From: eder@hsvaic.boeing.com (Dani Eder)
Newsgroups: alt.individualism
Subject: Re: gold standard
Keywords: money gold_standard keynes silver_standard federal_reserve_bank bankin
Date: 8 Oct 92 14:28:48 GMT
Distribution: na
Organization: Boeing AI Center, Huntsville, AL

tcox@ssrl01.slac.stanford.edu (Tony Cox - (415)926-3105) writes:

>> Second, the fact that there is a limited amount of silver or gold
>> around is not a problem in running an economy any more than the fact
>> that there was one prototype meter and one prototype kilogram
>> limited economic activity.  In physical measures, you have to
>> make your measures reflect the original, but you do not have to
>> make all your meter sticks and balance weights out of platinum-
>> iridium alloy (which is what the prototypes were made of)

>   I don't think that your analogy is particularly useful. Surely you
>   are not suggesting that one could use counterfeit gold to back your
>   currency? Clearly that is the corollary.

No, that is not what I was suggesting.  Some people have claimed
that a gold standard would limit the growth of the economy because
there is a limited amount of gold, and as the economy grows you
would reach a point where the demand for gold as money would
exceed the supply.  Then loans and payments would be delayed for
lack of a medium to make the payments with.  Aside from the other
reasons this is an incorrect argument, I was claiming that you
can use other precious metals or other valuble commodities
as stores of value backing a currency or monetary system.  In
particular land and houses could be used as backing for a currency,
as they have a realtively stable value, compared to say sybeans or
crude oil.  You would first value the property in units of precious
metal (this house is worth 300 oz of gold), then use it to back
the currency, i.e. you can exchange your currency for houses at
any time just as you can exchange your currency for gold.

Even in the unlikely case that you run out of gold to back a
currency, there are few who would claim that the need for currency
is so great that there is not enough real estate to back it.


>   Lets investigate this further....

>   It is easy to see how gold producers can benefit in such a
>   situation, and at whose expense. Suppose that gold is priced at
>   $360/oz. Suppose now that I, as a gold producer, can generate the
>   stuff for $300. I go to my local 'free bank', and I offer to sell
>   for (say) $330. The 'free banker', not violating his contract with
>   his investors, takes my gold and circulates 360 of those wonderful
>   gold-backed dollars - 330 to me and 30 to himself. I have my
>   guaranteed profit, and he has his commission.

I see a conceptual difficulty here.  The gold mining company must
pay it's employees and suppliers.  If you say that the standard price
for gold is $360 and ounce and the mining cost is $300 per ounce, that
means that 5/6 of the gold mined must be paid out to the employees and
suppliers, and the mining company keeps the other 1/6 as it's profit.

Some mining companies in the real world, Johnson and Matthey is
an example, produce their own bars and coins.  All a coin is is
a small bar. J&M produces 1,5,10, and up oz silver bars.  Credit
Suisse produces 5,10, and 25 gram gold wafers (very small bars),
up through 1 kilgoram bars and 400 oz ingots.  Wafers, coins,
bars, and ingots are all just specific lumps of metal of a 
uniform weight.  Some are round and some are rectagular, some
have pretty designs stamped on them, some just have the name
of the mint, the weight and fineness, and a serial number.

So, the mining company who mints it's own coins can simply give
a portion of them to the employees, send some of them to the
suppliers of mining equipment, and keep the balance.  If the
employees and suppliers will accept a cheque, then what it means
is this:

The mining company sent the gold to a bank for storage, coining,
etc.  The mining company gets a credit on it's account for
having deposited (physically) that much gold.  A check is a
document that says "Pay the sum of XXXXXXXXXXX dollars to the
order of YYYYYYYYYY".  This in a gold standard equals saying
"Pay  XXXXXXXXX/360 ounces of gold to YYYYYYYYY".  It is merely
an indirect way of giving the employee his share of the mine's
produce.

Why would the mining company accept a credit at the rate of
$330 per ounce, which deprives him of 1/12 of the amount of
gold which he is depositing with the bank?  Maybe that is
just the cost of doing business with the bank.  In reality I
think it is much less than this, but let this lie for a minute.

The banker in the example by Mr. Cox above issues notes for
360 dollars.  Does he have an ounce of gold on hand? Yes he
does.  He credits my account with 11/12 of an ounce and his
own account for 1/12 of an ounce.  He may use units of dollars,
but this is the split in ownership of the physical gold in his
vault.

>   Who is the loser here? It is economic system as a whole, which now
>   has more of those $$$'s floating around, but the economy is NO
>   BIGGER than it was before. There has just been one non-recurring
>   trade, from me to him. $300 worth of gold has been produced and
>   $360 of gold backed $$'s have found their way into the system.
>   Result - Inflation.


Now, we have what I consider an incorrect statement.  Mr. Cox
states that "$300 worth of gold has been produced".  We should all
know that the worth of a product is what it sells for, not what
it costs to produce.  The economy has in fact increased by the
addition of one ounce of gold to the stock of wealth, and by 
$360 to the national product accounts: $300 to the employees and
suppliers, $30 to the bank, and $30 to the mining company.

The increase in goods in the economy, namely the ounce of gold,
matches the increase in the accounts of the parties involved,
so there is no inflationary tendency.

>   Supposing that, on the contrary, gold costs $400 to produce. All
>   the mines shut up shop for the duration. The beneficiarys now are
>   the consumers of gold, who, instead of having to pay the 'economic'
>   extraction price of $400 for each ounce, cash in on the banking
>   system and retrieve gold according to contract for $360.

And as the amount of gold decreases in relation to the amount of
other goods in the economy, people will be willing to trade more
goods for a given amount of gold, i.e. deflation, not inflation as
you claim.

[in reference to the change of gold from scarce to not scarce]
>   "Unlikely" is all that saves you from economic crisis?
>   Why even tolerate that. Take my advice and you become immune!

The better is the enemy of the good.  A return to the gold standard
is a simple change in terms of what the general population would
understand and accept.  A GNP standard would be less understandable.
You could pass a law that states "The money supply shall be fixed
at 0.2 times the GNP", or whatever number is appropriate, but I place
less trust in the governement's ability to adhere to such a rule than
in the chances of gold suddenly becoming less scarce.

>>> In short, you can corner the market in a commodity, or in trying to do so,
>>> drive the price up to unnatural levels (re: Hunt brothers). Money tied
>>> to this is susceptible to such machinations.
>>> You just cannot do this if your money is tied to the size of the
>>> economy - it is a zero-sum game.
>> 
>> 
>> The quantity of gold stock in the world is something like 2 billion
>> ounces.  The market value is around $700 billion.  I can't imagine
>> anyone cornering that market.  The largest concentration of gold
>> holdings ever was when the US depository gold reached 25% of the
>> world's supply.  It took the largest economy in the world removing
>> all it's population's gold at gunpoint to acheive that concentration.

>   So, in terms of the world global economy, gold represents what?
>   The US economy is around $6,000 billion/year right? Total world economy
>   is probably around $20,000 billion/year. So all the gold in all the
>   world represents around 3.5% of one years economic activity.

>   Hard to imagine cornering that market, but then you don't need to
>   corner to influence. Seems like, large as it is, gold makes up only
>   a small part of the total world wealth.

>   Why have the tail wag the dog?

The total stock of private wealth in the US is something like 2 years
worth of economic activity (around $12 trillion).  If we extrapolalte
to the whole world, we have something like the value of the Earth
at around $40 trillion.  So gold a little under 2% of the value of
the planet.  What else is there that you suggest that has a larger
component of the value of the world?

Dani Eder

-- 
Dani Eder/Boeing/Advanced Civil Space/(205)464-2697(w)/232-7467(h)/
Rt.1, Box 188-2, Athens AL 35611/Member: Space Studies Institute
Physical Location: 34deg 37' N 86deg 43' W +100m alt.
***THE ABOVE IS NOT THE OPINION OF THE BOEING COMPANY OR ITS MANAGEMENT.***