RE: Re: Gold

["David Shemano" <dshemano@xxxxxxxxxx>]

Christian wrote:

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>I specifically said that the money supply will fluctuate under a gold
>standard in respond to liquidity demands.  The point is that the
>decision of increasing/decreasing the money supply will be made by the
market, not the idiosyncracies of the Fed governors.>>

In theory, this is supposed to work counter-cyclically--which was your
complaint about Greenspan in a previous post. Only in this case, the
countercycle is boom-and-bust rather than incremental restraint.

But the point is that you overestimate AG's ability to control money supply.
Assuming that we did return to a gold standard, there is still nothing to
stop financial innovation--indeed, as market enthusiasts so frequently
boast, efforts to restrain credit are often the source of new financial
inventions. Why would you want to try and restrain that?

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Again, this is a misunderstanding.  Greenspan is attempting, through the
manipulation of interest rates, to act counter-cyclically to his personal
understanding of the strength/weakness of the economy.  Comparatively, a
gold standard policy is entirely neutral as to the strength/weakness of the
economy.  The sole goal is to maintain the constant value of the currency as
a unit of account.  It is entirely possible that if the economy is booming,
the aggregate demand for money will increase, in which case the price of
gold will go down.  In response, the Fed should then buy bonds until the
value of gold heads back to the targeted price, thereby increasing the money
supply.

Furthermore, a gold standard is not an effort to restrain (or encourage)
credit.  It is entirely neutral to real or nominal interest rates.  This is
a Keynesian confusion (as I understand it) that believes interest rates are
simply derived from the money supply, and you can decrease interest rates
simply by pumping money into the system.  If there is anything we have
learned over the past 30 years, it is that maybe you can fool lenders once
or twice, but you cannot do it as a sustained policy over time.

David Shemano