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From: faustus@ucbcad.UUCP
Newsgroups: net.politics.theory
Subject: Re: The gold standard.
Message-ID: <94@ucbcad.UUCP>
Date: Thu, 7-Feb-85 21:03:45 EST
Article-I.D.: ucbcad.94
Posted: Thu Feb  7 21:03:45 1985
Date-Received: Sat, 9-Feb-85 08:25:44 EST
References: <613@ukma.UUCP>
Organization: UC Berkeley CAD Group, Berkeley, CA
Lines: 31

>    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