of England was supposedly running the gold standard skillfully, the monetary system was far from a fully automatic gold standard.'

-- Milton Friedman, Capitalism and Freedom

OK, but...

[Gorimek]

I have read a lot of Friedman, and I guess you're right that I overstated his position. I don't have time to search my books for quotes, but as I remember it he never clearly comes out in favor of any monetary system. He observes that commodity based schemes have their problems, but they have shown to be pretty workable and safe over the centuries, and that fiat money systems are responsible for pretty much all monetary disasters in history. I think he says that the current system with sophisticated fiat currencies is a historic experiment, and it's too early to say how it's gonna work out until it's been operating a few centuries.

So I guess what I should have said was that Friedman finds the original posters position a perfectly reasonable and respectable one, even if he may not fully agree with it. Calling it "one of the stupidest things i've ever heard" that is refuted by economics 101 is clearly a statement from an ignoramus. I'm sorry that I let myself get dragged down to that level, and I appreciate you correcting it

Re:OK, but...

[Skald]

[Gorimek]: I don't have time to search my books for quotes, but as I remember it he never clearly comes out in favor of any monetary system. He observes that commodity based schemes have their problems, but they have shown to be pretty workable and safe over the centuries, and that fiat money systems are responsible for pretty much all monetary disasters in history.

Well, I don't really think he says that they're responsible for all the monetary disasters in history. He certainly regards political meddling in the money supply as a very bad thing, and governments are inflationary creatures. It might be safer to think he'd say that bad monetary policy is the common factor behind monetary disasters, and that fiat currencies make bad monetary policy easy.

A fixed currency would be something of a remedy to this. But he regards an exchange rate, pegged directly to a commodity, to be unworkable... and there have certainly been monetary disasters in partial reserve systems.

Overall I feel safe in saying that he advocates (for large countries) floating exchange rates, at the other end of the spectrum entirely. The common factor is that the role of government is limited.

There's a nice summary in a 1998 interview:

[Friedman]: 'a floating exchange rate is one in which the government does not intervene in the exchange rate market but allows the market to set its own values. [Here you find] one very interesting historical phenomenon. No nation that has had a floating exchange rate has ever had external currency crisis in international finance.'

[...]

'And I have always argued that for a large country, like the U.S., Germany, France, Britain -- none of them are going to be willing to give up their independent central banks, and therefore, the best course for them to follow is to have a freely floating exchange rate determined in the market. But for small countries, they will on the whole do better if they peg their currency, unify their currency with a foreign currency, and avoid having an independent central bank -- provided that they do it with a country which is one of their major trading partners so that a lot of their business is being done in that currency anyway.'

[...]

'The lesson for Asia is; if you have a central bank, have a floating exchange rate; if you want to have a fixed exchange rate, abolish your central bank and adopt a currency board instead. Either extreme; a fixed exchange rate through a currency board, but no central bank, or a central bank plus truly floating exchange rates; either of those is a tenable arrangement. But a pegged exchange rate with a central bank is a recipe for trouble.'

[Gorimek]: I'm sorry that I let myself get dragged down to that level, and I appreciate you correcting it

For my part, I think I was a little harsh. But it wasn't clear from your short reply that you were not a crank yourself, merely invoking a name. No offense intended.

Nope

[Gorimek]

The problem with the gold standard is that there is only a fixed amount of gold in the world and hence a fixed supply of money. This has a tendency to actually increase inflation since having a country's currency backed by it gold, which would essentially be fixed at a maximum amount, since there is no infinite amount of gold in the world, would mean that for every extra dollar that the treasury prints out, the overall value of the currency would decrease. In short as the money supply grew, so would inflation.

Yeah, expect it's completely opposite. If money is backed by gold, the money supply is by definition the gold supply, which while not constant, grows very slowly. The money supply can only grow strongly by abandoning the gold standard, and printing more money than you have gold. You can do that without officially acknowledging that that's what you're doing, which may be what you're referring to.

In reality, inflation has been virtually non existent through history with gold based currencies.

For those of you who think I'm blowing smoke all this stuff I got out of my college economics book (Baulmer and Blinder are the authors I think ).

I hope that's a misreading of the book. A good book on the subject is Money Mischief : Episodes in Monetary History by Milton Friedman.

Re:Nope

[markmoss]

inflation has been virtually non existent through history with gold based currencies. One instance I know of was 14th Century Europe. The Black Death killed around half the population. The survivors of the upper classes often inherited fortunes -- but when they went to re-model their castle or whatever, labor was very difficult to find and often insisted on twice the pay as before. Buying food was even worse. This apparently led to much preaching and passing of price-freeze laws, with little effect: if the workers couldn't get a competitive wage in one barony, they could go to another one.

Population halved, money/person doubled, value of money halved. Not to imply that our republican government would handle a similar problem any better...

Theoretically, big gold discoveries could similarly inflate a gold based currency, but it hasn't happened in the industrial age. They mined a lot of gold in California, but the US economy was growing faster -- for instance, more value was harvested from the timber in Michigan than was mined from CA. The problem was _deflation_, when the economy grew much faster than gold production later in the 19th century. This meant that prices dropped and farmers often couldn't make their loan payments, while the bankers grew richer. Hence, William Jennings Bryan and his campaign to temporarily inflate the currency by basing it on gold and silver both. (If he'd won, no doubt a few years later he'd have been trying to get copper declared a coinage metal also, then iron and lead.)

What happened instead was an unannounced change in the currency systems. Originally, paper money was just a deposit receipt declaring that someone was holding the equivalent amount of gold, and you could go to them and exchange the paper for gold. This made commerce considerably easier, instead of carrying 100 pounds of gold across the countryside, you deposited it and carried a note from your banker. So paper money was initially issued by a private bank. Some of those bankers in the early 19th century US were less than honest, and discovered that since all the paper money wouldn't come back at once, you didn't have to hold the full amount of gold in the vault. Well, that worked until word got out, and then everyone was rushing to the bank to try to cash in before they ran out... So the US government took over the job of holding the gold and printing paper money in exchange. Most of the time before 1900 they did it honestly, but in the Revolutionary and Civil Wars, American governments were issuing greenbacks with nothing to back them except a promise that someday they would raise enough real money from taxes to redeem them. I'm sure European governments often made the same compromise.

Around 1900, what had been temporary expedients during wars began to become a permanent situation governments started printing the amount of money needed to keep the economy flowing, even though the gold backing was insufficient. The US probably stayed close to a gold standard longer than most, because in WWI much of Europe's gold went into Fort Knox, but by 1935 we abandoned the gold standard while pretending not to: the dollar was theoretically redeemable at $35/ounce (compared to $16/ounce in 1900), but American citizens were not allowed to own gold.

I guess the moral here is: even gold currency is not a panacea, and politicians will f* up any system when the heat is on...

Makes zero sense

[aozilla]

First of all, you have to realize that gold has very little useful value. Sure, it is used in industry, and in jewelry, but most of it is merely stored for currency purposes.

So why is the global economy so reliant on gold? It's very simple, because it can't be counterfeited. Au is an element. Short of a nuclear reaction you just aren't going to produce it from something that doesn't already contain gold. There therefore need no government regulations on it whatsoever.

You could just as easily have a monetary system based on points stored in a computer system. As long as the total number of points in the system was fixed, you'd have the same stability as gold (more since gold is being found every day). The reason you don't do that is because of fraud and regulations.

Now consider goldmoney.com. Even if they really do back your "points" with real live gold, how are they protecting against robbery? If someone steals the gold, goldmoney.com is going to go out of business, and guess what, you're broke. Goldmoney.com is also only as secure as the country in which it is located. Someone takes over that country, they can then confiscate all your gold. Even without a coup the gold could still be confiscated by the government.

Really the only thing you're getting here is the promise of privacy. If that's what you need, and you can't find it anywhere else (you certainly don't get it with credit card payments), fine. But for stability, I'd say the Swiss government is much more stable than the corporation running goldmoney.com. You even get the privacy there, just not the privacy for the transactions themselves. Maybe Switzerland should look into forming it's own e-transaction system.

There are more interesting things out there!

[friday2k]

Like this story in Wired that talks about Zeroknowledge licensing out Stefan Brands patents in toolkit form and eCash doing the same with the (way, way more important) Chaum's blind signature and other patents. This will give interested parties the opportunity to develop anonymous networks, with limited traceability (another Chaum patent) and with anonymous payment methodologies (utilizing the blind signature patent) or building other applications. And then somebody is talking about yet-another-scam payment system. Yawn! Good night!

A lot of folks in the U.S. are missing the point

[hillct]

The critical element here is stated quite clearly:

most transactions in cyberspace still involve national currencies, fraught with risk of fluctuating exchange rates

although you still need to worry about the valuation of gold. It is important though, to bave a new currency be bullion based at lest until it becomes universally accepted.

I also liked the comment by the providers of this currency:

For their part, the digital currency entrepreneurs say they seek legitimate customers who wish to make large, low-fee online international transactions.

Translation:
We welcome money launderers, those looking to hide funds from their spouse, and just about anyone else who wants to enguage in any sort of even halfway shady dealings.

There is one other application of this sort of independant international currency. That is, when someone (aparently not Hilton 1, 2, 3) get around to building a hotel or other tourist destination in space, or some other location beyond the jurisdiction of any one country, such as a deep sea hotel. Currently, there is only one player remaining in this arena as far as I know, but they'll need a currency, and in order to avoid national ties, this type of cyber-currency would be perfect.

--CTH


---

Flaky banks? hmmmm....

[corvi42]

Well the E-Gold seems a bit more reliable, but the description of GoldMoney: A bahamas based company that contracts a South-African company to run webservers on the British channel island of Jersey?

Does that sound like a fly-by-night company or what?

On credit

[freeweed]

Credit cards, while some people seem to not be able to live without them, just aren't the solution to a universal currency. Why, you ask? Well, the 2-5% merchant fee, for one thing. With profit margins sometimes hovering close to that, it doesn't make much sense for a retailer to even transact the sale, especially for a transaction that would cost a bank all of 10 cents to process.

There is of couse the issue of credit itself. Some people (like me) have real problems living on borrowed money. I'd much prefer to be able to spend MY OWN money, thanks. Especially as I don't have to worry about over-extending myself, as once the money's gone, I can't incur interest.

Please don't make me quote statistics on how many university grads declare bankruptcy, in no small part due to the $5,000.00 credit cards issued upon graduation...

For some of us, credit just isn't the answer.

(Note: I'm Canadian, and maybe the financial world is just skewed here.)

It's time to go back on the gold standard

[alewando]

Integrating gold with online fiat-currency transactions is a nice start, but it hardly goes far enough. It's time to go back on the gold standard for good.

When the Founding Fathers wrote the constitution, the fundamental property rights it embodies were rooted in actual intrinsicly valuable commodities. When the Federal government took your land under the 5th amendment, they had to compensate you in gold. Even well into the end of the 19th century, the biggest hotbutton currency debate concerned minting silver instead of gold.

Today, we're off the gold and silver standards altogether. This is truly sad. Instead of being able to predict how much a dollar will be worth tomorrow, we leave that decision up to the whims of international currency daytraders. It's little surprise that inflation rates under the Carter administration crested well over 10% so soon after Nixon pulled us out of Vietnam and took us off the gold standard.

The economy of the twentyfirst century cannot withstand uncertainties. The technological revolutions of the industrial age all occurred under the gold standard. Why should we experiment with a proven thing? Why let politicians pay off their political debts by devaluing our currency? Brazil went down that path, and we needn't follow.

In today's economic climate, the prudent investor will consider converting at least part of his or her paper assets into precious metals. Right now, with metal prices at a fraction of their all-time highs, may be an ideal time to invest in precious metals. The Gold Vienna Philharmonic sets the standard in purity and popularity. And with the exclusive Monex buy-back guarantee, your gold investment can only maintain or increase in value for one year, which adds a unique benefit to your gold purchase. Sign up today and receive a free copy of Gold In The Age Of Uncertainty.

Re:It's time to go back on the gold standard

[ma_sivakumar]

This is one of the grand old debates of Economics and gold standard is the darling of many armchair experts. In reality it is no more than one way controlling the amount of currency in circulation

A currency is a lubrication for the economic activity of capitalist system. If there is not enough currency in ciculation to support the level of economic activity, the society will suffer due to reduced level of investment, production etc. On the other hand if there is too much of currency, it will lead to inflation affecting the most vulnerable sections of the society.

A gold standard ensures that the amount of currency in circulation is tied to the amount of gold available with the government. This is the reason for the flurry of economic activity witnessed whenever there was a new 'God Rush' during the gold standard days.

In today's floating currency systems the amount of currency in circulation is determined by the governments. In many countries this is managed by largely autonomous central banks who look at the economic activity and take necessary policy and physical steps. If the central bank does a good job, the economy benefits otherwise it suffers (Mexico!!)

Going back to gold standard will not ensure prosperity. At best it will make certain that the governments act responsibly. At worst it will stiffle economic progress by tying the amount of available currency to the skills of miners than to the knowledge of central bank governers!!

banks

[QuantumG]

Yep, and eCash is forever plagued from the ideas from the early 90's, banks. I would love to be able to say to my bank "fork me some untracable electronic currency please" but it aint gunna happen. Banks would like to get rid of cash altogether IMHO, but regardless, banks dont jump on bandwagons and eCash is feeling it. So where does that leave you? As a merchant selling a payment service (ala PayPal) which results in you needing a way of getting money into and out of the system and seeing my money is in my bank that means I need a way of transfering money from my bank account to your bank account. Again we hit banks. Suprising enough PayPal has actually managed to make this happen, I can register a checking account with PayPal (if I'm in the states) and click money between my bank account and my PayPal account, great, but what about that great promise of anonymity? You know, the whole allure of "cash". We're pretty far from zero knowledge by now. The merchant I'm buying from can track who I am (look at the FreeNet donations page ffs), PayPal can browse through all my transactions at will, my bank can see how much money I've put into my PayPal account, the government can monitor my PayPal Bank account transfers and PayPal would probably give up any information they wanted after a few cool threats. Will banks ever get off their ass and give us what we want? Not really, and even if they do we're not going to get "zero knowledge" because I dont trust my bank.

wont last long here's why

[joq]

Remember earlier this year...

WASHINGTON -- The Secret Service has raided a New York state business that exchanged dollars for grams of the digital currency called e-gold.

A bevy of agents from the Secret Service, Postal Service and local police recently detained the owners of Gold-Age, based in Syracuse, and seized computers, files and documents from the fledgling firm.

source: Wired Magazine

For those interested in gold, and the government I suggest reading "End of Ordinary Money by Orlin Grabbe, and take a quick look at Jim Bell's case where he created Assassination Politics, which delved slightly into currency which could be used anonymously. Now please don't jump the gun so quick to say it won't happen, if that were the case the government would be quick to assist developing a financial system they thought would improve the economy, business, etc., and they haven't in fact it's been the opposite.

Re:wont last long here's why

[e-gold]

Here's more about Parker Bradley. Despite three months + having passed since the raid, Parker has yet to be charged with jack squat. *sigh* Parker Bradley is a friend of mine, and life isn't too nice for him these days...(get some e-gold and donate it to him). e-gold isn't anonymous cash like in Cryptonomicon or the Grabbe piece, it's just another flavor of money, but one that can be particularly useful, IMO (see below). e-gold provides a level of privacy exceeding credit cards (they don't sell, trade, give away, etc. customer info) but not exceeding bearer stuff, so it's not a good idea for the Jim Bell types.

e-gold (which has so far lasted since 1996) andOmniPay (I work for them, not e-gold, and I speak only for myself) are doing fine, actually. I'd like lots of Slashdot folks to try the stuff, because you tend to be programmers, and nice things happen when programmers play with e-gold. I'd like for Slashdot-like sites to sell mod points (a quickly expiring currency) so I've offered a ten-gram reward for it (about 80-90 bucks' worth, at the moment, so not much). I'd like for folks to think of e-gold for the cool stuff that can be done with it. Using the shopping cart as a tipjar and direct, voluntary donations to musicians might solve the Napster problem someday, IMO. e-gold is a bit tough to understand at first (grams as a currency?!?) although selling gold (a very emotional substance with humans, still, whether it's electronic or physical) can be a business where it's very hard to love *every* single customer...Mostly it's fascinating and lots of fun. The currency is growing pretty fast without much marketing budget, in part because of the "fan club" of sites like BananaGold and cool directories maintained by others. It's very nice for me.

Anyway, if folks on Slashdot want to try it, I have a promotional account, so just send me your account number and I can click you some (not much, I don't toss this stuff around like Paypal, but OTOH we're in the black...) gratis. Thanks.
JMR

Great Idea, but...

[Tsujigiri]

they should call them Gold Pieces, or GP for short. They could then supplament them with other metals for smaller denominations, like Silver Pieces (SP) and Copper Pieces (CP).

Then I can start looking around the internet for Armour and Swords and maybe a lantern and a sack, and head off to the Sword Coast to find adventure and loot.

(Submitted in the five minutes before heading home from work, brain broken, must sleep...)

"I'll take the red pill, no, blue. AAAHHHHHHHHHHHHHHHH........"

Reasons for going off the gold standard.

[corvi42]

All this talk of going on/off the gold standard also belies another aspect to current money which is that there is only about 10-30% of the money in circulation in any country actually exists as cash. The rest of it only exists as data in bank computers.

The way I understand it, part of the reasons for going off the gold standard was to give the Federal government more control over the economy. When you're tied to only issuing as much money as you have gold in stockpile, then there's a limit to your control over that aspect of the economy. But when you are working in a money-market type situation, you can look at the given value of your currency in the money market, and then decide to either print / issue more money and see how the markets react to you.

Anyone read "Cryptonomicon"? Remember the absurdity of the chinese banks in the first chapter, running about demanding of each other to see the gold? This is another aspect to the money-market situation that makes it advantageous not to use gold. In the case of a serious economic downturn, you can prevent the 'run on the bank' in which everyone dashes to their local bank and demands gold for their money - which can't happen when you're off the gold standard. It also prevents 'goldrush' type phenomena, which is bad when you find rich new gold deposits somewhere and the market is flooded with gold which devalues all currencies around the world.

DeBeers has been artificially controlling the diamond market for years to prevent exactly this sort of thing. They have huge stockpiles of diamonds from south africa and russia, but only release them in small quantities to keep the prices up. Apparently if they released them all then diamonds would be worth about as much as - I don't know really, but not worth much anyway.

This isn't the only example of an artificial market: aluminum ( or aluminium if you prefer ), is actually 'worth' a whole lot more than we normally think. The only way to extract aluminum from other metals is with powerful electric currents, which makes it very costly to produce, but governments subsidize the aluminum industry so heavily that it keeps the consumer price very low. This is why the first thing government wants to get out of a recycling program in any city is lots of aluminum.

As an aside, being off the gold standard is not always a bad thing for all countries. Switzerland for example has had a currency that over the last 100 years or so has been more stable than the gold market - so its actually a better investment ( if you want stability ) to put your money in a swiss bank than to buy gold.

Why no modern economy can use the gold standard

[Zeinfeld]

The US and the rest of the world abandoned the gold standard in two stages. First during the depression the promise to pay that used to underly the dollar bill or pound sterling was 'suspended'. After WWII a bunch of civil servants in the US and UK set up a system in which the value of national currencies was tied to the value of gold reserves. The Ian Flemming novel 'Goldfinger' is partially about the gold running that took place under that system.

Both systems failed for the same basic reason, there simply was not enough metal to back the amount of money required by a modern economy. If you think about it the idea that the optimum amount of money in circulation should be tied to the amount of a shiny metal that has been taken out of the ground is rather odd.

The US federal government still has ownership of something like 50-60% of the total world gold reserves. Most of that is the payment on war loans made by the British following world war I and II which in turn was the booty of Empire. The total quantity of gold bullion has at most doubled since WWII, in the same time the GDP of the US has in real terms expanded at least ten fold.

There simply is not enough yellow metal to go round. Nixon abandoned the gold standard for the simple fact that even under the system of managed exchange rates there was simply not enough yellow metal to support the economic activity. The supply of gold had become the limiting factor for the economy.

The idea that money should be backed by real value has emotional appeal to many. Back at the turn of the century the Deomcratic party was essentially captured by a monomaniac called Willian Bryans Jennings whose sole speech was 'that man should not be crucified on a cross of gold' - monetary reform by moving to a bimetalic standard.

It is not surprising that people trying to invent their own currencies should attempt to base them on gold. But there is a big difference between having a gold ingot in the hand and having an account with a fly by night operator in St Mcru (pop 5 penguins).

It is now 30 odd years since the US was on the gold standard and the number of people expecting a return is rapidly diminishing. At the same time most other countries have abandoned the gold standard and nobody wants to have a managed exchange rate (although some are forced to). I suspect that the diminishing gold price reflects the fact that gold is loosing its traditional role as a safe haven in troubled times.