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Alternative money for transactions What if gold or Bitcoin replaced the dollar?


What if U.S. retail prices were not denominated in U.S. dollars, but instead were denominated in gold or Bitcoin? Paying for a loaf of bread with gold wouldn’t be very practical, as you’d need a very small speck of the precious metal. But one can imagine a system of gold substitutes, such as notes giving you ownership of a fraction of an ounce of gold, thereby overcoming the small-change problem. With Bitcoin, it’d be much easier, as a virtual currency can be divided any way you want.

Now, let’s look at actual prices. FRED doesn’t have price data on just a loaf of bread, but it does have the consumer price index for cereals and bakery products, so let’s use that. The blue line shows the evolution of the U.S. dollar price of a basket of baked goods. The red line shows the price in gold, and the green line shows the price in Bitcoin. It’s apparent that the dollar price is much more stable and has slowly increased over time. The gold price has considerable fluctuations from month to month. While the gold price seems to have a tendency to decrease, this isn’t always true, which you can see if you enlarge the sample window. As for Bitcoin, the fluctuations are extreme, even when you restrict the sample period to the past year.

What’s behind the differences? The Fed’s mandate is to stabilize prices as expressed in U.S. dollars, and this is quite apparent in this graph. The Fed does this by adapting to changes in the demand for dollars. That isn’t possible with gold, as its supply is determined by worldwide mining success, which is outside of the control of any institution. The same applies to Bitcoin, with the additional constraint that mining success keeps dwindling.

How this graph was created: For line 1: Search for and select “cereal price cpi” and click on “Add to Graph.” (You can also paste the series ID, CUSR0000SAF111, directly in the search field.) From the “Edit Graph” menu, use the “Add Line” feature to again search for and select the same cereal price CPI series two more times. For line 2: Open the “Edit Line 2” tab, search for and add “Gold Fixing Price 10:30 a.m. (London Time)…” in the “Customize data” section or paste in the series ID (GOLDAMGBD228NLBM). Then apply formula a/b*1000. (Multiplying by 1000 helps place the line within a visible range.) Repeat this for line 3 by searching for and adding “Coinbase Bitcoin” (series ID CBBTCUSD). Finally, restrict the sample period to the past twenty years.

Suggested by Christian Zimmermann.

View on FRED, series used in this post: CBBTCUSD, CUSR0000SAF111, GOLDAMGBD228NLBM


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