The Magic of the Gold Standard

A lot of people think that the gold standard is magic. They are probably thinking about some ancient era when all we had was gold, and no one had credit. In the 1930s, the rule in the United States was that for every $25,000 gold bar the federal government had in reserve, they could issue $71,000 in reserve credit to registered banks. That's nearly a multiplier of three. Those banks, could then issue a combined credit of about $525,000, based on their $71,000 worth of reserves which were, in turn, back by the $25,000 chunk of metal sitt2ing in a vault somewhere.

That's an effective multiplier of about 21. But where did that come from? That's easy, 21 is roughly the product of 2.84 and 7.39. Where did those numbers come from? That's easy, they made them up. The magical, wonderful, natural, organic gold standard was based on bars of gold and made up numbers. I suppose the financial community raised a ruckus whenever one of those numbers got adjusted one way or the other, but they raise a ruckus now.

I'm not exactly sure of how the the gold standard was all that different from what we have nowadays, except that we've dropped the gold bar part.