From: eder@hsvaic.boeing.com (Dani Eder)
Newsgroups: alt.individualism
Subject: Re: gold standard
Keywords: gold money keynes
Date: 5 Oct 92 15:22:43 GMT
Distribution: na
Organization: Boeing AI Center, Huntsville, AL

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


>   As a store of value, retreat from the gold standard has allowed
>   politicians to do just what you would expect them to - they have
>   devalued the money supply and generated quite remarkable inflation.

>   The market has responded to this in the way that Le Chetalier would
>   have expected - the system (financial market) has responded to annul
>   the constraint (the devaluing of the currency). There are no Silas
>   Marners around today, except for the very stupid - people invest in
>   stocks, futures, bonds, foreign currency and all manner of 'stores of
>   value'. Amongst these various 'investment instruments' are gold, gold
>   options and gold futures. You can store the fruits of your hard
>   labour in gold, and preserve its value that way.

First, as a matter of history, the US was never officially on a gold
standard.  The price of gold was fixed in terms of dollars, and
dollars were defined as a certain amount of silver by weight.  In
effect, a ratio was established between the values of gold and silver.
Over time, with the vagaries of mining, the market drove the ratio
to be different than the official ratio.  The price of gold was
adjusted a few times to reflect this, but the dollar remained
constant at 0.78 ounces of silver over the whole period from 1793
to 1964.  In fact, since the US dollar merely reproduced the average
value of the Spanish silver dollar, the constancy of weight in
silver extends back into the Colonial era.

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)

So, when the US was on a silver standard, most of the economic
transactions, when measured in value, used gold (for the large
transactions).

The whole point of setting a standard of value is to remove
from politicians the ability to play with the value of a currency.
This is akin to not allowing them to adjust the length of the
year, which they would adjust to their benefit if they could.
In fact the Congress keeps itself within the letter of the
law as far as deadlines in the budget cycle by maintaining a
'legislative date' which is behind the calendar date.  So they
do in fact fiddle with calendars to suit their purposes.

The economic reason to reduce inflation and inflation uncertainty
is that lenders and investors demand a premium rate of return to
cover inflation uncertainty.  This raises the cost of capital and
shortens time horizons.  And Mr. Cox correctly points out that
savings are lowered, and savings are where future investment 
capital comes from.


>   So why base the currency on Gold? Pure whim! There is NO difference
>   in the final analysis.

The reason gold has been used as the major coin of value, even
in the US when we were on a silver standard are: inertness, 
compactness, and stability.  Gold is chemically inert, and most
of the gold ever mined is still around.  It is fairly unique, and
thus hard to counterfeit (the combination of density and color are
unique, and most of the other metals in the density range of gold
are also valuble).  A physically small amount of gold carries
a lot of value.  For example, a 4 inch block, massing 19 kg, will
fit in a sturdy briefcase, and can be carried by one person (although
a strugle to do so).  The 630 ounces therein can buy a large house
most anywhere in the US except California, where it will buy a
medium sized house.  The ratio of gold stocks to mining rates
is about 40 years, and the amount of gold per person on the
planet (about 1/2 ounce per person) is almost stable, as the mining
rates and population growth rates are very close.  Even is
gold mining were to stop entirely, or the mining rate were to
double, you would not expect inflation or deflation more than
2.5% per year.  Given recent history in most countries, this
would be an improvement.

>   Inflation is an irritating feature of money I'll agree, but hardly a
>   show stopper. It leads to interest bearing cheque accounts (etc.
>   etc.), but apart from the tax consequences of artificially inflating
>   asset values, it is harmless. As long as the RATE can be predicted
>   (well, as long as Inflation = fn(time) can be predicted), its NO BIG
>   DEAL.

That is exactly the problem.  With our Federal Reserve System alternately
expanding and contracting the rate of money supply growth, the inflation
rate has become unpredictable.  In the last few years, the Fed has
said it now monitors commodities prices (including specifically gold)
and has been using that as a factor in monetary policy.  We note that
in the last few years inflation has stabilized at a relatively low rate.
I suggest that a firmer connection to a commodity standard would
stabilize infaltion even more and make the rate more predictable.

> 1) Why pick on Gold as having a special place in the system? My
> attraction to libertarianism has always been based upon its even handed
> approach to human relationships. Why give owners of Gold an advantage
> in the market place? On the gold standard, owners of Gold (or gold
> miners) have a GUARANTEED price for their product. Why should they have
> advantages over (say) Milk producers? Why not a guaranteed price for
> milk?

It's not a guaranteed price, it is just a unit of measure.  If
gold is itself the standard of value, then stating that the 'price'
of gold is $360 per ounce is merely stating that the dollar is
defined as 1/360 of an ounce of gold.  You are just establishing
the unit of measure, like fixing the ratio of ounces to kilograms.
What the miners of gold may get for their gold will fluctuate, as
all commodities tend to fluctuate realative to each other.  So they
are not guaranteed any quantity of other commodities in exchange
for their gold, aside from the expectation based on history that
gold will continue to have reasonably high value.

> 2) Suppose that someone comes up with a cheap way of extracting gold
> (Oh Rubbish! says an earlier post). Well, suppose that Rumours start
> that someone is experimenting with such a process (shades of cold
> fusion, if you will). Energy stocks gyrated after cold fusion hit the
> world. Why make your currency system fluctuate with peoples fears in
> such a limited way. Surely you should base your currency on as large a
> 'value sink' as possible?

In fact, a relativley inexpensive mining method (heap leaching) has
been developed in the last few decades.  It involves dribbling acid
through a big pile of gold ore, and collecting the gold which comes
out bound to the acid.  I understand that the mining cost runs $175-
200 per ounce in the best cases.  This has not affected the price
of gold noticeably, other than making the US a larger producer
than in former years.  Gold mining is limited by scarcity - you
have to find it, even if you can extract it for free.  In the
case of getting it out of sea water, the concentration is a million
times lower than ores that are mined today.  Finding an extraction
process a million times more efficient seems a pretty far out
possibility.  I would worry more about locating another large gold
field, or an extra-terrestrial (asteroidal) source.

> 3) Who decides how much gold to store, and how much currency to issue?
> Will anyone who brings gold to the bank be able to exchange it for
> currency? If not, why not? If so, and '2)' ever occurs, how do you stop
> a massive expansion of the money supply.

Any bank may issue bank notes representing a precious metal stored.
They need to keep the metal in sufficient quantity on hand to 
redeem notes presented for conversion, if they issue convertible
bank notes.  They are free to issue non-convertible notes, but
why would someone trade a convertible note for a non-convertible
note, or trade gold for a non-convertible note?  Coinage and melting
down should be a free process.  Setting a standard merely ensures
that all 'one dollar' coins contain the same amount of precious
metal, just as setting a weight standard ensures that all 5 pound
bags of flour actually have the same weight of flour.

For this reason, I believe that we could eliminate the dollar
entirely and have a monetary system that runs like this:

The government will establish one precious metal as the standard
and a set of precious metals that it will accept as payment and
use itself for payments.  Metals other than the standard will
be accepted and payed out at the current market ratios of their
values.  If you have to pay a tax or fine, or collect interest on
a government bond or payment for selling the government toilet
paper, then you know that these are the terms you will have to
deal with them on.

For private transactions, the default will be what is acceptable
to the government at the time of the deal being made, is what
is acceptable for that contract.  If gold, silver, and platinum
are being accepted by the government at the time a mortgage is
negotiated, then these are what can be used to make payments.
Private individuals may decide to contract on more restrictive
(payments in gold only) or broader (I will accept any precious
metal listed on the NY commodities exchange as payment in the
ratio they hold to gold), as individuals see fit.  They can]
even specify payment in crude oil, blank videotapes, or McDonalds'
gift certificates if they like, although for practical reasons
a small range of commodities will end up in common use.  

An issuer of coin or currency that states a value in weight of
precious metal would be committing fraud if the coin is under-
weight, and breach of contract if he will not redeem his note.
These breaches can be dealt with as any other legal cases in
these categories.


> 4) A process to generate cheap gold would be a license to print money.
> The rewards would be so substantial that it would create an artificial
> impetus to design such a process - the philosophers stone of the 21st
> century. Why should libertarians tolerate such a market distortion?

People have been searching for gold for thousands of years.  It
is still scarce.  If you think that transmutation will become available
to make gold out of base metals - then other things can be made by trans-
mutation too, so the prices of many things will fall.  Diamond represents
a poor choice for a commodity standard for the reason that there
is lots of carbon in the world, and people can and do re-arrange
molecules and crytalline forms.  There have been methods developed
to make diamond out of carbon.  Changing something into gold, however
requires changing the nucleus - which requires millions of times
the energy of breaking chemical bonds.

> 5) Suppose that a new industrial process comes along which uses large
> quantities of gold. The owners of the factories come to you with
> fistfuls of dollars to retrieve their gold (it is a very profitable
> and useful process). Do you keep exchanging gold until it is all gone
> and there is no money in circulation? Who makes that decision? 

Like any other commodity, if it gets used up and becomes scarce, the
price (in terms of what other things can be exhanged for it) will
rise until the industrial process becomes un-economic.  It is unlikely
that a process will be developed that uses more gold than the 
amounts of platinum that are used in auto catalytic converters - since
few things are made in as large quantities as automobiles.  Platinum
is scarcer than gold, and the industrial uses have not materially
affected it's value.

> 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.

Today, that 200 million ounces of gold is only 10% of the worlds'
stock, since mining more gold has continued.

Dani Eder

-- 
Dani Eder/Boeing/Advanced Civil Space/(205)464-2697(w)/232-7467(h)/
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