Money: Pegging/backing to Commodities

[adrock3215]

There IS something to be said for multi-metal standards; I watch bullion prices and it is amazing how one metal will sometimes go up more than the others. Gold and silver tend to rise or fall in unison, but platinum and palladium can sometimes fall (and sometimes a LOT) while gold and silver rise or remain fairly steady.

Are you saying that a multi-metal standard should be established or that it would be established? My position on this is that the market should decide; whether market participants use 1 metal or 100, or wheat for that matter, makes no difference. I am not confident enough in my prediction abilities to say exactly how many and what metals the market would choose though.

[Steve D'Ippolito]

I'm saying it is a viable option.

In a free marketplace for money many people will offer "products", I expect some would offer gold, others silver, yet others other commodities. Copper too, I imagine. There's no reason a precious-metal alloy of some kind couldn't be offered. (Our silver coinage was an alloy of 90% silver 10% copper but the copper was neglible value; even more so for the gold coinage which also had copper in it.)

So no, neither should, nor would, but rather could. I've pointed out one advantage such a scheme would have, as well as a distinct disadvantage.

[agrippa1]

The principle at work here is that currency should be backed by some commodity or commodities, so as to prevent unconstrained inflation of the currency.

The idea of pegging the dollar to two commodities separately was doomed because the market exchange rate of those commodities was bound to diverge from the "official" rate, and that therefore the commodity that diverged downward from the official exchange rate, in terms of the other commodity, was bound to be the one favored for currency backing. (that is, "bad money drives out good") There is some stability provided by the fact that the commodity favored is therefore removed from the market, and will tend to increase in value as supply decreased below demand. It would be interesting to explore whether gold's dominance was a result of the fractional gold reserve system in the U.S., which limited the amount of gold removed from the market in response to money supply increases.

The symmetalic idea, of making $1 worth x amount of gold plus y amount of silver simply expands the supply of commodities available to be converted to/from currency. There is no reason to make coins of either metal, only to have available the metal to freely exchange for currency. Two metals is better than one, providing they are used in a symmetallic, vice bimetallic, manner, because the amount of value added to them as means of exchange is decreased.

Of course, you could extend this idea to define a basket of commodities that defines the value of a dollar, so that any one commodity or group of commodities would not destabilize the price of all other commodities.

As for the convertibility between currency and any one commodity under a symmetalic or commodity basket system, the entire basket could be converted to a single commodity, based on the current market exchange rates of all of the commodities to the commodity being offered for conversion.

Working in this paradigm, you could conceivably extend the basket of commodities to include all valuable commodities in an economy as legitimate backing for currencies. This is exactly what happens in fractional reserve banking, in which the effective supply of money (i.e., the total of all deposits) is expanded as commodities are introduced as collateral for loans. (but that's a different discussion)

Edited August 12, 2008 by agrippa1

[volco]

Living in a Latin America, 3rd World country with huge inflation, and a long way to private currency, I've got to say pairing up with the dollar is the closest thing to an objective standard for money.

on another note, it's funny you mention a currency named Rand, since not only it exists, but I suspect that Dutch speaking Southafrican pronounce 1 kruggerand as "Ayn Rand"