The approach of comparing gold reserves and money is so totally wrong I can't understand why it would afflict so many people on this list.
The value money held at a bank must be the lesser of its redemption value and the value of the bank's total assets to total liabilities (assuming all liabilities are equal). If a bank has assets worth 100 tonnes and liabilites (all deposits) of 90 tonnes, those liabilities are likely to be good even if the bank makes some losses and even if the reserves are fractional. It does not matter if the bank's assets are reserves, bonds or loans, provided the losses on liquidating bonds and loans does not cost the bank more than its equity. All major central banks have assets greater than their liabilities (typically by 10-20%), including the Fed. The Fed *could* sell its foreign exchange reserves for gold bullion. Suppose that gave it a balance sheet as follows: Assets Gold and gold receivebles 12 500 tonnes USD Bonds $660 000m Liabilities $700 000m If the dollar were to be defined in terms of gold, ar are P ($/tonne), the bank's equity would be $660 000m +P*12 000tonnes - $700 000m=P*12 500 tonnes - $40 000m. This implies that the bank would have positive equity provided the price of gold greater than $3.2m/tonne. At a price of $10m/tonne the bank's equity is 23% of its debt. So if the bank pegged it currency unit at $10m/tonne, it would be able to redeem its entire outstanding debts by selling bonds to replenish its reserves as needed. Only if its bonds fell very sharply in value (i.e. yield rate soared) would the bank's equity be endangered. If the pegged currency offered a yield premium over gold it would attract gold deposit. This arbitrage enables the peg to be maintained and ensures that the interest rate on USD and gold would be the same. Only if the peg was not credible (e.g. not contractually established or not enforcable) could an interest rate premium be maintained. There is simply no basis for valuation of a currency or setting of a peg rate based on a single form of asset. The rate to establish a peg should be based on the value of the bank's assets and liabilities, and the asset mix should be adjusted to onclude an appropriate mix of bullion, bank currency bonds, and gold denominated bonds. David Hillary --- You are currently subscribed to e-gold-list as: archive@jab.org To unsubscribe send a blank email to [EMAIL PROTECTED] Use e-gold's Secure Randomized Keyboard (SRK) when accessing your e-gold account(s) via the web and shopping cart interfaces to help thwart keystroke loggers and common viruses.