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From: eder@ssc-vax.UUCP (Dani Eder)
Newsgroups: net.politics.theory
Subject: Re: The gold standard.
Message-ID: <420@ssc-vax.UUCP>
Date: Thu, 14-Feb-85 15:46:45 EST
Article-I.D.: ssc-vax.420
Posted: Thu Feb 14 15:46:45 1985
Date-Received: Sat, 16-Feb-85 04:41:03 EST
References: <613@ukma.UUCP> <94@ucbcad.UUCP>
Organization: Boeing Aerospace Co., Seattle, WA
Lines: 43

> >   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