From: nancy@genie.slhs.udel.edu (Nancy Lebovitz)
Subject: Re: Wither the gold standard (was: Re: Views? :)
Organization: UDel, School of Life & Health Sciences
Date: Wed, 16 Dec 1992 19:20:35 GMT

In article <1992Dec15.011406.3695@athena.mit.edu> cmk@athena.mit.edu (Charles M Kozierok) writes:
>In article <Bz9oBq.M42@encore.com> rcollins@encore.com writes:
>>In article <1992Dec14.190130.24501@athena.mit.edu>, cmk@athena.mit.edu (Charles M Kozierok) writes:
>>|> gold would always be equal to $35, as you say. the problem was not that
>>|> gold wasn't worth $35 anymore, it was that $35 wasn't worth an ounce
>>|> of gold. meaning that the goods which could be had for $35 were
>>|> not worth an ounce of gold given what other countries would pay
>>|> for an ounce of gold.
>>
>>It still doesn't make sense.  With gold backed currency, 35 dollars
>>would be an ounce of gold.  No vendor in the US would treat the two any
>>differently (given 100% confidence in US government).  Prices of gold in
>>other countries would only say something about the transaction costs of
>>moving gold, dollars or whatever "goods" you mention between US and
>>there, or confidence in the US government.
>
>i guess i am not communicating this very well...
>
>if the US government says that an ounce of gold is worth $35, it *will*
>always be that way. but if $35 buys X amount of stuff, and somewhere
>else you can get 2X amount of stuff for one ounce of gold, nobody
>will accept US dollars as currency. so within the US you are fine.
>but outside the US you are in trouble. and this is relevant because
>of the shrinking percentage of the world market that is the US market.
>
>so in other words, yes an ounce of gold will always be $35. but 
>no-one else will care, because they think the gold is worth
>more than what they can get with $35. the only way the government
>can fight an increase in the world market's value of gold
>is to drive the it back down by increasing
>supply, which it does by selling gold reserves. once the reserves are
>gone, if demand again increases, the US is powerless to influence
>the increased value of gold, and this would theoretically
>cause non-acceptance of the US dollar, because foreigners would
>say "keep your $35. my gold is worth more. i'll trade with someone
>who can give me 2X stuff for my ounce of gold".
>
>now, if the appreciation of gold really happened like this,
>the foreigners wouldn't say "keep your $35". 
>instead, the US vendors who formerly sold X amount of stuff
>for $35 will say "wait a minute. i need your business. and i know
>that my X amount of stuff isn't really worth an ounce of gold. so
>i'll sell to you for $15 (or however many dollars the market
>decides the product is worth in gold)". and the reverse happens
>if the market is flooded in gold and its value decreases.
>
>the net effect is that the US loses control of price stability.
>too little gold in the market --> real value of dollar relative to 
>gold goes down --> prices go down.
>too much gold in the market --> real value of dollar relative to
>gold goes up --> prices go up.
>
>the US could handle these fluctuations with its gold reserves
>back in the 50's. now it would just take too much gold.
>
>please tell me if that makes more sense.

Yes--it also shows why, if the US government wanted to switch to a gold
standard, it should start by setting the dollar/gold equivalence at
that day's free market level to minimize disruption. (I guess that this
opitimisitically assumes that the govt. has enough gold to back the
currency at that level.)

Actually, I'm interested in the question of what the smoothest way would
be for a government to switch from a fiat currency to a commodity-backed
currency. (A fiat currency is one that has value because some powerful
organization says it does.)

Nancy Lebovitz
nancy@genie.slhs.udel.edu

Newsgroups: alt.politics.libertarian