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From: eder@ssc-vax.UUCP (Dani Eder)
Newsgroups: net.politics.theory
Subject: Re: The gold standard.
Message-ID: <449@ssc-vax.UUCP>
Date: Sat, 23-Feb-85 16:54:28 EST
Article-I.D.: ssc-vax.449
Posted: Sat Feb 23 16:54:28 1985
Date-Received: Wed, 27-Feb-85 03:49:17 EST
References: <613@ukma.UUCP> <94@ucbcad.UUCP> <420@ssc-vax.UUCP> <686@ccice5.UUCP>
Organization: Boeing Aerospace Co., Seattle, WA
Lines: 48

> > 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