From: whg@inel.gov (Bill Gray)
Subject: Re: Wither the gold standard (was: Re: Views? :)
Organization: Idaho National Engineering Laboratory, Idaho Falls, Idaho
Distribution: usa
Date: Wed, 16 Dec 92 00:23:32 GMT

In article <1992Dec15.011406.3695@athena.mit.edu>, cmk@athena.mit.edu (Charles M Kozierok) writes:
|> In article <Bz9oBq.M42@encore.com> rcollins@encore.com writes:
|> >In article <1992Dec14.190130.24501@athena.mit.edu>, cmk@athena.mit.edu (Charles M Kozierok) writes:
|> >|> gold would always be equal to $35, as you say. the problem was not that
|> >|> gold wasn't worth $35 anymore, it was that $35 wasn't worth an ounce
|> >|> of gold. meaning that the goods which could be had for $35 were
|> >|> not worth an ounce of gold given what other countries would pay
|> >|> for an ounce of gold.
|> >
|> >It still doesn't make sense.  With gold backed currency, 35 dollars
|> >would be an ounce of gold.  No vendor in the US would treat the two any
|> >differently (given 100% confidence in US government).  Prices of gold in
|> >other countries would only say something about the transaction costs of
|> >moving gold, dollars or whatever "goods" you mention between US and
|> >there, or confidence in the US government.
|> 
|> i guess i am not communicating this very well...
|> 
|> if the US government says that an ounce of gold is worth $35, it *will*
|> always be that way. but if $35 buys X amount of stuff, and somewhere
|> else you can get 2X amount of stuff for one ounce of gold, nobody
|> will accept US dollars as currency. so within the US you are fine.
|> but outside the US you are in trouble. and this is relevant because
|> of the shrinking percentage of the world market that is the US market.
|> ...

The U.S. has been on three different "gold" standards (OK guys,  this is 
from memory - the dates could be off):

1. The bimetallic specie standard.  Under this standard "dollar" was 
   just another name for (roughly) 1/20 troy oz. of gold or 16/20 troy oz.
   of silver.  The relative value of gold or silver off the legal
   ratio would tend to drive one or the other out of circulation in
   a substitution effect per Gresham's law.  A bimetallic standard
   was successfully maintained until 1873 (with time out for the Green-
   back episode during the Civil war).

2. From 1873 to 1933,  a gold specie standard.  During this time, "dollar"
   was just another name for (roughly) 1/20th troy oz. of gold.  Here, 
   there would be no question of "$20 buys more stuff than 1/20th oz of
   gold".  They were the same thing.

3. From 1933 on,  a gold exchange standard.  Gold was devalued to $35 to
   the troy oz.;  private ownership of gold by US citizens was prohibited,
   and the dollar (for foreigners) was "backed" by gold.  From about 1945
   on major world currencies were on a dollar exchange standard,  with the
   dollar still on the gold exchange standard.  Sometime in the Johnson
   regime (?),  the dollar was again devalued to $42.? per troy oz.  In
   this situation,  "dollar" was no longer renamed gold;  it was just a
   (not very good) promise to pay same to certain foreign central banks.

In 1971,  Nixon closed the gold window in response to a foreign (largely
French) run on the dollar. The dollar and all major currencies now float
against one another (disregarding minor details like the ERM).  They are
backed by no commodities whatever.  This is historically unprecedented.
What discipline now prevents hyperinflation?






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