Monday , March 27 2017
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A forgotten cost of the gold standard.

Summary:
While waiting for the kettle to boil in the Economics department lounge, I searched for something - anything - to read. Then I spotted the 1961 Ontario Economic Survey on the departmental bookshelf. Opening the old volume at random, I hit gold: A problem peculiar to gold mining is that the price of gold has remained unchanged since 1933-34 when it was set at U.S. .00 per ounce. However, in the past 27 years, the costs of production have risen considerably, while no compensation could be found in an increase in the price of the final product. The Emergency Gold Mining Assistance Act, passed by Parliament in 1948, made it possible for high-cost or marginal mines to obtain financial assistance. As a result, economic activity could be maintained at a satisfactory level in communities such

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While waiting for the kettle to boil in the Economics department lounge, I searched for something - anything - to read. Then I spotted the 1961 Ontario Economic Survey on the departmental bookshelf.

Opening the old volume at random, I hit gold:

A problem peculiar to gold mining is that the price of gold has remained unchanged since 1933-34 when it was set at U.S. $35.00 per ounce. However, in the past 27 years, the costs of production have risen considerably, while no compensation could be found in an increase in the price of the final product. The Emergency Gold Mining Assistance Act, passed by Parliament in 1948, made it possible for high-cost or marginal mines to obtain financial assistance. As a result, economic activity could be maintained at a satisfactory level in communities such as the Porcupine gold camp, Kirkland Lake, Larder Lake and Red Lake, where the majority of the population depends directly or indirectly n the gold mining industry. The Act, which was to terminate in 1950, has been extended several times, the latest extension covering the years 1961, 1962 and 1963. An increase in the price of gold would undoubtedly enable those mines now receiving Government assistance to operate again on a profitable basis. The recent decline in the premium on the Canadian over the U.S. dollar has raised the price of gold in Canadian dollars and improved the position of Canadian gold mines.

Here are the original images, with some more information.

Gold mining one

Gold mining two

That's one aspect of the gold standard that is sometimes forgotten. When the price of gold is fixed in dollar terms, that price by definition cannot adjust to changes in the metal's production costs. The resulting inefficiencies snowball: an (inefficiently) low price of gold leads to (inefficiently) low production, which the government counteracts with subsidies, financed with (inefficiently) high taxes. 

Any contemporary lessons from this episode? Or is this just a forgotten and forgettable curiosity? 

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Frances Woolley
I am a Professor of Economics at Carleton University, where I have taught since 1990. My research centres on families and public policy. My most-cited work is on modelling family-decision making, measuring inequality within the household, feminist economics, and tax-benefit policy towards families. I hold a BA from Simon Fraser University, an MA from Queen’s, and completed my doctorate at the London School of Economics, under the supervision of Tony Atkinson.