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Strategies & Market Trends : Currencies and the Global Capital Markets

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To: SofaSpud who wrote (3517)	2/4/2003 3:21:11 PM
From: jameswallen	of 3536

But I'm also not convinced that the gold standard is a suitable alternative. In his recent book "Money Mischief" Friedman points out that the US monetary standard was initially silver before the Civil War and gold thereafter. The depletion of the California and Alaskan gold mines along with the roughly concurrent adoption of gold as the standard by European countries led to worldwide deflation in the 1880s and 1890s. This trend was reversed with the gold discoveries in South Africa, the introduction of the cyanide process for refining gold, etc. Although the deflation in the 1880s and 1890s caused political unrest (Williams Jennings Bryan and the cross of gold), deflation did not prevent rapid economic growth in the US. In fact, the growth exacerbated deflation as prices came down as rapidly as they did because output was growing so much faster than the quantity of money. Although inflation/deflation may be a problem, the uncertainty about the amount inflation/deflation is the bigger problem. One thing I think is interesting is when an economy's money standard is based on species, everyone knows what causes inflation/deflation. Bryan's campaign for president was on the platform of "free silver" whereby the US mint would accept 16 ounces of silver as equal to one ounce of gold. The goal was to reflate the money supply. It seems certain that Greenspan thought gold was a suitable standard for the money supply for his first decade as Fed chairman. But I agree that gold is not ideal. There are special situations (war, for example) which can drive up the demand for gold and its price. An index of commodities makes better monetary compass. I suggest the CRB Spot Index. It is an average of spot commodity prices.

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