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Date:         Mon, 14 Dec 1992 15:58:34 -0500
From:         Andrew Allen <E7L8ALL@TOWSONVX.BITNET>
Subject:      Re: why gold

>I don't know of a single problem of the actual economy that would
>be ameliorated by a gold standard.

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 don't understand why deflation is supposed to be a problem either,
>though.)

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.


>>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.

In short, years ago wealthy people would deposit their gold with
goldsmiths for safekeeping. The goldsmiths would issue a receipt
for the amount deposited, after a while the wealthy just started
trading the receipts. The fun started though, when the goldsmiths
figured out that they could write extra receipts and lend them
out so long as they had enough gold laying around to meet the
average demand.


>>Banks borrow and lend money. If they lend more that they borrow, they
>>produce "banking money". If they lend too much they should go bankrupt.
>>I want this *too much* factor to be based on somethig real, like gold.

>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.

>Banks are private businesses. Anyone who would prefer to do
>business with only those banks who keep a huge gold reserve should
>feel free to use their money that way. A gold standard only restricts
>what the federal government can do. How would it affect private
>banking practices?

The Fed regulates the size of the money supply, hence controlling
the amount available to the banks to lend. The idea of the goldbugs
is that if you link money expansion to gold then the Fed has a limit
to the amount that it can expand the money supply and hence credit.


>>I see no such brake in todays economy. So we have inflation.
>>Of course it would require abolishing compulsory bank deposits insurances.

>Again, why is inflation more of a problem than deflation would be?

It irritates the wealthy since it makes their return on investment
diminish, of course they just demand an "inflation premium" on their
investments, which they get, so don't feel too badly for them. It's
the uncertainty and the sneaking suspicion that the middle class
might get one over on them by paying off their mortgages in lower
value dollars that really drives 'em nuts though.


>>>> [..]  So when one wants to have growth
>>>> of the economy, one has to increase the amount of money available at the sa
   m
>>>> rate.

>>It is not obvious. Hayek thought that 0 percent monetary growth would
>>produce the best results in the economy.

Depends on what results you're shooting for; if you are looking to
help out the rich at everybody else's expense this would be the way
to go.

>What is the suggestion here?
>That the money supply NOT increase according to the amount of goods
>and services in the economy? I can't see how that's even possible.

The population continues to grow, so it would be helpful if the
economy grew too, the money supply needs to grow enough to provide
capital for productive ventures, but not so much as to promote
foolish speculation due to the availability of "cheap money."

Perhaps something like a soviet system with a planned economy
could be rigged to take care of things without money supply growth;
but it's not likely. Those who planned soviet economies were no
better at figuring things out than our capitalist brand of economists.


>(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.

You'd have to ask Caius which of these he wants to convert,
we're looking at a few trillion here though, I'm not sure
what the total value of all of the gold we've got is. The value
of gold has gone way up since currency was last pegged to it;
so maybe Caius would like to devalue gold to its old rate of
$35.00 per ounce?


>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'm not even quite clear about
>HOW the fed manipulates the money supply, actually.

It involves black robes, a lot of incense, a variety of secret
and arcane incantations and some funny handshakes. B)

You basically had it right though.

>What does that have to do with a gold standard?

Nothing anymore.

>Jamie

-other Andy