mck@ratex.UUCP (Daniel Kian Mc Kiernan) (02/27/85)
I would like to add some comments and objections to the remarks of
Dani Eder concerning the short- and long-term fluctuations in the prices of
gold and silver, and the merits of a commodity standard.
In focussing on specific aspects, I have taken the liberty of quoting
Eder's remarks in an order other than that in which they originally
appeared.
> [...] on a gold standard, or silver standard as the US was
>until 1964, [...]
[...]
> What happened in 1964 was we debased the coinage, [...]
[...]
> The silver dollar had the same metal content from the
>Revolutionary era, when Spanish Silver Dollars were in circulation,
>through 1964.
Well, actually, it's alot more complicated than that. The Constitutional
standard was -- and remains -- a silver standard. But the de facto
economic standard changed repeatedly from 1834 to 1933, as Congress altered
ratios and issued inconvertible paper money. From 1933 until 1971, altho
notes were not domestically convertible into the legally corresponding
amounts of gold, they were internationally convertible. The
silver coins of denomination less that $1 issued from 1853 to 1964
contained about 93% of the amount that their denomination would indicate;
no silver dollars were minted after 1935 (except for some Ike collector's
items). Silver Certificates were redeemable until 30 Jun 1968.
> When you have a persistent outflow, as occured in the
>early 60'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.
Well, now, we have to be careful here! Readers may have noticed that I
often avoid using the word 'inflation'; that's because the word has a
confusing array of definitions ('inflation' is variously defined as an
increase in the money supply, as an increase in the money supply in excess
of increases in the amount of the monetary commodity, as an increase in the
money supply in excess of increases in the real value of goods and services
available, as an increase in the money supply which leads to a general
increase in prices, and as a general increase in prices).
If you use a single commodity as your standard of value, and after a
period of inflow or no-flow, people begin consistently trading in notes for
that commodity, then indeed the value of notes has decreased. But is such
a commodity a good objective standard of market-value? If it trades at a
fairly consistent rate for a representative market-basket, then: Yes; if
not, then: No.
> Over the long run the value of gold has
>remained remarkably stable.
Over the very long run, you're right. But there have been protracted
periods where, on a gold standard, prices have generally climbed, and
protracted periods where they have generally dropped. Such periods are
characterized by flows of wealth not corresponding to productivity, and
distorted economic calculation.
> When you have a persistent outflow, as occured in the
>early 60'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.
Assuming that the relevant commodity trades at the same rate for a
representative market-basket, and that the contraction of the money-supply
necessary to end the outflow is minor, then you're right. But, as you
probably already recognize, a major contraction (to off-set a previous
major expansion) is economically ill-advised.
> 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.
Using 1967 as the base year (figures approximate):
From before 1790 until 1834, the US was on a de facto silver standard. In
1790, the price level was 17. In 1834, the price level was again 17. But
it had been as high as 38 during the War of 1812 (because of government
issuance of securties).
From 1834 until 1861, the US was on a de facto gold standard. The price
level oscillated between 16 and 20, ending at 18 in 1861.
From 1861 until 1879, the US was on a de facto fiat money standard. As
US Notes (Greenbacks) were printed to fund Union government expenditures,
the price level in the North climbed to 32 by war's end; the experience
of the Confederacy was far more dramatic. From 1865 until 1879, the money-
supply was contracted and the price level declined to 20.
From 1879 until 1933, the US was back on the de facto gold standard, altho
there were some corruptions of this standard. The price level oscillated
between 22 and 18 until 1896, began climbing until reaching 60 in 1920,
dropped to 51 in 1921, hovered between 51 and 53 until 1929, and dropped
to 39 by 1933.
From 1933 until the present, we've pretty much been on a fiat money
standard again. The price level had climbed to around 90 by 1964.
What do these figures tell us about the relationship between changes in the
price level and commodity-standard money? Not very much. They indicate,
as Dani asserts, that long term net general changes in prices are smaller
when a gold or silver standard is used -- the net changes are NOT, however,
zero, and the short-term changes can be dramatic. How are these changes
to be explained? Well, in part because gold and silver are not perfectly
representative of the market in general. But what we really need to do is
dig-up the figures for the WHOLE money-supply, and what we'll discover is
that convertiblity alone does not keep the government from excessively
expanding the money-supply; other restraints are necessary.
Bye,
Daniel Kian Mc Kiernaneder@ssc-vax.UUCP (Dani Eder) (02/28/85)
Thank you Mr. McKiernan for the data on price levels. While it is propably impossible to develop a money standard with no fluctuations in price levels, I believe that any commodity standard is better than what we have now. Whether the commodity is gold, silver, oil, a 'market basket' of twenty different commodities, or whether the standard is human labor (such as 1$= 1 hour unskilled labor), making your standard something of real value is a vast improvement over what we have now, where money can be created and destroyed at will. Dani Eder / ssc-vax!eder / Boeing