From: cmk@athena.mit.edu (Charles M Kozierok)
Subject: Re: Gold v. Oil: Backed Currency
Organization: Massachusetts Institute of Technology
Date: Tue, 15 Dec 1992 14:37:49 GMT

In article <64S=J4-@engin.umich.edu> positron@engin.umich.edu (Jonathan Scott Haas) writes:
>In article <1992Dec14.145610.16543@athena.mit.edu> cmk@athena.mit.edu (Charles M Kozierok) writes:
>
>>i claim that the problem with having a gold-backed currency is that
>>it will put our exchange rates at the mercy of whoever has the gold.

[description of problem partially deleted]

>>now let's say some other country (i used denmark in the last example
>>for now particular reason) says "i don't accept US dollars, but i'll
>>give you 14 widgets for an ounce of gold". the south africans sell
>>to them, which effectively drops the real price of widgets in the 
>>US to $2.50, or raises the exchange rate to $70 per ounce, i'm not
>>sure which.
>
>>it seems to me that this is not a healthy situation under which to
>>run an economy. as the US's share of world GNP continues to shrink,
>>we would become more and more subject to the markets of other nations.
>
>OK, look at it this way. When you make your currency backed by something,
>your currency then becomes a convenient way of dealing with the commodity
>in question. If one dollar is backed by 1/35th of an ounce of gold, then
>paying $35.00 for something is just a more convenient way to trade an
>ounce of gold for it.
>
>If someone (in another country or in this one) is willing to trade 14
>widgets for an ounce of gold, then he is willing to trade 14 widgets for
>$35.00. There is no difference. And having another country undercut your
>price is no different than having someone in this country undercut
>your price. The price of widgets in Denmark is $2.50. 
>
>Now, suppose South Africa digs up a large supply of gold. That's fine.
>If they wanted to, they could redeem every ounce they dug up for $35.00.

but in doing so they would cause rampant inflation in the united states.
every time the market is flooded with gold, all of our prices go up.

aren't you ignoring the psychological effects of price instability?
let's say south africa digs up tons of gold. immediately the price
of gold begins to fall. prices will start to rise. people will run
out and do all the wonderful things they do when prices rise (i'll
spare you the general treatise on the evils of inflation).

the reverse is just as bad. currency growth is necessary in times
of economic expansion. this would require even growth in the supply of 
gold to match the growth in the money supply. now let's say the
gold supply runs out (or south africa decides they have a bone to
pick with us, *not* a far-fetched scenario). they hold back all the
gold. prices decline. deflation. recession. then when they have us
good, they flood the market again! fishtailing, inflation, panic.

in other words, the real problem is loss of control over the economy.
how would we deal with this? remember, they couldn't do this in the 50's --
they had no-one else to sell to (virtually). now they have lots of options.

>Note also that objections like "but what if the government fixes gold
>at $1.00 per 1/35th ounce, when the actual price is $10.00 per 1/35th
>ounce?" are meaningless. $1.00 *is* 1/35th of an ounce of gold, if that's
>what the issuer of dollars is willing to back it with.

granted. we could say 1 penny was worth a *pound* of gold if we wanted
to -- makes no difference whatever (except psychological).

--
charles
Newsgroups: alt.politics.libertarian