watts, snyder, new evidence on the resource costs of irredeemable paper money

19
Electronic copy available at: http://ssrn.com/abstract=2208041 New Evidence on The Resource Costs of Irredeemable Paper Money Tyler Watts Miller College of Business Ball State University 2000 W. University Ave. Muncie, IN 47306 Lukas Snyder Mathematics Department Ball State University 2000 W. University Ave. Muncie, IN 47306 Abstract This paper compares estimates of the resource costs of monetary gold accumulation under the classical (1880-1914) gold standard with estimates of the resource costs associated with gold “investment” in the post-Bretton Woods era (1972- present) for the United States. While the costs associated with monetary or “investment” uses of precious metals—primarily gold coins and bullion—fell to historically low levels during the “great moderation” era (1982-2007), they rose sharply during both the “great inflation” era of the 1970s and the “great recession” era (2008-present), approaching levels consistent with the average for the classical gold standard in terms of real gold “investment” per capita. These results indicate that a transition to fiat money does not eliminate the resource costs of investment or “monetary” uses of gold. Indeed, fiat money volatility, whether realized as high and variable inflation rates, or the large monetary expansion undertaken since the 2008 financial crisis, can generate gold investment on par with the levels of monetary gold production of the classical gold standard. 0

Upload: guillermo-sanchez

Post on 14-Apr-2015

13 views

Category:

Documents


0 download

TRANSCRIPT

Page 1: Watts, Snyder, New Evidence on the Resource Costs of Irredeemable Paper Money

Electronic copy available at: http://ssrn.com/abstract=2208041

New Evidence on The Resource Costs of Irredeemable Paper Money

Tyler Watts

Miller College of Business Ball State University

2000 W. University Ave. Muncie, IN 47306

Lukas Snyder

Mathematics Department

Ball State University 2000 W. University Ave.

Muncie, IN 47306 Abstract This paper compares estimates of the resource costs of monetary gold accumulation under the classical (1880-1914) gold standard with estimates of the resource costs associated with gold “investment” in the post-Bretton Woods era (1972-present) for the United States. While the costs associated with monetary or “investment” uses of precious metals—primarily gold coins and bullion—fell to historically low levels during the “great moderation” era (1982-2007), they rose sharply during both the “great inflation” era of the 1970s and the “great recession” era (2008-present), approaching levels consistent with the average for the classical gold standard in terms of real gold “investment” per capita. These results indicate that a transition to fiat money does not eliminate the resource costs of investment or “monetary” uses of gold. Indeed, fiat money volatility, whether realized as high and variable inflation rates, or the large monetary expansion undertaken since the 2008 financial crisis, can generate gold investment on par with the levels of monetary gold production of the classical gold standard.

0

Page 2: Watts, Snyder, New Evidence on the Resource Costs of Irredeemable Paper Money

Electronic copy available at: http://ssrn.com/abstract=2208041

I. Introduction

I do not know of any attempt to measure the real resource costs of an irredeemable paper currency and to compare such costs with the real resource costs of a commodity currency. That is clearly a much needed research project. (Friedman 1986, p. 646)

In 1986, Milton Friedman published a short article in the Journal of Political

Economy suggesting the possibility that real resource costs associated with the production

and use of money could be greater under the current fiat money regime than under the

commodity money regimes that preceded it. This article, and the broader implication

about the resource costs of paper money, however received scant attention. For by 1986,

the Fed’s disinflationary policies had come to full fruition, inaugurating the “Great

Moderation” which ushered in several decades of low inflation, low unemployment, and

strong real growth in the US economy. Although private investment in gold coins and

bullion as an inflation hedge, safe-haven asset had ballooned—along with gold’s price—

in the 1970s, the Volcker disinflation brought the gold price crashing back down to earth,

erasing most of this investment demand.

25 years later, the world has experienced severe financial crises, recession, and

massive monetary interventions aimed at preventing a recurrence of the Great

Depression. While the world waits for the other shoe to drop in the European sovereign

debt crisis, many commentators believe that both households and governments in the

heavily indebted nations of Europe and the US are in for a deleveraging cycle. Many

economists believe central banks should (or at least will) accommodate this process by

resorting to explicitly higher inflation targets. Recent monetary expansion, and

expectations of continued expansion, have caused asset price booms in commodities. In

particular, gold—the traditional “safe haven” asset still widely used as a hedge against

1

Page 3: Watts, Snyder, New Evidence on the Resource Costs of Irredeemable Paper Money

inflation and economic uncertainty—has seen its price soar to new nominal highs, and its

real price remains elevated near all time highs, as shown in Figure 1.

Figure 1: Gold Prices, 1967-2011

Source: World Gold Council, “Average annual gold prices since 1900” http://www.gold.org/download/value/stats/statistics/xls/annual_gold_price_from_1900.xls

The gold boom is not just a price boom, but a gold mining boom and a gold

“investment” boom—i.e. the high price of gold is largely a result of the extra safe-haven

investment funds being diverted into gold during these times of fiscal and monetary

uncertainty, and this high price in turn induces mining entrepreneurs to direct additional

resources into gold production. In light of these rising resource costs of what we might

still call “monetary” gold production, Friedman’s unanswered question takes on new

urgency and merit.

2

Page 4: Watts, Snyder, New Evidence on the Resource Costs of Irredeemable Paper Money

This article assesses the resource costs of fiat money by tracking the costs

associated with efforts by individuals, corporations, governments and central banks to

shield themselves from fiat money volatility. While there are several tools individual

investors can use for this purpose, such as inflation-protected securities, real estate and

other commodity investment vehicles, increased foreign exchange holdings, and so on,

accumulating gold is the most well-publicized means of hedging against fiat money

inflation. By comparing the net annual value of gold investment in the fiat money era

against the net annual value of monetary gold production in the classical gold standard

era, we seek to probe Friedman’s argument and indicate under what conditions the

resource costs of irredeemable paper money may equal or even exceed those of a gold

standard.

The remainder of this paper proceeds as follows: Section II presents some

estimates of the resource costs of the classical gold standard. While standard estimates

assume that the classical-style gold standard requires on the order of 1-2% of annual real

output be dedicated towards monetary gold production (Friedman 1953; Friedman 1960),

recent revisions, based on a more realistic fractional reserve practice of the actual gold

standard era, revise this number significantly downward, to the .05% of GDP range

(White 1999). The estimates of scholars using the historically and theoretically accurate

fractional reserves practice serves as a baseline by which to compare resource costs of net

monetary gold production in both the modern pure fiat money regime and the classical

gold standard.

Section III presents new evidence we’ve compiled on the resource costs of gold

across both monetary regimes. We look at trends in gold “investment” both as a

3

Page 5: Watts, Snyder, New Evidence on the Resource Costs of Irredeemable Paper Money

percentage of GDP and as a percentage of total gold demand. We find that in the past

several years, not only has gold “investment” increased significantly as a fraction of total

gold demand, from roughly a 10% average in the pre-2008 years, to nearly 40% in the

post-2008 period, but gold coin and bullion holding has increased as well, approaching,

in real, per-capita terms, levels last observed during the classical gold standard era. These

data give weight to Friedman’s suspicion that the “direct resource cost of the gold and

silver accumulated in private hoards may have been as great as or greater than it would

have been under an effective gold standard” (1986, p. 644).

Section IV concludes by noting that a real resource opportunity cost is not unique

to the gold standard. Fiat currencies are much more susceptible to devaluation and

deflation, and rational economic actors anticipate these risks by continuing to accumulate

“monetary” gold. If the costs associated with gold hoarding and other investment vehicles

directed at protecting wealth against fiat money volatility are seen to approach the levels

of monetary gold production under historical gold standards, then the argument that fiat

money avoids the resource costs of a gold standard falls short. Our results indicate that, in

2 major fiat money volatility episodes in the last 40 years, fiat money regimes have

drawn gold into “monetary” or investment uses at levels approaching those of the

classical gold standard.

II. Resource Costs of Money

A chief complaint against the gold standard is the ostensibly large opportunity

costs associated with real resources that must be dedicated to the mining and minting of

coins. As Friedman states,

4

Page 6: Watts, Snyder, New Evidence on the Resource Costs of Irredeemable Paper Money

The fundamental defect of a commodity standard from the point of view of 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 result without employing those resources. (1962, p. 40)

Friedman has supplied widely-cited estimates of this resource cost, in terms of the

percentage of total national income required to be directed towards gold mining each year

to add sufficient monetary gold stocks so as to maintain price level stability consistent

with real economic growth. Assuming a 100% reserve gold standard monetary system

(i.e. wherein all hand-to-hand currency consists of gold coin or fully backed gold

certificates, and all bank demand deposits represent 100% gold-backed “warehouse

receipts” for physical coin), Friedman variously estimates that:

[S]omething like 1½ per cent of the national income would have had to be devoted to the production of the currency commodities in order for prices to have remained stable under a strict commodity standard (1953, p. 210).

[U]nder a pure commodity standard, the United States would at present be devoting about 2½ per cent of its national product or about $8 billion a year to produce directly or indirectly through foreign trade additional amounts of the monetary commodity to add to the amounts already in circulation or in warehouses (1960, p. 5).

Alan Meltzer, building on Friedman’s estimates, concluded that “the resource cost

of a full commodity standard remains high” (1983, p. 105). Meltzer used Friedman’s

estimate of the annual monetary gold production cost as a fraction of GDP. According to

Meltzer, Friedman’s 1.5% of GDP figure amounted to half of the average GDP growth

for the US economy during the historical period in question. Updating the figure—

5

Page 7: Watts, Snyder, New Evidence on the Resource Costs of Irredeemable Paper Money

presumably on the basis of then-current data, specifically the fact that the ratio of money

to income had fallen since Friedman’s initial report—Meltzer arrived at a gold cost figure

of “16 percent of the average, annual growth rate of output” (1983, p. 105), which at the

time would have amounted to roughly .5% of GDP.

These resource costs would constitute a high burden by anyone’s standards, and

Friedman posits that the development of fractional reserve banking was largely the result

of efforts by individuals to economize on the resource costs of a strict 100% reserve gold

standard. In actual fact, historical gold standard monetary regimes have universally

featured substantially less than 100% reserves, yet Friedman strangely persists in

estimating the resource costs of an imagined 100% reserve system, rather than a more

realistic fractional reserve system.

More recently, monetary scholar Lawrence White sought to correct Friedman’s

mistaken estimates of the resource costs of the gold standard. White’s research into

historical gold standard-cum-free banking monetary regimes indicates that, in a

financially developed economy with a mature banking system under a gold standard, the

ratio of gold reserves to banks’ demand liabilities (which constitute most of the currency

or “circulating medium” of an economy) can fall as low as 2%, or 1/50th of Friedman’s

assumed 100% reserves scenario. Thus, White concludes, the amount of new gold

production required each year to maintain monetary equilibrium in the economy could

therefore be as low as .05% of GDP—again, 1/50th Friedman’s 1960 estimate (1999, p.

47). Even a far more conservative 10% gold-to-bank demand liabilities ratio would

indicate an annual “gold cost” of only .25% of GDP. The upshot of these historically

6

Page 8: Watts, Snyder, New Evidence on the Resource Costs of Irredeemable Paper Money

realistic estimates of the resource cost of gold is that they are on an order of magnitude

below the “traditional” view of resource costs that Friedman’s initial estimates had

established.

Even granting that Friedman and Meltzer’s traditional estimates of the resource

costs of the gold standard were far too high, the argument that fiat paper money can avoid

such resource costs altogether still must be taken into account. With a negligible marginal

cost of production, paper money obviously has the potential to drastically reduce the net

resource costs of the monetary regime. Moreover, due to the fact that a reserve

monopolist central bank is needed to install a fiat money regime in an economy, fiat

money can—at least in theory—be supplied with perfect elasticity through activist

monetary policy. Thus fiat money offers the potential twin benefits, as compared against

the gold standard, of zero resource costs and an elastic supply that could obviate both

liquidity crises and deflationary adjustments in the face of adverse nominal spending

shocks in the economy. It is not our task here to address whether central banks have in

practice actually achieved a greater degree of monetary stability than the gold standards

they superseded—we leave this debate to other, far more capable scholars. We will

confine ourselves to an investigation of fiat money’s actual track record with respect to

resource costs. We simply seek here to investigate the question: has the imposition of

pure fiat money in the US obviated the demand for “monetary gold,” or at least

permanently reduced it to below-gold standard levels?

A great irony with fiat money is that the very feature, namely its negligible

marginal cost of production, that has the potential to spare resource costs of money can, if

abused, potentially resuscitate these very resource costs. Inflation through excessive fiat

7

Page 9: Watts, Snyder, New Evidence on the Resource Costs of Irredeemable Paper Money

money issuance can be, and has historically been, far more severe and prolonged than the

mild inflations associated with new gold discoveries in the historical gold standard

regimes. This kind of fiat money inflation, or even the very threat of it, can inaugurate a

flight back into gold as a “safe-haven” asset. As White explains,

[I]f the public is uncertain about the reliability of a fiat money, and buys newly minted gold coins and bullion as an inflation hedge, flow resource costs of a (quasi-) monetary kind are still incurred (White 1999, p. 43)

Roger Garrison echoes this point, noting that the resource costs of gold could be

driven higher within a fiat money system than under the gold standard itself:

[A] paper standard administered by an irresponsible monetary authority may drive the monetary value of gold so high that more resource costs are incurred under the paper standard than would have been incurred under a gold standard… When an irresponsible monetary authority begins to overissue paper money, market participants begin to hoard gold, which stimulates the gold-mining industry and drives up the resource costs (Garrison 1992, p. 70)

White goes on to estimate opportunity cost of fiat money in terms of the burden

placed on money holders and users by the much higher inflation rates that fiat money

tends to generate. White cites Rolnick and Weber (1997), who find an average inflation

rate of 6.5% per year (excluding hyperinflations) under historical fiat money regimes, vs.

a .5% deflation average for historical gold standard regimes. The 7 point differential in

the inflation rate implies, according to White’s conservative calculation, a deadweight

loss of .15% of national income arising from fiat money regimes (1999, p. 49). Thus,

when compared to White’s best-case estimate of a paltry .05% of GDP annual resource

cost of monetary gold production, White concludes that it is possible or indeed likely—

based on actual experiences with even relatively well-behaved fiat money regimes—that

a country would be better off under a gold standard, at least as far as the opportunity costs

8

Page 10: Watts, Snyder, New Evidence on the Resource Costs of Irredeemable Paper Money

in terms of resource allocation and economic efficiency are concerned. White states, “A

country where fiat money is managed so as to keep inflation below 4 percent can do

without a gold standard; but a high-inflation country would be better off with gold.”

(1999, p. 49)

III. US Monetary Gold Production: Gold Standard vs. Fiat Currency

This brings us to our present task, which is to provide data comparing monetary

or investment gold production for two distinct periods of US monetary experience: the

classical gold standard era of 1879-1914, and the post-Bretton Woods, pure fiat money

era of 1972-present. The former period represents, of course, the zenith of the

international gold standard in the decades leading up to World War I. The latter period is

instructive because it provides two distinct periods of increased gold investment,

interspersed by a period declining gold prices and slack gold investment demand: 1. the

gold boom of the 1970s, brought on by inflationary volatility in fiat money; 2. the so-

called “great moderation” in US inflation and interest rates from 1982-2007; 3. the

financial crisis and recession of 2007/2008-on, accompanied as it has been by massive

monetary interventions by central banks such as the Federal Reserve and the ECB.

Although the latter actions have not yet generated much measured inflation, they

nevertheless have encouraged the long term bull market in gold, leading the yellow metal

to new nominal price records in 2011.

Procedure: We set about to estimate yearly “gold flow” by taking the net annual

change in the monetary gold stock figures for the classical gold standard (CGS) era, and

9

Page 11: Watts, Snyder, New Evidence on the Resource Costs of Irredeemable Paper Money

the net annual gold investment demand (as opposed to industrial or jewelry demand) for

the modern fiat money era. Using the GDP deflator index, we converted the yearly gold

flow values into constant 2005 dollars, then divided these real monetary/investment gold

flow figures into real GDP for each year, to provide estimates in terms of the above-

referenced literature of the resource cost of gold in terms of the fraction of total output

devoted to net annual production of monetary or investment gold. Keeping in mind that

the awesome technological progress of the last 100 years has brought about a 24-fold

growth in real GDP for the US, while population has gone up only 3 fold, we find that the

inflation-adjusted value of monetary/investment gold production per capita gives the best

indication of the relative resource cost of gold. These figures are presented in table 1:

10

Page 12: Watts, Snyder, New Evidence on the Resource Costs of Irredeemable Paper Money

Table 1: Monetary and Investment Gold Figures, Gold Standard vs. Fiat Money Eras

Average annual values for each time period:

Time Period Data Source

Net Monetary/ Investment Gold Flow, nominal $

Net Monetary/ Investment Gold Flow, 2005 $

Real Gold Flow/ Real GDP (constant 2005 $)

Nominal Gold Flow per capita

Real Gold Flow per capita (2005 $)

Antebellum (1822-1860)

Friedman and Schwartz

(1970)

$6,175,000

$123,101,638

0.266% $0.28 $5.67

Early CGS (1879-1896)

Report of the Director of the Mint,

1907

$19,401,802

$362,032,973

0.176% $0.42 $7.90

Late CGS (1897-1913)

Report of the Director of the Mint,

1907, 1913

$81,511,508

$1,560,750,384

0.350% $0.913 $17.28

CGS Average

$45,447,808

$864,720,920

0.249%

$0.66 $12.43

1970s Gold Boom (1972-1980)♦

www.krugerrandproof.com $412,999,689

$1,017,279,206

0.019%

$1.85 $4.58

Great Moderation (1982-2007)♦

www.krugerrandproof.com; World Gold Council,

Gold Demand Trends

$268,458,420

$351,382,230

0.004%

$1.01 $1.36

Post Financial Crisis (2009-2012)

World Gold Council, Gold

Demand Trends

$3,954,439,123

$3,550,060,763

0.027%

$12.76 $11.45

Post-Bretton Woods Average

$641,427,027

$817,066,663

0.010%

$2.31 $3.12

Table 2 presents data on the shares of total gold production devoted to various uses,

primarily monetary or investment use as opposed to industrial and jewelry use. ♦ 1972-1996 Gold investment demand for the US is estimated at 50% of total Krugerrand production for each year…

11

Page 13: Watts, Snyder, New Evidence on the Resource Costs of Irredeemable Paper Money

Annual average value of percentage of calculated net yearly production used in:

Period Data Source Jewelry/ Industrial Monetary/ Investment

1880-19131

(CGS) Report of the Director of the Mint, 1914 33% 67%

1975-1980 (1970s Gold Boom)

USGS, Gold End-Use Statistics 60% 40%

1982-2003 (“early” Great Moderation)

USGS, Gold End-Use Statistics 53% 46%

1997-2007 (“late” Great Moderation)

World Gold Council, Gold Demand Trends 91.6% 8.4%

2008-2011 (Great Recession)

World Gold Council, Gold Demand Trends 60% 40%

IV. Conclusion

We have sought to shed some light on the patterns of gold use in US history, and

how they change with respect to the behavior of the underlying monetary regime. The

question as to whether the current fiat money system does actually deliver a lower

resource cost of gold, in terms of ongoing “monetary” gold holding, has become quite

relevant in the wake of the now decade-long gold price boom which has been accelerated

by recent economic and monetary policy developments. Our data indicate that when the

central bank has done a good job of maintaining price-level stability, such as the “great

moderation,” gold investment demand is light, and the value of net yearly real gold

investment, both total an in per-capita terms, falls well below that of the gold standard

era. However, in times of fiat money volatility, measured in terms of high and variable

1 These values were estimated by adding the total value of gold used in the industrial arts (Annual Report of the Director of the Mint 1914) to our net gold flow data for each year to arrive a figure for total domestic gold consumption. We then simply divided each category figure (monetary and industrial arts) into this total to arrive at annual proportions; the figure here is based on the averages of each category for the stated period.

12

Page 14: Watts, Snyder, New Evidence on the Resource Costs of Irredeemable Paper Money

inflation, or anticipation thereof, gold investment demand grows to levels that can rival

monetary gold production of the classical gold standard era.

References Annual Report of the Director of the Mint for the Fiscal Year Ended June 30, 1907. Annual Report of the Director of the Mint for the Fiscal Year Ended June 30, 1913. Annual Report of the Director of the Mint for the Fiscal Year Ended June 30, 1914. Friedman, Milton. 1953. Essays in Positive Economics. University of Chicago Press. Friedman, Milton. 1960. A Program for Monetary Stability. New York: Fordham

University Press. Friedman, Milton. 1962. Capitalism and Freedom. University of Chicago Press. Friedman, Milton. 1986. “The Resource Cost of Irredeemable Paper Money.” Journal of

Political Economy 94 (3); 642-647. Friedman, Milton and Anna J. Schwartz. 1970. Monetary Statistics of the United States:

Estimates, Sources, Methods. New York: Columbia University Press. Garrison, Roger W. 1992. “The Costs of a Gold Standard” in Rockwell, Llewellyn H.,

ed., The Gold Standard: Perspectives in the Austrian School. Auburn, Alabama: Ludwig von Mises Institute.

Meltzer, Alan. 1983. “Monetary Reform in an Uncertain Environment.” Cato Journal 3

(1); 93-112. Rolnick, Arthur J & Weber, Warren E. 1997. "Money, Inflation, and Output under Fiat

and Commodity Standards." Journal of Political Economy 105(6); 1308-1321. Street, Louise, et al. 2012. Gold Demand Trends. World Gold Council.

http://www.gold.org/investment/research/regular_reports/gold_demand_trends/ White, Lawrence H. 1999. The Theory of Monetary Institutions. Malden, MA: Blackwell

Publishers. .

13

Page 15: Watts, Snyder, New Evidence on the Resource Costs of Irredeemable Paper Money

Data Appendix I. Classical Gold Standard—monetary gold data

Year Gold Stock (Nominal)  Gold Flow  Real GDP (2005 $) 

GDP Deflator 

US Population 

Gold Stock, 

% Real GDP 

Gold Flow, % 

Real GDP 

Real Gold Flow, % 

Real GDP 

Nominal Gold Flow per 

capita 

Real Gold Flow per 

capita 

1879  $245,741,837  $32,541,860  $177,133,000,000  5.28  49,264,000  0.14%  0.0184%  0.3479%  $0.661  $12.511 

1880  $351,841,206  $106,099,369  $191,814,000,000  5.4  50,262,000  0.18%  0.0553%  1.0243%  $2.111  $39.091 

1881  $478,484,538  $126,643,332  $215,798,000,000  5.39  51,466,000  0.22%  0.0587%  1.0888%  $2.461  $45.653 

1882  $506,757,715  $28,273,177  $227,250,000,000  5.37  52,893,000  0.22%  0.0124%  0.2317%  $0.535  $9.954 

1883  $542,732,063  $35,974,348  $233,535,000,000  5.27  54,435,000  0.23%  0.0154%  0.2923%  $0.661  $12.540 

1884  $545,500,797  $2,768,734  $229,685,000,000  5.13  55,826,000  0.24%  0.0012%  0.0235%  $0.050  $0.967 

1885  $588,697,036  $43,196,239  $230,480,000,000  5.03  57,128,000  0.26%  0.0187%  0.3726%  $0.756  $15.032 

1886  $590,774,461  $2,077,425  $249,225,000,000  4.89  58,258,000  0.24%  0.0008%  0.0170%  $0.036  $0.729 

1887  $654,520,335  $63,745,874  $267,331,000,000  4.92  59,357,000  0.24%  0.0238%  0.4847%  $1.074  $21.828 

1888  $705,818,855  $51,298,520  $282,701,000,000  4.9  60,614,000  0.25%  0.0181%  0.3703%  $0.846  $17.272 

1889  $680,063,505  ‐$25,755,350  $290,824,000,000  4.76  61,893,000  0.23% ‐

0.0089%  ‐0.1861%  ‐$0.416  ‐$8.742 

1890  $695,563,029  $15,499,524  $319,077,000,000  4.73  63,056,000  0.22%  0.0049%  0.1027%  $0.246  $5.197 

1891  $646,582,852  ‐$48,980,177  $322,850,000,000  4.77  64,432,000  0.20% ‐

0.0152%  ‐0.3181%  ‐$0.760  ‐$15.937 

1892  $664,275,335  $17,692,483  $339,301,000,000  4.82  65,920,000  0.20%  0.0052%  0.1082%  $0.268  $5.568 

1893  $597,697,685  ‐$66,577,650  $319,606,000,000  4.82  67,470,000  0.19% ‐

0.0208%  ‐0.4322%  ‐$0.987  ‐$20.472 

1894  $627,293,201  $29,595,516  $304,458,000,000  4.65  68,910,000  0.21%  0.0097%  0.2090%  $0.429  $9.236 

1895  $636,229,825  $8,936,624  $339,247,000,000  4.6  70,076,000  0.19%  0.0026%  0.0573%  $0.128  $2.772 

1896  $599,597,964  ‐$36,631,861  $333,642,000,000  4.64  71,188,000  0.18% ‐

0.0110%  ‐0.2366%  ‐$0.515  ‐$11.090 

1897  $696,270,542  $96,672,578  $348,023,000,000  4.64  72,441,000  0.20%  0.0278%  0.5987%  $1.335  $28.761 

1898  $861,514,780  $165,244,238  $386,074,000,000  4.69  73,600,000  0.22%  0.0428%  0.9126%  $2.245  $47.871 

1899  $962,865,505  $101,350,725  $412,475,000,000  4.73  74,793,000  0.23%  0.0246%  0.5195%  $1.355  $28.649 

1900  $1,034,439,264  $71,573,759  $422,843,000,000  4.86  76,094,000  0.24%  0.0169%  0.3483%  $0.941  $19.354 

1901  $1,124,652,818  $90,213,554  $445,287,000,000  5  77,584,000  0.25%  0.0203%  0.4052%  $1.163  $23.256 

1902  $1,192,395,607  $67,742,789  $468,159,000,000  5.14  79,163,000  0.25%  0.0145%  0.2815%  $0.856  $16.649 

1903  $1,249,552,756  $57,157,149  $481,821,000,000  5.38  80,632,000  0.26%  0.0119%  0.2205%  $0.709  $13.176 

1904  $1,327,672,672  $78,119,916  $464,761,000,000  5.53  82,166,000  0.29%  0.0168%  0.3040%  $0.951  $17.193 

1905  $1,357,881,186  $30,208,514  $517,201,000,000  5.57  83,822,000  0.26%  0.0058%  0.1049%  $0.360  $6.470 

1906  $1,472,995,209  $115,114,023  $538,350,000,000  5.77  85,450,000  0.27%  0.0214%  0.3706%  $1.347  $23.347 

1907  $1,466,056,632  ‐$6,938,577  $552,184,000,000  6.13  87,008,000  0.27% ‐

0.0013%  ‐0.0205%  ‐$0.080  ‐$1.301 

1908  $1,615,140,575  $149,083,943  $492,484,000,000  6.12  88,710,000  0.33%  0.0303%  0.4946%  $1.681  $27.460 

1909  $1,640,567,131  $25,426,556  $528,081,000,000  6.1  90,490,000  0.31%  0.0048%  0.0789%  $0.281  $4.606 

1910  $1,635,424,513  ‐$5,142,618  $533,767,000,000  6.26  92,407,000  0.31% ‐

0.0010%  ‐0.0154%  ‐$0.056  ‐$0.889 

1911  $1,753,134,114  $117,709,601  $551,061,000,000  6.23  93,863,000  0.32%  0.0214%  0.3429%  $1.254  $20.129 

1912  $1,812,856,241  $59,722,127  $576,879,000,000  6.48  95,335,000  0.31%  0.0104%  0.1598%  $0.626  $9.667 

14

Page 16: Watts, Snyder, New Evidence on the Resource Costs of Irredeemable Paper Money

1913  $1,866,619,157  $53,762,916  $599,651,000,000  6.53  97,225,000  0.31%  0.0090%  0.1373%  $0.553  $8.468 

II. Post-Bretton Woods Era/ Early Great Moderation—US gold investment

Year Krugerrand 

Mintage Est. US 

Krugerrand sales  Real GDP (2005 $) GDP 

deflator  US Population Gold Flow % 

Real GDP 

Real Gold Flow % 

Real GDP Nominal Gold 

Flow per Capita 

Real Gold Flow per 

capita 

1967  $2,097,000  $1,048,500  $3,942,500,000,000  21.12  198,752,000  0.0000%  0.0001%  $0.005  $0.025 

1968  $1,547,600  $773,800  $4,133,400,000,000  22.01  200,745,000  0.0000%  0.0001%  $0.004  $0.018 

1969  $1,643,600  $821,800  $4,261,800,000,000  23.1  202,736,000  0.0000%  0.0001%  $0.004  $0.018 

1970  $8,302,787  $4,151,393  $4,269,900,000,000  24.32  205,089,000  0.0001%  0.0004%  $0.020  $0.083 

1971  $22,937,760  $11,468,880  $4,413,300,000,000  25.53  207,692,000  0.0003%  0.0010%  $0.055  $0.216 

1972  $32,392,212  $16,196,106  $4,647,700,000,000  26.63  209,924,000  0.0003%  0.0013%  $0.077  $0.290 

1973  $84,697,596  $42,348,798  $4,917,000,000,000  28.11  211,939,000  0.0009%  0.0031%  $0.200  $0.711 

1974  $512,133,019  $256,066,510  $4,889,900,000,000  30.66  213,898,000  0.0052%  0.0171%  $1.197  $3.905 

1975  $775,331,428  $387,665,714  $4,879,500,000,000  33.56  215,981,000  0.0079%  0.0237%  $1.795  $5.348 

1976  $376,785,222  $188,392,611  $5,141,300,000,000  35.49  218,086,000  0.0037%  0.0103%  $0.864  $2.434 

1977  $494,583,892  $247,291,946  $5,377,700,000,000  37.75  220,289,000  0.0046%  0.0122%  $1.123  $2.974 

1978  $1,163,570,840  $581,785,420  $5,677,600,000,000  40.4  222,629,000  0.0102%  0.0254%  $2.613  $6.468 

1979  $1,518,924,704  $759,462,352  $5,855,000,000,000  43.76  225,106,000  0.0130%  0.0296%  $3.374  $7.710 

1980  $2,475,575,482  $1,237,787,741  $5,839,000,000,000  47.75  227,726,000  0.0212%  0.0444%  $5.435  $11.383 

1981  $1,788,821,687  $894,410,843  $5,987,200,000,000  52.23  230,008,000  0.0149%  0.0286%  $3.889  $7.445 

1982  $1,500,960,709  $750,480,354  $5,870,900,000,000  55.41  232,218,000  0.0128%  0.0231%  $3.232  $5.833 

1983  $1,521,621,500  $760,810,750  $6,136,200,000,000  57.6  234,333,000  0.0124%  0.0215%  $3.247  $5.637 

1984  $966,784,199  $483,392,100  $6,577,100,000,000  59.77  236,394,000  0.0073%  0.0123%  $2.045  $3.421 

1985  $404,348,679  $202,174,340  $6,849,300,000,000  61.58  238,506,000  0.0030%  0.0048%  $0.848  $1.377 

1986  $13,942,494  $6,971,247  $7,086,500,000,000  62.94  240,683,000  0.0001%  0.0002%  $0.029  $0.046 

1987  $59,496,153  $29,748,076  $7,313,300,000,000  64.76  242,843,000  0.0004%  0.0006%  $0.122  $0.189 

1988  $286,493,780  $143,246,890  $7,613,900,000,000  66.99  245,061,000  0.0019%  0.0028%  $0.585  $0.873 

1989  $87,168,862  $43,584,431  $7,885,900,000,000  69.52  247,387,000  0.0006%  0.0008%  $0.176  $0.253 

1990  $157,147,825  $78,573,912  $8,033,900,000,000  72.2  250,181,000  0.0010%  0.0014%  $0.314  $0.435 

1991  $108,131,152  $54,065,576  $8,015,100,000,000  74.76  253,530,000  0.0007%  0.0009%  $0.213  $0.285 

1992  $2,500,826  $1,250,413  $8,287,100,000,000  76.53  256,922,000  0.0000%  0.0000%  $0.005  $0.006 

1993  $73,696,888  $36,848,444  $8,523,400,000,000  78.22  260,282,000  0.0004%  0.0006%  $0.142  $0.181 

1994  $72,913,555  $36,456,778  $8,870,700,000,000  79.87  263,455,000  0.0004%  0.0005%  $0.138  $0.173 

1995  $35,312,887  $17,656,444  $9,093,700,000,000  81.54  266,588,000  0.0002%  0.0002%  $0.066  $0.081 

1996  $10,146,099  $5,073,049  $9,433,900,000,000  83.09  269,714,000  0.0001%  0.0001%  $0.019  $0.023 

15

Page 17: Watts, Snyder, New Evidence on the Resource Costs of Irredeemable Paper Money

III. Late Great Moderation—Great Recession: US Gold Investment

Year 

US Gold Demand (World Gold 

Council)  Real GDP (2005 $) GDP 

deflator  US Population Gold Flow % 

Real GDP 

Real Gold Flow % 

Real GDP Nominal Gold 

Flow per Capita 

Real Gold Flow per 

capita 

1997  $578,594,540  $9,854,300,000,000  84.56  272,958,000  0.0059%  0.0069%  $2.120  $2.507 

1998  $776,678,137  $10,283,500,000,000  85.51  276,154,000  0.0076%  0.0088%  $2.812  $3.289 

1999  $784,718,459  $10,779,800,000,000  86.77  279,328,000  0.0073%  0.0084%  $2.809  $3.238 

2000  ‐$167,489,991  $11,226,000,000,000  88.65  282,418,000  ‐0.0015%  ‐0.0017%  ‐$0.593  ‐$0.669 

2001  $207,444,039  $11,347,200,000,000  90.65  285,335,000  0.0018%  0.0020%  $0.727  $0.802 

2002  $214,484,465  $11,543,100,000,000  92.19  288,133,000  0.0019%  0.0020%  $0.744  $0.807 

2003  $247,145,380  $11,836,400,000,000  94.13  290,845,000  0.0021%  0.0022%  $0.850  $0.903 

2004  $265,279,509  $12,246,900,000,000  96.78  293,502,000  0.0022%  0.0022%  $0.904  $0.934 

2005  $408,442,124  $12,623,000,000,000  100  296,229,000  0.0032%  0.0032%  $1.379  $1.379 

2006  $638,453,272  $12,958,500,000,000  103.24  299,052,000  0.0049%  0.0048%  $2.135  $2.068 

2007  $375,836,188  $13,206,400,000,000  106.23  302,025,000  0.0028%  0.0027%  $1.244  $1.171 

2008  $2,202,436,738  $13,161,900,000,000  108.57  304,831,000  0.0167%  0.0154%  $7.225  $6.655 

2009  $3,605,771,945  $12,703,100,000,000  109.73  307,483,000  0.0284%  0.0259%  $11.727  $10.687 

2010  $4,220,522,857  $13,088,000,000,000  111  310,106,000  0.0322%  0.0291%  $13.610  $12.261 

2011  $4,037,022,568  $13,315,100,000,000  113.34  312,041,000  0.0303%  0.0268%  $12.937  $11.415 

IV. Monetary vs Industrial gold use, CGS

Year  Est. Total Gold Flow  Monetary Gold Flow Monetary % of Total  “Industrial Arts” Gold 

Consumption Industrial % of 

Total 

1880  $63,105,432  $53,000,000  83.99%  $10,105,432  16.01% 

1881  $78,566,742  $68,000,000  86.55%  $10,566,742  13.45% 

1882  $105,514,707  $95,000,000  90.03%  $10,514,707  9.97% 

1883  $51,435,462  $36,000,000  69.99%  $15,435,462  30.01% 

1884  $43,500,000  $29,000,000  66.67%  $14,500,000  33.33% 

1885  $20,824,742  $9,000,000  43.22%  $11,824,742  56.78% 

1886  $55,944,719  $41,418,029  74.03%  $14,526,690  25.97% 

1887  $52,018,966  $37,208,620  71.53%  $14,810,346  28.47% 

1888  $79,871,539  $63,356,697  79.32%  $16,514,842  20.68% 

1889  $16,775,685  $78,629  0.47%  $16,697,056  99.53% 

1890  $1,868,992  ‐$15,786,968  ‐844.68%  $17,655,960  944.68% 

1891  $35,009,037  $15,322,121  43.77%  $19,686,916  56.23% 

1892  $2,940,830  ‐$16,388,244  ‐557.27%  $19,329,074  657.27% 

1893  ‐$21,312,941  ‐$36,748,842  172.43%  $15,435,901  ‐72.43% 

1894  $28,197,526  $15,538,922  55.11%  $12,658,604  44.89% 

16

Page 18: Watts, Snyder, New Evidence on the Resource Costs of Irredeemable Paper Money

1895  ‐$27,280,121  ‐$42,709,206  156.56%  $15,429,085  ‐56.56% 

1896  ‐$14,393,912  ‐$27,789,846  193.07%  $13,395,934  ‐93.07% 

1897  $110,205,767  $96,335,536  87.41%  $13,870,231  12.59% 

1898  $67,976,384  $52,410,505  77.10%  $15,565,879  22.90% 

1899  $220,400,013  $200,552,835  90.99%  $19,847,178  9.01% 

1900  $92,527,863  $70,379,721  76.06%  $22,148,142  23.94% 

1901  $118,516,047  $94,647,091  79.86%  $23,868,956  20.14% 

1902  $91,418,408  $63,735,561  69.72%  $27,682,847  30.28% 

1903  $102,510,492  $73,446,941  71.65%  $29,063,551  28.35% 

1904  $101,005,227  $72,349,264  71.63%  $28,655,963  28.37% 

1905  $61,076,424  $27,867,809  45.63%  $33,208,615  54.37% 

1906  $111,755,343  $72,628,580  64.99%  $39,126,763  35.01% 

1907  $213,196,730  $172,469,660  80.90%  $40,727,070  19.10% 

1908  $53,293,251  $21,817,160  40.94%  $31,476,091  59.06% 

1909  $63,055,325  $25,426,556  40.32%  $37,628,769  59.68% 

1910  $36,644,534  ‐$5,142,618  ‐14.03%  $41,787,152  114.03% 

1911  $158,543,893  $117,709,601  74.24%  $40,834,292  25.76% 

1912  $103,699,384  $59,722,127  57.59%  $43,977,257  42.41% 

1913  $99,626,982  $53,762,916  53.96%  $45,864,066  46.04% 

AVG:  $69,042,803  $46,662,310  67.58%  $23,071,186  33.42% 

V. Monetary vs. Industrial Gold Use, Post-Bretton Woods to 2003 (USGS Gold End-Use Statistics)

Year Total Domestic Gold consumption  Investment Value  Investment % of Total  Jewelry & Arts Value 

Jewelry & Arts % of Total 

1975  $1,075,726,413  $475,802,067.38  44.23%  $605,096,107.43  56.25% 

1976  $890,326,187  $328,859,222.08  36.94%  $561,466,964.52  63.06% 

1977  $1,083,720,363  $404,018,556.48  37.28%  $684,454,966.27  63.16% 

1978  $1,510,960,727  $609,358,647.24  40.33%  $901,602,080.10  59.67% 

1979  $2,351,309,294  $895,268,392.20  38.08%  $1,416,688,444.80  60.25% 

1980  $3,361,355,685  $1,423,632,996.00  42.35%  $1,937,722,689.00  57.65% 

1981  $2,233,187,622  $724,676,778.00  32.45%  $1,508,510,844.00  67.55% 

1982  $2,139,693,386  $846,206,424.00  39.55%  $1,293,486,962.40  60.45% 

1983  $2,644,587,979  $1,335,925,886.40  50.52%  $1,308,662,092.80  49.48% 

1984  $2,158,790,902  $1,032,969,840.30  47.85%  $1,125,821,061.90  52.15% 

1985  $1,834,518,942  $856,108,839.60  46.67%  $978,410,102.40  53.33% 

1986  $2,224,314,029  $911,022,235.20  40.96%  $1,313,291,793.60  59.04% 

1987  $2,773,673,040  $1,149,709,032.00  41.45%  $1,623,964,007.70  58.55% 

17

Page 19: Watts, Snyder, New Evidence on the Resource Costs of Irredeemable Paper Money

1988  $2,866,170,604  $1,292,586,742.80  45.10%  $1,573,583,860.80  54.90% 

1989  $2,596,876,340  $1,175,944,003.20  45.28%  $1,420,932,337.20  54.72% 

1990  $2,441,362,761  $986,409,196.56  40.40%  $1,454,953,564.93  59.60% 

1991  $2,211,997,096  $873,156,748.28  39.47%  $1,338,840,347.36  60.53% 

1992  $2,243,972,896  $1,028,026,991.68  45.81%  $1,215,945,904.14  54.19% 

1993  $2,475,307,471  $1,422,723,452.70  57.48%  $1,052,584,017.85  42.52% 

1994  $2,765,474,611  $1,827,188,582.40  66.07%  $938,286,028.80  33.93% 

1995  $2,851,672,888  $1,777,666,216.18  62.34%  $1,074,006,672.27  37.66% 

1996  $2,930,065,297  $1,782,975,904.28  60.85%  $1,147,089,392.96  39.15% 

1997  $2,820,269,049  $1,362,243,163.39  48.30%  $1,458,025,885.82  51.70% 

1998  $6,309,834,653  $3,292,087,644.86  52.17%  $2,071,744,810.99  32.83% 

1999  $3,578,791,512  $1,381,287,952.04  38.60%  $2,197,503,560.07  61.40% 

2000  $3,024,097,093  $1,381,931,609.06  45.70%  $1,642,165,483.49  54.30% 

2001  $2,239,530,312  $679,701,806.78  30.35%  $1,559,828,505.31  69.65% 

2002  $2,628,921,586  $1,005,761,667.41  38.26%  $1,623,159,918.69  61.74% 

2003  $2,371,633,037  $911,267,866.55  38.42%  $1,460,365,170.75  61.58% 

VI. Monetary vs. Industrial Gold Use, 1997-2011 (World Gold Council)

Year 

Total Gold Demand ($ millions) 

Gold Investment ($ millions) 

Investment % of Total  Jewelry & Arts 

(millions $) 

Jewelry & Arts % of 

Total 

1997  $3,933  $579  14.71%  $3,354  85.29% 

1998  $4,090  $777  18.99%  $3,313  81.01% 

1999  $4,149  $785  18.91%  $3,365  81.09% 

2000  $3,283  ‐$167  ‐5.10%  $3,450  105.10% 

2001  $3,601  $207  5.76%  $3,393  94.24% 

2002  $4,122  $214  5.20%  $3,907  94.80% 

2003  $4,438  $247  5.57%  $4,192  94.46% 

2004  $4,912  $265  5.40%  $4,646  94.57% 

2005  $5,445  $408  7.50%  $5,037  92.50% 

2006  $6,670  $638  9.57%  $6,032  90.43% 

2007  $6,215  $376  6.05%  $5,839  93.95% 

2008  $7,273  $2,202  30.28%  $5,070  69.72% 

2009  $8,344  $3,606  43.21%  $4,741  56.82% 

2010  $9,317  $4,221  45.30%  $5,096  54.70% 

2011  $9,848  $4,037  41.00%  $5,816  59.06% 

18