[OPE-L:2359] RE: commodity money

Chai-on Lee (conlee@chonnam.chonnam.ac.kr)
Fri, 24 May 1996 22:16:17 -0700

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On Saterday May 25, Duncan wrote:

in responce to my note:
> >
> >By analogy, the fixed rate of echange in the foreign exchange
> >corresponds to the offical conversion rate while the floating rate of
> >exchange does to the market price of gold. And "the current production
> >condition of gold and/or the import price of gold" corresponds to the
> >import and export prices of goods.

>It seems to me that there's one determination fewer here when >there is no
>legislated link between the value of the national currency and gold >(or some other produced commodity).

If there is a link "between the value of the national currency and gold (or
some other produced commodity)", there should be no need to a fixed
exchange rate. Because the links are removed, the offical exchange
rate system was introduced. Thus, the above analogy is from the
comparison between a gold standard system and the non-conversion

> >In theory, the central banks can issue paper money with no limit
> >as far as it is backed by foreign currencies. They can intervene
> >in the foreign exchange markets with unlimited freedom. Its feasibility
> >zone is limited by the import and export balances.
> >Yet, if the central banks collaborate (among the G7 countries) to
> >increase the issue of money in the same proportion, the exchange
> >rate does not change with no interest rate being influenced.
> >In this situation, the credit money turns into the pure state paper
> >money. (the difference between the state paper money and the
> >credit money consists in if the issue of money is backed by bonds
>> or not).

>To the extent that a central bank tries to stabilize the value of its
>currency on the foreign exchange markets, it does establish a link between
>the national currency and other currencies (mainly the dollar, I guess).
>But this doesn't solve the system-wide problem of determination unless the
>reserve currency (the dollar) is convertible into gold or some other


Yes, the central bank establishes a link between the national
currency and other currencies (mainly the dollar) because the
other link between gold and the national currency was eliminated.
It is true that the fixed rate system cannot solve the system-wide
problem of determination. But it is nevertheless required.

With Cheers,