From: positron@engin.umich.edu (Jonathan Scott Haas)
Subject: Re: Gold v. Oil: Backed Currency
Date: Tue, 15 Dec 92 02:18:04 EST
Organization: University of Michigan Engineering, Ann Arbor

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.
>let's say south africa digs up an enormous quantity of gold. now in the
>1950's, they had to come and sell it here, because the US was something
>like 75% of the world's GNP. we could be monopsonistic and charge
>whatever price we want, say $35 to pick a random number (:^).

>since the number doesn't matter, let's use that one. now as you
>have pointed out, the currency is only a medium of exchange. holders
>of the currency only care about what others who are willing to accept
>the currency decide it is worth. so back to south africa. let's say
>the south africans want to exchange their gold for widgets. in the US
>a widget costs $5, so one ounce of gold is worth 7 widgets.

>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.

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.

Presumably, in the process of readopting a gold standard, a government
would pick a price compatible with the current value of gold. In other
words, if gold were trading for $400.00/oz when the government decided
to go back on the gold standard, they would agree to back every four
hundred dollars by one once of gold. This avoids a sudden shakeup in
prices.

-- 
__/\__  Jonathan S. Haas         | Jake liked his women the way he liked
\    /  University of Michigan   | his kiwi fruit: sweet yet tart, firm-
/_  _\  positron@engin.umich.edu | fleshed yet yielding to the touch, and
  \/                             | covered with short brown fuzzy hair.
Newsgroups: alt.politics.libertarian
From: chris@keris.demon.co.uk (Chris Croughton)