New Evidence on the Resource Costs of Irredeemable Paper Money

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.