[OPE-L:5163] Re: [CLAUS] RE: use-value of money

Duncan K. Foley (dkf2@columbia.edu)
Mon, 2 Jun 1997 13:35:16 -0700 (PDT)

[ show plain text ]

In reply to Paul C.'s OPE-L:5138:

>> 4) Suppose now that the moment of return to gold convertibility is very
>> off in time, or perhaps may never happen. Isn't there still a possibility
>> of speculation establishing the value of the liabilities of the State?
>> Duncan
>As posed no.
>The speculative valuation of a currency that may return to the
>gold standard is a valuation of a liability denominated in terms
>of gold. As such it can be rated above or below par in terms
>of gold.

I agree with this.

>If it was reckoned that there was a 500robability of returning
>to the gold standard tomorrow and a 500robability of returning
>to the gold standard in 1 years time, then if the rate of interest
>was 10% the rational valuation of the dollar at its old $35 /oz parity
>would be
> 0.5 + 0.5 * (1.0 -0.1)
> (--- ----------------) = 0.95/35 = 0.027 oz gold
> 35 35

I think this is the relevant type of calculation. Of course, "returning to
the gold standard" does not necessarily mean returning at $35 an ounce.

>When the state gives no indication that it will ever
>restore the gold standard, as with the dollar now, its speculative
>value in terms of gold would be the integral from now to infinity
>net discounted present value of 1/35 oz times the probability
>of redemption in any one year.

There are serious American politicians who have proposed a return to the
gold standard. The issue is dormant at the moment because inflation is very
low and even seems to be falling, but it could easily arise again. The
concrete proposals that were made in the 1980s were not to return at $35 an
ounce, but at some price close to the current market price ($300-$400 and
ounce.) It's rather striking that since about 1986 the price of gold in
dollars has not fluctuated a whole lot. Might the Fed be managing a de
facto gold standard?

>Since the probability of redemption would be reckoned as very low
>for every single year into the forseeable future, the dollar's present
>value would on this basis be very low indeed - on a par with that
>of Czarist state debt in the 1970s. Whilst the dollars value in gold
>is well under 1/35 oz, it has not fallen to such nugatory levels,
>so such speculation in terms of gold is unable to explain its current
>purchasing power.

As I've indicated, this judgment depends on some particular assumptions
about what the future possibilities might be.

But if you believe this, why do you think hard-headed capitalists are
willing to accept dollars in exchange for commodities at current price



Duncan K. Foley
Department of Economics
Barnard College
New York, NY 10027
fax: (212)-854-8947
e-mail: dkf2@columbia.edu