plh@ukma.UUCP (Paul L. Hightower) (02/05/85)
>Subject: Re: Re: Re: Inflation in a Free Economy? (Nota bene, Baba!) > >[ Note the change of groups. ] > >> Find someone with a Federal Reserve Note (i.e. One Dollar Bill, Fiver, >> etc.). Examine it closely. Notice the words "This note is legal tender for >> all debts, public and private", examine the bill closely for the promise that >> the bill can be redeemed for some portion of the reserve on which it is based. >> Unless your bill is a collector's item you will not find such a promise. It >> is still a "Federal Reserve Note", but there is no reserve of gold or silver >> with which to back it up. Isn't it curious that all our significant battles >> with inflation have taken place in the short time since we got off the gold >> standard? >I can think of a few reasons why the gold standard is useless. If the >economy expands at say 5 % / year, and the gold reserves in Fort Knox >don't expand by the same rate, then you get deflation. (Assuming that >every dollar is worth a certain amount of gold.) I don't know much >about economics, I will admit, but deflation certainly isn't something >that seems desirable. > You share a common misconception about the gold standard. A gold standard does not require the Treasury to maintain $1.00 in gold for every $1.00 of money in the economy. In fact, the actual amount of gold kept on reserve is almost immaterial. Here's how it works: The Treasury announces it will buy and sell gold at some fixed price, say $350 per ounce. Meanwhile, the Federal Reserve is charged with maintaining a fixed supply of gold in the Treasury. The Fed (short for Federal Reserve) creates and destroys money through the banking system. If the Fed creates money faster than the economy creates goods and services, people will begin to notice inflation (rising prices) and will seek to exchange their devalued dollars for commodities, such as gold. The Treasury will find it is selling more gold than it is buying. This acts as a signal to the Fed to slow down the growth of money, and it will act to remove bank reserves (usually by selling securities.) Now people begin to notice that money is scarcer, i.e., prices are no longer rising. On the other hand, if the Fed creates too little money, money will gain in value relative to commodities, and people will line up to sell their gold for valuable money. Now the Fed notices that the Treasury's supply of gold is rising, so the Fed acts to inject more reserves into the banking system, which creates more money. This will halt the deflation. The theory, then, is that the gold standard provides the Fed with an auto- matic rule for deciding when to expand or contract the money supply. If the supply of goods and services in the economy grows at 5% a year, and this rule causes the money supply to grow at 5%, inflation should be non-existent. You should realize that, at present, the Fed uses NO fixed rule to decide when to expand or contract the money supply; the Fed frequently pursues incompatible goals, such as trying to peg both the price of money (interest rates) and the supply; and the history of the 1970's is a testament to the folly of ad hoc decisions on money growth. Paul Volker is widely praised for taming inflation, yet he has been directly involved in every major monetary decision since 1970 when he joined the Nixon administration and urged the complete abondonment of the gold standard. If it takes a decade of mismanagement to train a Fed chair- man, how are we going to replace Volker? Reasonable questions to be asked about the gold standard include: How can we be sure it will lead to the right amount of money growth? (Gold bugs believe it will, aurophobes are sure it won't. This seems to be a religious question. I don't know, but the current system does not appear to work, so maybe gold is worth a try.) What if outside factors cause wild swings in the supply or demand for gold? (My guess is that tying gold to dollars would serve to fix the value of gold in terms of other commodities. The supply of gold is historically rather stable, and grows only slowly, so gold bugs don't consider this a likely problem. Others have suggested a more general commodity standard, say a combination of precious metals, soybeans and pork bellies.) Well, that was much longer than I intended, but I hope it explains a few things. Paul Hightower University of Kentucky
laura@utzoo.UUCP (Laura Creighton) (02/07/85)
I have a question. Assume that we do away with the Fed, and say that it cannot muck with the money supply any more. The Fed was supposed to protect solvant banks from buckling if there was a run on banks -- now the existing agreements between the banks can do this. Assume that we are on a gold standard, and that there is a fixed ratio between the amount of paper dollars and the amount of gold. Wealth increases. The money supply doesn't. The prices of goods fall. I can now buy more stuff with the same salary I was making last year. I am happier. This is called deflation, and is supposed to be a very bad thing. At some point it may be desirable to increase the money supply (say when newspapers cost .8 cents each) but is there any good reason to tie the growth in wealth with a growth in the money supply as a matter of course? Milton Friedman seems to think so, but I have yet to read him explain why, and I would rather see the growth in wealth passed onto me than passed onto either the government or the banks through an increase in the money supply. Laura Creighton utzoo!laura
faustus@ucbcad.UUCP (02/08/85)
> The Treasury announces it will buy and sell gold at some fixed price, say > $350 per ounce. Meanwhile, the Federal Reserve is charged with maintaining > a fixed supply of gold in the Treasury. The Fed (short for Federal Reserve) > creates and destroys money through the banking system. If the Fed creates > money faster than the economy creates goods and services, people will begin > to notice inflation (rising prices) and will seek to exchange their devalued > dollars for commodities, such as gold. The Treasury will find it is selling > more gold than it is buying. This acts as a signal to the Fed to slow down > the growth of money, and it will act to remove bank reserves (usually by > selling securities.) Now people begin to notice that money is scarcer, i.e., > prices are no longer rising. > On the other hand, if the Fed creates too little money, money will gain in > value relative to commodities, and people will line up to sell their gold for > valuable money. Now the Fed notices that the Treasury's supply of gold is > rising, so the Fed acts to inject more reserves into the banking system, which > creates more money. This will halt the deflation. > The theory, then, is that the gold standard provides the Fed with an auto- > matic rule for deciding when to expand or contract the money supply. I can think of problems with this -- the demand for gold might have some completely random elements in it, like fashons in jewelry, or new mineral discoveries. As I remember, the price of gold has undergone changes of more than 100 % in a few years. Also, aren't such things as consumer - price indexes better indications of inflation than demand for gold? It seems that the government generally has a very accurate idea of how the economy is going, so using the gold standard for this doesn't make any sense. What you should argue is that they should make better use of this knowledge, instead of get it by a different (and less reliable) method. Wayne
draves@harvard.ARPA (Richard Draves) (02/08/85)
If the gold standard was working so well, why did we give it up? (This is a genuine request for information.) Rich -- "If I am conceited, it is the conceit of an amazing man who has never found any surpassing himself." Al-Mutanabbi
cliff@unmvax.UUCP (02/08/85)
> If the gold standard was working so well, why did we give it up? > (This is a genuine request for information.) > > Rich > -- > > "If I am conceited, it is the conceit of an amazing man > who has never found any surpassing himself." > > Al-Mutanabbi The gold standard is not as tolerant of the Fed tampering with the money supply as the fed wanted would have liked. It is easy to dupe the citizens into a false sense of security with fiscal tricks. This sort of thing is encouraged by our political system, because it allows the politicians to look good while in office whilst passing off serious problems to the next guy. Take a look at the national debt for an example of the sort of fiscal buck passing that goes on... --Cliff
jlg@lanl.ARPA (02/09/85)
> The gold standard is not as tolerant of the Fed tampering with the money > supply as the fed wanted would have liked. It is easy to dupe the citizens > into a false sense of security with fiscal tricks. This sort of thing is > encouraged by our political system, because it allows the politicians to > look good while in office whilst passing off serious problems to the next > guy. Take a look at the national debt for an example of the sort of fiscal > buck passing that goes on... > > > --Cliff Wait a minute Cliff! You're the one that just finished saying that the government ir real rich and can only get richer. How is it that you now claim that it has a debt problem? The Fed gave up the gold standard in 1933 due to rapid deflation causing a run on the gold reserves. The proper course (to maintain the gold standard) would have been to cut back on the money supply. The liberal politicians then in office didn't think this would be good, and they wanted a quicker, more responsive, solution. Once off the gold standard, it's hard to return. J. Giles
cliff@unmvax.UUCP (02/09/85)
> > The gold standard is not as tolerant of the Fed tampering with the money > > supply as the fed wanted would have liked. It is easy to dupe the citizens > > into a false sense of security with fiscal tricks. This sort of thing is > > encouraged by our political system, because it allows the politicians to > > look good while in office whilst passing off serious problems to the next > > guy. Take a look at the national debt for an example of the sort of fiscal > > buck passing that goes on... > > > > > > --Cliff > > Wait a minute Cliff! You're the one that just finished saying that the > government ir real rich and can only get richer. How is it that you now > claim that it has a debt problem? Yes, I did claim that the government is real rich. I also claim that if someone has enough credit cards and goes heavily into debt, but owns and lives in a luxury yacht that he person is rich, even if he is up to his ears in debt. I don't claim that the debt is not a problem, but until the yacht is repo'd the person is rich. I never said that the government can only get richer. I have know idea what motivates you to claim that I said anything of the sort. > The Fed gave up the gold standard in 1933 due to rapid deflation causing > a run on the gold reserves. The proper course (to maintain the gold > standard) would have been to cut back on the money supply. The liberal > politicians then in office didn't think this would be good, and they > wanted a quicker, more responsive, solution. Once off the gold standard, > it's hard to return. I agree with this assessment. I am surprised to see the absense of vitriolic attacks. In a previous letter J. Giles maintained that my lack of economic knowledge should suggest that I stop posting to the net... I do maintain that the gold standard would be quite preferable to the tinkering Fed we have now. > J. Giles
wendt@arizona.UUCP (Alan Lee Wendt) (02/11/85)
> ... is there any good > reason to tie the growth in wealth with a growth in the money supply > as a matter of course? Milton Friedman seems to think so... > Indeed, why not just target a basket of commodities and try to hold their price steady? Seems like this would be easier than measuring the money supply and praying that the growth rate about matches it. I think the reason is that commodity prices lag monetary growth by four or six months(?), and money supply growth tends to lag the decision-making process, so we're in danger of setting up positive-feedback loops. That's why Friedman argued for concurrent reserve accounting instead of lagged reserve accounting, to try and close the loop faster (a change that has been implemented, I think).
bprice@bmcg.UUCP (Bill Price) (02/11/85)
draves@harvard.ARPA (Richard Draves) asks: >If the gold standard was working so well, why did we give it up? "We" didn't give it up: the government did. (Notice the clever way I tell you of part of my attitude, right off.) Seriously, it is necessary to distinguish between the government and the population, at least in this case. That's because the government (Congreess, specifically) is given the responsibility to "coin money and regulate the value thereof, and of foreign money [possible minor misquote]." Whether the gold standard was "working well" is a value call. Thus, it depends on the point of view of the caller. The gold standard is quite effective at preventing inflation. From many points of view, that is good. If we judge by results, though, governments do not think so. [I have not done an exhaustive study of the following conjecture, but what I have done supports it to 1.000: all inflation (overexpansion of the money supply) has been caused by government.] In short, the government gave up the gold standard because the gold standard prevents the government from debasing the currency. >(This is a genuine request for information.) > It's good to see a genuine anything on the net. Thank you. >Rich >-- -- --Bill Price uucp: {decvax!ucbvax philabs}!sdcsvax!bmcg!bprice arpa:? sdcsvax!bmcg!bprice@nosc
chenr@tilt.FUN (Ray Chen) (02/13/85)
> --Bill Price uucp: {decvax!ucbvax philabs}!sdcsvax!bmcg!bprice > [I have not done an exhaustive > study of the following conjecture, but what I have done supports it to 1.000: > all inflation (overexpansion of the money supply) has been caused by > government.] I'll say you haven't done an exhaustive study. Have you ever heard of supply shocks? They cause inflation quite nicely by making necessary good(s) more scarce, hence more valuable, and thus lowering the purchasing power of the money in circulation thereby debasing the currency. All without the government doing a thing. Ray Chen princeton!tilt!chenr
plh@ukma.UUCP (Paul L. Hightower) (02/13/85)
>The Fed gave up the gold standard in 1933 due to rapid deflation causing >a run on the gold reserves. The proper course (to maintain the gold >standard) would have been to cut back on the money supply. The liberal >politicians then in office didn't think this would be good, and they >wanted a quicker, more responsive, solution. Once off the gold standard, >it's hard to return. > >J. Giles > Correction: a DEFLATION would lead to a rapid BUILD-UP of gold reserves, as people try to sell their gold before it declines further in value. In this case, the Fed should INCREASE the money supply to stem the fall in prices. My impression of the economic history of the period is that, having contributed to the market crash of 1929 by excessively inflating the money supply, the Fed over-compensated in 1933, aborting an incipient recovery with a deflation. Those who object to the gold standard point to this as proof of its failure, while supporters of the gold standard insist that the Fed failed to maintain the standard. Paul Hightower University of Kentucky
rdz@ccice5.UUCP (Robert D. Zarcone) (02/14/85)
> draves@harvard.ARPA (Richard Draves) asks: > >If the gold standard was working so well, why did we give it up? > > In short, the government gave up the gold standard because the gold standard > prevents the government from debasing the currency. > > --Bill Price uucp: {decvax!ucbvax philabs}!sdcsvax!bmcg!bprice > arpa:? sdcsvax!bmcg!bprice@nosc Our local PBS feed is running an English series called "The Great Depression". Last week's episode explained how Britain's return to the gold standard after WWI actually heavily contributed to it's depression (which started before our's). I suggest this show for anyone interested in that period. *** REPLACE THIS LINE WITH YOUR MESSAGE ***
eder@ssc-vax.UUCP (Dani Eder) (02/14/85)
> > The theory, then, is that the gold standard provides the Fed with an auto- > > matic rule for deciding when to expand or contract the money supply. > > I can think of problems with this -- the demand for gold might have some > completely random elements in it, like fashons in jewelry, or new mineral > discoveries. As I remember, the price of gold has undergone changes of > more than 100 % in a few years. Gold is very durable, chemically. Most of the gold which has ever been mined is still around, somewhere around two billion ounces. Annual world production amounts to no more than 4% of this, so the total supply of gold is quite predictable over long periods of time. The supply of gold is unaffected by oil cartels or Russian crop failures, which a market basket based standard is prone to. Industrial use of gold only amounts to 10% of annual production, so demand is not affected much by swings in the economy. Over the long run the value of gold has remained remarkably stable. If you take 1940 as a base year, and $35 per ounce as a base price, inflation since then leads to a current price of $264 per ounce for gold, which is not very different from the 300-310/oz prices today. All in all, using gold as a standard of value is not perfect, but it is better than almost any other standard I am aware of. The only other standard that could be as good, in my opinion, is the 'human standard', where unskilled human labor is the standard of value to which all other values are compared. > Also, aren't such things as consumer - > price indexes better indications of inflation than demand for gold? It > seems that the government generally has a very accurate idea of how > the economy is going, so using the gold standard for this doesn't make > any sense. What you should argue is that they should make better use > of this knowledge, instead of get it by a different (and less reliable) > method. > > Wayne Consumer price indexes are not accurate measures of inflation. The relative prices of goods shift over time, and any measure that assumes a particular mix of purchases, or market basket, gets progressively worse as these relative shifts occur. Consumer prices also lag the inflatING, the expansion of money supply, by a year or so. This is a contributing factor to current economic instability, since it takes so long for the Federal Reserve to see the effects of their actions. Dani Eder / ssc-vax!eder / Boeing
josh@topaz.ARPA (J Storrs Hall) (02/15/85)
>> ...all inflation (overexpansion of the money supply) has been caused by >> government.] > >... Have you ever heard of >supply shocks? They cause inflation quite nicely by making necessary >good(s) more scarce, hence more valuable, and thus lowering the purchasing >power of the money in circulation thereby debasing the currency. All >without the government doing a thing. A "supply shock" causes the price of one particular commodity to rise; however it is not inflation (overexpansion of the money supply). The ill effects of inflation are primarily due to the economic miscalculation induced by false cost signals generated, whereas the higher prices of a given item when it is in short supply are exactly the accurate information the price system is supposed to supply. --JoSH
rdz@ccice5.UUCP (Robert D. Zarcone) (02/19/85)
> by swings in the economy. Over the long run the value of gold has > remained remarkably stable. If you take 1940 as a base year, and $35 > per ounce as a base price, inflation since then leads to a current > price of $264 per ounce for gold, which is not very different from > the 300-310/oz prices today. > > Dani Eder / ssc-vax!eder / Boeing This is true. My question however, (and it is an honest one) is how would you compensate for those periods, such as the late 70's, when gold lost all rational contact with inflation rates? If I remeber correctly, gold was selling for over $800 an ounce during this period. *** REPLACE THIS LINE WITH YOUR MESSAGE ***
radford@calgary.UUCP (Radford Neal) (02/20/85)
> Our local PBS feed is running an English series called "The Great Depression". > Last week's episode explained how Britain's return to the gold standard after > WWI actually heavily contributed to it's depression (which started before > our's). I suggest this show for anyone interested in that period. My understanding is that Britain after World War I tried to return to the gold standard AT THE PREVIOUS POUND-GOLD CORRESPONDENCE. During the war they had left the gold standard inorder to finance the war through inflation. Returning to it afterwards was a reasonable thing to do, but trying to undo all the previous inflation was not reasonable. Radford Neal The University of Calgary
eder@ssc-vax.UUCP (Dani Eder) (02/24/85)
> > by swings in the economy. Over the long run the value of gold has > > remained remarkably stable. If you take 1940 as a base year, and $35 > > per ounce as a base price, inflation since then leads to a current > > price of $264 per ounce for gold, which is not very different from > > the 300-310/oz prices today. > > > > Dani Eder / ssc-vax!eder / Boeing > > This is true. My question however, (and it is an honest one) is how > would you compensate for those periods, such as the late 70's, when > gold lost all rational contact with inflation rates? If I remeber > correctly, gold was selling for over $800 an ounce during this period. > Let me see if I can answer your question. The price of gold was very high in 1979-1981 BECAUSE of inflation rates. It was not simply gold, but real estate, collectibles, things which are perceived to have intrinsic long term value, which were in demand during that inflationary period. People believed that their wealth was safer in these type of assets than in dollar-denominated investments. The amount of gold available for purchase at any one time is a small percentage of all there is. When the demand exceeded the supply, naturally the price rose. Note that when people perceived inflation subsiding, the price fell back to its historical range in a year or so. When you are on a gold standard, or silver standard as the US was until 1964, the price of the precious metal is fixed BY DEFINITION. The Dollar was defined as a coin containing .78 ounces of silver, hence the price of silver was by definition $1.29 per ounce. The way the price was maintained at that value in the face of short term fluctuations was by the Treasury department being ready to buy or sell at that price. This created a supply when demand was high, and a demand when supplies were high. When you have a persistent outflow, as occured in the early 1960's, that is a signal that the value of the metal RELATIVE TO PAPER MONEY has increased. An equivalent statement is that the value of paper money has decreased, i.e. that inflation has occurred. The proper response is to cause some deflation to correct for the inflation. What happened in 1964 was we debased the coinage, and allowed inflation to continue. Then in 1969 we removed all precious metal content from our coins. We have had even more inflation since then. So the answer to your question is that, given the proper actions by government, fluctuations like happened in 1979 should not occur. The silver dollar had the same metal content from the Revolutionary era, when Spanish Silver Dollars were in circulation, through 1964. While there were periods of inflation, there were also periods of deflation that followed. There was zero net long term inflation. Since 1964 there has only been persistent inflation. Which do you prefer? Dani Eder / ssc-vax!eder / Boeing
mmt@dciem.UUCP (Martin Taylor) (02/24/85)
>A "supply shock" causes the price of one particular commodity to rise; >however it is not inflation (overexpansion of the money supply). The >ill effects of inflation are primarily due to the economic miscalculation >induced by false cost signals generated, whereas the higher prices of >a given item when it is in short supply are exactly the accurate >information the price system is supposed to supply. > >--JoSH For once, JoSH is unwittingly right. Uncertainty IS the main cause of inflation, and the "false cost signals" augment that uncertainty. Over a 2000-year history, inflation has averaged around 4%, which may be some kind of optimum. Prices cannot supply accurate information when they are changing, simply because the information does not apply to the present. Whether inflation IS the "overexpansion of the money supply" or whether that is a result of inflation is not relevant. -- Martin Taylor {allegra,linus,ihnp4,floyd,ubc-vision}!utzoo!dciem!mmt {uw-beaver,qucis,watmath}!utcsri!dciem!mmt
tdh@frog.UUCP (T. Dave Hudson) (02/27/85)
>From: eder@ssc-vax.UUCP (Dani Eder) > When you are on a gold standard, or silver standard as the US was >until 1964, the price of the precious metal is fixed BY DEFINITION. Fixing the price of gold or silver in terms of dollars is not a gold or silver standard. If I remember correctly, it is a gold/silver *exchange* standard. A gold standard is far less susceptible to monetary machinations than a gold exchange standard; sort of the difference between a hot dog and a turd. >The Dollar was defined as a coin containing .78 ounces of silver, hence Bullshit. Once the U.S. moved from the bimetallic standard to the gold standard, silver coins were only token money; their value did not come from their silver content, but rather from their exchangeability with gold (and later fiat money), until the inflationists had robbed their owners of it so badly that their silver content was worth more than what the government was willing to
orb@whuxl.UUCP (SEVENER) (03/01/85)
> > Our local PBS feed is running an English series called "The Great Depression". > > Last week's episode explained how Britain's return to the gold standard after > > WWI actually heavily contributed to it's depression (which started before > > our's). I suggest this show for anyone interested in that period. > > My understanding is that Britain after World War I tried to return to > the gold standard AT THE PREVIOUS POUND-GOLD CORRESPONDENCE. During the > war they had left the gold standard inorder to finance the war through > inflation. Returning to it afterwards was a reasonable thing to do, but > trying to undo all the previous inflation was not reasonable. > > Radford Neal > The University of Calgary A good lesson for all the goldniks as they lead us down the path to another Depression. It is very interesting that Ronald Reagan has a picture of Calvin Coolidge in the White House: he is following in the same mistakes made over 50 years ago. The present economic "boom" is built upon a house of cards: when it collapses most of us will be suffering. tim sevener whuxl!orb