In a past article I wrote about the importance of introducing the Gold Standard in NZ in order to help reduce actual carbon emissions. The process would not be uncomplicated – there are many practical obstacles to consider, least of which would be planning to acquire a sufficient amount of gold to serve as a reserve for the entire NZ economy.
Excepting Bretton Woods, no nation has been on the Gold Standard for 100 years. This creates a little bit of a problem for us if we want to adopt the Gold Standard, in that there is no practical living case body of experience as to how to implement it and what the practical consequences may be in a modern economy.
Fortunately, there are some tools and levers we could use to allow the NZ economy to ‘phase in’ the Gold Standard. This would reduce its immediate impact, give farmers and businesses a chance to plan ahead, and to test the waters before we commit to diving in.
The Gold Ceiling
The whole principle of the Gold Standard would be to allow people to exchange their NZ currency for actual gold.
This would involve setting the price of gold at a rate sufficiently above the market ‘spot price’ so as to make the risk of an immediate run on gold less likely. If the Gold Standard was set at the rate of $3000, and the current spot price was $1800, it would be pretty unlikely that people would be stupid enough to exchange their NZD for gold when they could simply buy the same amount at a lower price on the open market. (Some people might do, for the purpose of testing the exchange mechanism, however.)
Gradually, what would happen is the erosion of the NZD over the span of a few years would lead gold to become more expensive. As the spot price neared the Gold Standard, the full effect of the Gold Standard would kick in. When this happened, inflation would start to hit the floor, and the Kiwi dollar would likely start to appreciate.
Following the ‘Gold Ceiling’ would enable us to phase in the Gold Standard over time, giving business owners, farmers and exporters some time in advance to prepare the changes they would need to make to their business models.
Restricting Gold Exchange Rights to NZ Citizens and Permanent Residents, At Least Initially
One way to limit or reduce the possibility for a run on gold would be to limit the people who are legally able to exchange their NZD currency for gold exclusively to NZ Citizens and Permanent Residents.
At the same time, we could tighten up the gifting regulations in NZ to prevent entities from giving large sums of money to one another without a gift duty.
This would not necessarily prohibit other international governments, businesses or market speculators from using the Gold Standard, but it would frustrate those efforts somewhat by introducing the need for transactions to be undertaken through a locally resident intermediary.
It is likely that some NZ citizens or permanent residents would be able to turn it into a side business, allowing corporations and overseas individuals to use the Gold Standard for a fee.
The aim here would be to restrict somewhat the number of exchange transactions that occur, and potentially prevent speculative attacks on the NZ Gold Standard.
Limiting the Amount of Gold Exchanged by any Individual to an Annual Maximum
The next step would be to allow a simple maximum amount of dollars exchanged per NZ Citizen or Permanent Resident. This could be calculated on an annual basis.
While this would limit the potential for the Gold Standard to achieve market equilibrium, and would require some databasing and enforcement, it would also greatly restrict the potential for a run on the Gold Standard at any given time.
It would also give the Treasury some breathing space to plan ahead and decide how much future gold to purchase, sell or import.
Create a Gold Register
Rather than having to have the entire NZ population system placed on a database, you could simply have an ‘opt in’ system called a Gold Register. Individual citizens or permanent residents could choose to register on the system for the purpose of being able to exchange NZD for gold in the future, before they are allowed to make use of the Gold Standard exchange mechanism.
The process would require that the applicant produce a passport or other form of valid NZ license as part of their authentication.
This process might take several weeks to complete verification, but once done, would enable individuals to trade currency for gold. Due to the preparatory nature of the system, it could again delay or prevent speculative attacks.
Conclusion
The strategies above are fairly simple, and it would be quite easy to create systems to manage and enforce them. The administrative cost would be minimal and could be done on an ‘opt in’ basis.
While each of the strategies would somewhat interfere with the ability of the market to achieve parity on the Gold Standard, they would nonetheless allow the Treasury and the Government some level of control over the Gold Standard, and thus prevent runs on government gold reserves by speculators.
Although the safeguards discussed here would largely prevent the free flow of the markets from using the Gold Standard to full effect, they would provide certain safeguards against the biggest risk for a small nation Gold Standard: the risk of speculative runs on government gold reserves.
What you would have instead is a system largely moderated through individual residents and citizens, accessible to New Zealanders first, and then, ultimately, to the global markets.
