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

From: Allin Cottrell (
Date: Fri Nov 19 2004 - 21:25:32 EST

On Thu, 18 Nov 2004, Paul Cockshott wrote:

> What would be the implications for the US governments budget
> deficit of a re-adoption of the gold standard by the Federal
> Reserve?
> Would the current level of deficit be sustainable?
> If it were not, would that not force the re-abandonment of the
> gold standard in a few years.

Interesting questions -- though I tend to regard them as
hypothetical, since I do not believe that the Fed has any serious
commitment to the re-adoption of a gold standard.

Gold is peculiar, in that it is relatively imperishable and the
existing stock very much dominates flow production, so therefore on
Ricardian/Marxian grounds the price is relatively indeterminate,
governed by speculative considerations.  Among such considerations,
over the last few decades, the expected rate of sales out of central
banks' stocks has been very important, making the prospect of a
neo-gold standard curiously self-referential.

But just suppose for the sake of argument that we can abstract from
such speculation -- that is, suppose that the relative price of gold
were governed by cost of production at the margin.

I suspect (though I don't have strong evidence for this, and it's
hard to find evidence, since the market price of gold has long been
a creature of central bank policy and speculation) that over the
long run the rate of technical progress in gold production tends to
lag that in the economy at large.  If that is so, there would be a
long-term tendency for the relative price of gold to rise, in which
case stabilizing the price of gold would imply countenancing ongoing
CPI deflation.

In that case, the central bank would lose control over real interest
rates (since the floor for the nominal interest rate is 0), and I
suspect that this consideration would by itself force abandonment
of the policy.  To the extent that the central bank's support of
ongoing fiscal deficits requires monetization of those deficits,
this would also be ruled out, creating additional pressure to
abandon the policy.

Note that if there are diminishing returns in gold production (which
seems likely in an extractive operation), the flow production cost
at the margin is endogenous, depending on the rate of accumulation
or decumulation on the part of central banks, which contributes
another dimension to what I described above as the
"self-referential" aspect of a new gold standard.  Central banks
would be attempting to stabilize the price of something whose price
(even at "equilibrium") depends in an integral way on their own
actions, and on the expectations of those actions on the part of
market participants.


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