Re: Gold

[Michael Perelman <michael@xxxxxxxxxxxxxxxxx>]

Of course, the Fed would have to sell bonds to buy the gold, causing the
deflation.  The reason the Fed began in the first place is that the demand
for money fluctuates.  At the time, the harvest season created a surge in
the demand for money to finance the movement of crops from the farm.

On Thu, Jun 28, 2001 at 02:39:15PM -0700, David Shemano wrote:
> Doug Henwood wrote:
>
> -------------------
>
> How about Jude Wanniski? He'd almost be as much fun.
>
> Jude's now complaining that the Fed has imposed a monetary deflation
> on the world, though the money supply is growing faster than the 2%
> growth a gold standard would allow. So how'd we go from an
> inflationary fiat currency regime in the 1970s to a deflationary one
> in the 2000s?
>
> ------------------
>
> This a misunderstanding of what a gold standard (or any commodity standard)
> is, as I understand it.  Your notion is that if the gold supply increases 2%
> a year, the money supply could only increase 2% a year, so that the money
> supply is directly correlated the amount of gold.  Wanniski's argument is
> not that the Fed should make decisions based upon the amount of gold in the
> world, but that the Fed should publicly commit that it will buy and sell
> bonds to maintain a fixed dollar price relative to gold.  In other words, if
> the Fed commits to $350 an ounce, and the Fed sees that the market price for
> gold is $340, the Fed should take that as a signal that the economy demands
> more monetary liquidity, and the Fed should buy back bonds until the price
> goes back to $350.  If the price of gold goes up to $360, the Fed should
> take that as a signal that the economy demands less monetary liquidity, and
> the Fed should sell bonds until the price goes back to $350.
>
> Under this view, the Fed should not make policy decisions based upon the
> money supply (the monetarist view), or try to manipulate interest rates (the
> Keynesian view), but simply look at the market price of gold in order to
> satisfy the aggregate demand for monetary liquidity.  By doing so, the Fed
> will be stabilizing the dollar as a unit of account, which is the most
> important thing it can do.
>
> Because the Fed is not committed to a publicy announced gold price, the
> decisions of the Fed are unpredictable and subject to the personal
> idiosyncracies of the governors.  For instance, if a majority of the
> governors believe that growth causes inflation, which apparently they do,
> you get the amusing spectacle of the Fed trying manipulate interest rate
> counter-cyclically to the strength/weakness of the economy.  In other words,
> the present Fed believes it should destroy the village in order to save it.
>
> David Shemano
>
>
>

--
Michael Perelman
Economics Department
California State University
Chico, CA 95929

Tel. 530-898-5321
E-Mail michael@xxxxxxxxxxxxxxxxx