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

From: Allin Cottrell (
Date: Tue Nov 16 2004 - 23:33:38 EST

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

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.  Think Isaac Newton at the
Mint: if the precious-metallic content of newly-minted coin of the
realm falls outwith the specified range, it's off to the Tower with
the Master of the Mint.

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

Note: to the extent the Fed succeeds in executing the policy I have
imputed to them, they accomplish something that would be next to
impossible with any sort of commodity money.  What commodity basis
for money could one choose, that would produce the effect of a slow,
steady ongoing depreciation relative to the CPI basket?

Allin Cottrell

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