Re: (OPE-L) recent references on 'problem' of money commodity?

From: Fred Moseley (fmoseley@MTHOLYOKE.EDU)
Date: Fri Nov 19 2004 - 10:08:53 EST

On Tue, 16 Nov 2004, Allin Cottrell wrote:

> On Mon, 15 Nov 2004, Rakesh Bhandari wrote:
> > I just don't see the problem here with "the set equal to".
> [AC: as in the dollar's being "set equal to" x barrels of oil plus y
> grams of gold plus z bushels of grain]
> > As I wrote on July 14th of this year: Say that Greenspan aims to
> > ensure that x barrels of oil, y grams of gold and z bushels of
> > grain sells for $1000 over the medium term. If that basket now
> > comes to $1100, he sells bonds; if it comes to $900 he buys bonds.
> In my view, "set equal to" implies something much stronger that what
> you are saying here -- something that is possible in principle, but
> which as a matter of fact resides in fantasy-land: namely, the Fed
> establishes a trading desk, through which they stand ready to buy or
> sell unlimited quantities of the 'x*oil + y*gold + z*grain' basket
> at a fixed price in dollars.  You only have to spell this out to see
> how unreal it is.
> My own take on the contemporary behavior of central banks is this:
> They are concerned to maintain CPI inflation at a small positive
> rate.  If inflation seems set to speed up beyond the target range
> they are worried, and they raise money market rates with the help of
> contractionary open market operations (OMOs).  If they perceive
> inflation as likely to go negative they are even more worried (with
> good reason, in the light of the history of capitalism), and they
> react by lowering short rates with expansionary OMOs.
> Now, central banks like to be ahead of the game, and are always on
> the lookout for leading indicators of CPI inflation -- so that,
> ideally, they can act preemptively, before the "problem" even
> becomes widely apparent.
> That is the context of "special indexes" of the sort you have
> mentioned.  Some would claim that sensitive commodity prices serve
> as a leading indicator for the CPI (with a lot of error and noise,
> of course) -- and to that extent they can serve as a guideline for a
> monetary policy that aims to maintain CPI inflation within a target
> band.
> It's important, IMO, to appreciate that this has nothing whatsoever
> to do with the concept of commodity money.  Nothing.  Commodity
> money is when money is _composed_ of a commodity, or at least freely
> convertible into same at a fixed rate.  ...
> What Greenspan is doing is another matter: he's managing a fiat
> money is such a way as to try to maintain a fairly slow and stable
> rate of depreciation of this money in relation to the CPI consumer
> goods basket, possibly aided by supplementary indices which possibly
> serve as indicators of incipient speedups or slowdowns of CPI
> inflation.

I agree with Allin here.  Greenspan's attempt to conduct monetary policy
in order to keep the price of this basket of commodities stable is a
separate issue from money functioning as the measure of value and
the determination of the MELT.


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