From: PL436000@BROWNVM.BITNET (Jamie)
Newsgroups: bit.listserv.politics
Subject: Re: why gold
Date: 15 Dec 92 15:57:06 GMT
Comments: Gated by NETNEWS@AUVM.AMERICAN.EDU

First, a quick note to Caius.

I see the mechanism you are thinking of.
I should have phrased my question differently.

I want to know what the evidence is that the mechanism actually
operates in the real world.

Now, to O'Andy. I can't possibly respond to all of it, or this post
would be well over 200 lines.

>From:         Andrew Allen <E7L8ALL@TOWSONVX.BITNET>

>The idea is that by linking monetary growth to something that does
>not increase quickly, it will curb inflation. The prevention of
>inflation is like a religion to some, inflation is considered
>the greatest possible evil, deflation as the greatest good.

I still don't fully understand this.
The total mass of gold in the world, or in Fort Knox, does not
increase quickly. But its monetary value could increase quickly.
Wouldn't a growing economy lead to a rise in the price of gold?

(Why is deflation a bad thing?)

>Depends upon where your income is from, if you are cast out of work
>by deflationary pressures in the marketplace then you may not like
>it much. On the other hand if you are wealthy and own bonds or have
>money loaned out then you will likely enjoy a deflation as the money
>that you receive in repayment buys more.

Well, I believe these effects actually occur only when the deflation
(or inflation) is not expected. But if the country knew that it was
on the gold standard, it would obviously expect deflation.
Anticipated deflation cannot possibly have the effects you've mentioned.

>>>I only want "banking money" to be based on something REAL, like gold.
>
>It is ironic that this should be brought up since the modern
>banking practices that goldbugs (people who support the return to
>a gold standard) abhor were started because of the gold standard
>for money.

That's kind of what I suspected.

>>Banks do not lend more money than they borrow!
>>How could they?
>
>Banks lend out money based upon their reserve requirements and
>their individual prudence, if they get caught short of their
>reserve requirement at the point that they settle their accounts
>then they borrow money.
>
>The assumption that I think you are driving at, that the banks
>*must* at some point have as much money as they lend out is
>false. If the reserve requirement is 16% then they must only
>have 16% of what they have "out" in loans.

Correct me if I'm wrong.
Banks never lend more than they borrow (or anyway, more than they
have).
They often lend more than they keep in reserves.
If a bank lent out all of its cash, it would have zero reserves, but
it would still have not lent out more than it borrowed.

>>(I'm not sure whether the measure of the money supply is a measure
>>of the total market value of money, or a measure of the total number
>>of dollars or ounces of gold, or what, so I'm not confident that I
>>understand the proposal.)
>
>The money supply is measured in 4 components; M1 which is all of
>the currency and all the money in checking accounts, M2 which is
>the money in small savings accounts and shorter term time deposits,
>credit union deposits, money market accounts, M3 which is large
>denomination financial instruments (100k CD's, long term bonds),
>and L which is total liquidity - all of the financial assets that
>can be sold and turned into cash, T bills, commercial paper, US
>savings bonds, etc.

Thanks, I always forget these.
But my question was different.
Suppose all the currency is backed by gold.
Do we measure M1 by the dollar value of the currency? Or by the weight
of the gold? Or by the total price of the gold?

>>I don't get it.
>>First, I don't understand how a gold standard is related to the
>>manipulation of the money supply.
>
>It limits the growth of the money supply to the growth of discovery
>of gold.

I still don't see how!
As I speculated, and as O'Andy has confirmed, the basic way the
fed works on the money supply is by buying and selling its outstanding
bonds. Why would a gold standard change that practice?
(Would it change the way the fed can affect the reserve rate?)

Whew.

Too bad none of our list economists is a macro economist.

Or maybe it isn't too bad. Maybe we should count our blessings.

Jamie

(I have a very large set of numbers which I am willing to sell
real cheap. Some of them have a few imperfections which will
not affect average use. Send inquiries to the newsgroup
sci.philosophy.tech.)
Comments: Gated by NETNEWS@AUVM.AMERICAN.EDU