With day after day of bleak news regarding the credit crunch — and in particular, articles that constantly remind us that the Fed’s recent actions haven’t been tried since the Great Depression — the average American is understandably perplexed. And although what I’m about to admit may not surprise many readers, it nonetheless may worry them further:
Most economists don’t have a clue what’s going on, either.
During both the 1970s and today, the orthodox monetary prescriptions were (and are) not working as the textbooks said they should. The Federal Reserve’s toolkit of interventions were (and are) not able to deliver. FULL ARTICLE
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Eric Lansing:
“Are they mathematical identities? Or is it possible that banks can expand the money supply by issuing $ 100 Bank of America dollars against a bushel of wheat valued at $100… have the value of te “dollar” unchanged, but have prices of goods and services rise nonetheless? Am I being stupid? Is it really a mathematical identity?”
If E=the value of the dollar (bushels of wheat/$), then the inverse ($/bushel) is the price of wheat, so yes, it’s a mathematical identity. The relation gets slightly fuzzier when we’re talking about the price of a bundle of goods as opposed to the price of a single good, but saying that P=1/E is still a perfectly good first approximation. You can look up various elaborations of this by googling “paasche index” and “Laspeyres index”, but it’s only an elaboration.
mike sproul says:
“So convertible dollars will normally be worth the same as inconvertible dollars. (This explains why, for example, currencies do not normally fall when convertibility is suspended.)”
here’s another of the currency series that shows the devaluation leading up to, and following the 1933 fdr executive order dishonouring convertibility for us citizens. i think the dutch were the last on the continent to suspend gold convertibility.
The table(s) present the price of one United States Dollar.
Netherlands, 1932 – 1935
1932 2.4817 Guilder
1933 1.9334 Guilder
1934 1.4841 Guilder
1935 1.4768 Guilder
i’ve used exchange rates to question your contention, and you’ve given me cpi, the wrong measure. cpi doesn’t react to money supply changes with any immediacy or predictability, as the austrians are constantly emphasizing (not following the quantity theory in a purely mechanistic way). besides the us was in a deflation, so cpi was going to be depressed.
paper currencies have always failed over differing time-spans, but convertibility at least ensures a choke-leash is always around the note-issuer’s neck.
JP: “If we DID find an uninhabited island with a million houses fit for use than I agree with you, this would probably push world housing prices down.”
The point that I was trying to make was not about house-prices but about inflation, in the event that the money-supply doubled due to a huge increase in borrowing for houses. I queried how Sproul could deem this to have no effect on prices. Sproul’s reply:
“This ignores what is usually called the “Law of the Reflux”, which says that when an economy is already well-stocked with cash, any additional paper money will simply reflux to the bank that issued it, in exchange for silver, bonds, etc…”
This law will be true if the paper money is 100% backed by gold or silver. But otherwise the issue of fiduciary media will be inflationary, and then any subsequent “reflux” will be deflationary – which in a nutshell is the Austrian business cycle.
According to Mises, people may be short of cash, but not an economy. Even if the stock of gold or silver is fixed, then it will simply rise in value to accomodate any additional demand for cash holding due to population growth etc.
newson/mike:
I don’t know how relevant this is to your conversation but modern day convertible bonds might provide some insight into how non-convertibility would affect the value of a currency.
If two bonds are similar in all respects but one is convertible into stock at a certain price, the convertible bond will have a higher price and lower yield than the plain bond. If a firm were to somehow cancel that bond’s convertibility, I am sure it would fall in value. I’m no expert on converts though.
mike:
Let me ask a better question on money neutrality.
An Austrian would say that money is non-neutral because any increase in the money supply occurs at a certain point in the economy. Those near the initial point benefit at the expense of those at the end since the prices of their goods rise first. This redistribution is uneven, ie non-neutral. In a system with fiduciary money, when the money rate of interest is set below the natural rate, all sorts of projects that would be unprofitable are suddenly profitable. The business cycle erupts resulting in all sorts of non-neutralities.
We all know what you think about increases in the money supply. But with your theory, what happens from the point at which the money rate of interest is set below the natural rate? ie. from the point at which the Fed chooses to pay less for assets than they are worth? We are talking the Fed here, where competition and therefore reflux are muted, if existent at all.
Would price increases, ie the devaluation of the dollar, be uniform for all goods, assets, and services, given the above interest rate policy?
Would there be any impact on capital structure, the stock market, employment, etc given the above? Would a cycle appear?
“i’ve used exchange rates to question your contention, and you’ve given me cpi, the wrong measure. ..
paper currencies have always failed over differing time-spans, ”
I sense the approach of an endless debate over the merits of the cpi vs. exchange rates. Let me see if I can short-circuit the debate by saying that the suspension of convertibility normally has only small effects on the value of money. I think we can agree to that.
Here’s the way I see the issue: Suppose, for example, that a private bank issues paper dollars that will be convertible into 1 oz. of silver at the end of one year. In a world of 5% interest rates, we expect those dollars to be worth .95 oz at the start of the year, .975 oz. at mid-year, and 1 oz. at the end. In other words, the value of those inconvertible dollars is equal to 1/(1+R). Now suppose another bank issues paper dollars that are convertible into 1 oz. throughout the year. These dollars will sell for 1 oz. throughout the year.
Now we have a problem: The issuer of convertible dollars is getting a free lunch of (up to) .05 oz./year. He sells the dollar for 1 oz at the start of the year, and lends (almost) the whole ounce at 5%, so at the end of the year he gets (up to) 1.05 oz. from his loan, while buying back his dollar for only 1 oz. The issuer of the inconvertible dollar gets no such free lunch. He sells his dollar for .95 oz at the start of the year, lends the silver at 5%, and at the end of the year he gets back 1 oz. from his loan, but has to buy back his dollar for 1 oz.
The most obvious way to solve the free lunch problem is for the issuer of the convertible dollar to pay interest on it. He should maintain convertibility of the dollar at .95 oz at the start of the year, .975 at mid year, and 1 oz. at the end of the year. That way there’s no free lunch. Note, however, that if he suspended convertibility at mid year, his formerly convertible dollar will remain at .975 oz. That’s what I mean when I say that suspension normally does not affect value.
We can elaborate on this by supposing that the cost of issuing either kind of paper dollar (printing, handling, etc.) is .05 oz/year. Then the value of the inconvertible dollar will be 1/(1+R-C), where C=cost of issue). If R=C=.05, then both the convertible dollar and the inconvertible dollar will be worth 1.0 oz. throughout the year, and suspension, again, will not affect value. (This is discussed in my “No Fiat Money” paper.)
“but convertibility at least ensures a choke-leash is always around the note-issuer’s neck.”
It assures that if the bank loses assets, it will also suffer a disastrous run. Suspension of convertibility makes a run impossible, and only results in a small drop in the value of money, commensurate with the loss of assets. A choke leash is only helpful if it doesn’t kill the dog.
“This law (of the reflux) will be true if the paper money is 100% backed by gold or silver.”
No; paper can reflux to the bank in exchange for gold, but it can also reflux to the bank in exchange for bonds. The law of the reflux works as long as the bank maintains either financial or physical convertibility.
“If two bonds are similar in all respects but one is convertible into stock at a certain price, the convertible bond will have a higher price and lower yield than the plain bond.”
Yes, the same is true of money and options. The difference is normally small, and in principle it can be negligible.
jp:
“what happens from the point at which the money rate of interest is set below the natural rate?
Would price increases, ie the devaluation of the dollar, be uniform for all goods, assets, and services, given the above interest rate policy?”
I’m afraid I’ll have to continue to disappoint you on that one. The RBD just doesn’t say much on that subject, but my kneejerk reaction is that there’s no reason to expect the effects on prices to be non-uniform.
I find that most questions of this nature can be understood with a stock market analogy: If GM issued new shares of stock in exchange for assets of insufficient value, or lent those shares at below-market rates, would you expect non-uniformities in the price of GM? Well, the people who first get that underpriced stock might gain, (unless they had to expend resources searching for that gain), but in a world of well-informed investors, the price of GM stock will just fall across the board and that’s that.
in a world of well-informed investors, the price of GM stock will just fall across the board and that’s that.
Sounds suspiciously like the flaw of the “perfect knowledge” crowd. In the real world, there are plenty of less-well-informed investors, so you’d have people who got the undervalued stock first benefit the most, people who were watching closely and guessing correctly benefitting a little, and so on to the last clueless investor who finally notices the change in stock prices.
Furthermore, what bothers me about these stock analogies is the idea that issuing new stock, at whatever price, is going to have a uniform effect on the value of the stock. Stocks are valued based upon a number of factors, quantity of stock and company assets being only two, and not necessarily the most important two. Extra cash for the company by issuing more stock might have a positive or negative impact on the value, depending upon how they put that cash to use. Simple, mathematical calculations can’t answer those types of questions for the investor.
Michael: “Furthermore, what bothers me about these stock analogies is the idea that issuing new stock, at whatever price, is going to have a uniform effect on the value of the stock.â€
Good point! Sproul’s use of the stock analogy is way off base. Issuing stock is nothing at all like issuing money. When issuing stock, the company exchanges an asset for money. In issuing money, the gov exchanges money for assets, so the analogy is bass-ackwards. But Sproul makes it worse by focusing on just the issuance of one unit of stock and its effects on the price of the stock. Of course issuance of one unit of stock won’t change anything, just as the issuance of one dollar in a trillion dollar economy won’t have any measurable effects. Finally, Sproul wants us to focus on the transaction: exchaning one unit of stock does not change the value of the stock. But neither does selling one car change the price of that car or any other car, nor does selling one house change the value of that house or any other house. In other words, Sproul wants us to focus on the exchange of just one unit of something and its effect on its value.
The money supply is an aggregate measure of all money in the system. Small changes won’t have much effect. So to make Sproul’s stock analogy appropriate for the money supply, we have to look at all stock issued at once. Do changes in the total supply of stocks change the value of stocks? Of course. Analysts watch the supply of new issues entering the market, among other things, to help them determine the direction the stock market will take. When the stock market is low, many companies repurchase their own stock in an effort to raise its price. So Mike’s stock analogy, when properly understood in the aggregate instead of focusing on just one unit of stock, reinforces the Austrian theory of money.
PS, It should be clear to anyone who has invested in stock that the value of any stock fluctuates wildly, yet the assets of the companies who issued the stock don’t fluctuate much at all. If the RBD/Banking school were correct, the value of stocks would change only with the value of the underlying assets of the issuing companies, which means they wouldn’t change much. Instead, we witness almost daily very large changes in the prices of all stocks.
to jp:
yes, of course convertible bonds are always going to be worth more than plain vanilla bonds, because you’ve got a call option embedded. the call option’s value depends on the conversion price, the underlying equity’s volatility, the bond’s duration, and the dividend stream (and to a lesser extent, the volatility of the underlying equity’s dividend stream), and also the probability of other unknowable good things that management may direct towards shareholders, to the detriment of bondholders.
mike sproul’s example of the incentives shaping convertibility deal with private banks, where paper money printing does have a meaningful cost. in central banking, which is what we’re arguing here, all costs of issuance are meaningless. (think of the forests to supply zimbabwe with constantly changing denominations).
i also can’t see the gm stock and the gm derivative market as useful for thinking about the fed. i mean gm is really a convertible security. first, i can sell gm shares and any of its derivatives for dollars. gm has no control over the value of these dollars. second, i could buy all of the gm shares and convert the gm assets into dollars.
to mike sproul:
the example you’ve given, as i said to jp, illustrates what might happen in a free-banking scenario. in the central banking model, all costs of note-issuance are irrelevant. here’s the real value of money told through the “art” of british punk band, the k foundation:
“In a bizarre simultaneous sideshow, KLF nailed £1,000,000 of their own money to an art installation. When they dismantled the installation and returned the million to the Bank of England, pierced with nail-holes, the Bank declared the money unusable and fined the K- Foundation £9000 for damaging it and charged them £500 to print a new million.
finally, what about the disastrous collapses of pegged currencies? these are convertible, too. what about the argentine peso several years back?
It seems to me that neutral-money RBD leads to the conclusion that the Fed’s setting of rates below the natural rate is benign. Yes, the currency loses value. But price changes under neutral RBD are uniform, so no one benefits or is hurt by redistribution. A business cycle does not erupt. It puts one in the unlibertarian position of not being able to critique central banking. Neutral RBD gives no reason why free banking should be the best choice, since central banking creates no harmful distortions to begin with.
Fusgerm: “This law will be true if the paper money is 100% backed by gold or silver. But otherwise the issue of fiduciary media will be inflationary, and then any subsequent “reflux” will be deflationary – which in a nutshell is the Austrian business cycle.”
What if the paper money is 100% backed by houses?
Fundamentalist: You have good point about the aggregate supply of stock, though I think you’re forgetting the corresponding aggregate demand. A supply of new issues can simply be a manifestation of a strong underlying demand and needn’t result in lower stock prices.
Mike: “Yes, the same is true of money and options. The difference is normally small, and in principle it can be negligible.”
I don’t think I could find a single convertible bond trader who would agree with you that the effects of cancelling the convertability feature of their bonds is small to negligible. It would seem to me that convertability has value and probably shouldn’t be ignored.
“In the real world, there are plenty of less-well-informed investors, so you’d have people who got the undervalued stock first benefit the most, people who were watching closely and guessing correctly benefitting a little, and so on to the last clueless investor who finally notices the change in stock prices.”
This misses the forest for the trees. The more uncertainty there is, and the less information there is, the more imprecise is the relation between the value of money and the value of the assets backing it, and the same is true of stock. The point of the RBD is that the value of money is equal to the value of the assets backing it. The quantity theory, in contrast, says that the value of money is determined by how much money is chasing how many goods in the economy. The RBD makes sense, and the QT doesn’t. As long as every econ textbook presents only the QT, as if there were no other theory, and doesn’t even mention the RBD, then I’m going to focus my attention on the fundamental proposition that the value of money is determined by backing, and I’ll leave questions about uniformity of effects to be addressed in their own time.
“Of course issuance of one unit of stock won’t change anything, just as the issuance of one dollar in a trillion dollar economy won’t have any measurable effects.”
Not at all. The RBD says that if we issue 1 new dollar in exchange for assets worth $1, or a billion dollars in exchange for assets worth $1 billion, then in both cases the dollar will hold its value.
“in the central banking model, all costs of note-issuance are irrelevant.”
In the context of the dollars I mentioned above, where they start the year at .95 oz, rise to .975 at mid-year, and finish at 1 oz., I think it’s clear that a mid-year suspension would not affect value in the case of a costlessly-issued currency. I think it’s also clear that if those dollars cost .05 oz./year to issue, they will be worth 1 oz throughout the year, suspension or not. Is this what you’re arguing with? Otherwise I don’t see your point.
“what about the disastrous collapses of pegged currencies? these are convertible, too. what about the argentine peso several years back?”
If a bank holds $100 of assets as backing for 100 pesos, then a peso will be worth a dollar, convertible or not. If assets fall to $99, and the peso is inconvertible, then the peso will fall to $.99, but there will be no run. If the bank maintains convertibility at $1 per peso, even though the bank only has enough assets to support $.99/peso, then there will be a disastrous bank run, as nobody wants to be stuck with the last peso. This is what happened in Argentina.
“I don’t think I could find a single convertible bond trader who would agree with you that the effects of cancelling the convertability feature of their bonds is small to negligible. It would seem to me that convertability has value and probably shouldn’t be ignored.”
As above, this is a forest/trees thing. I think in the case of the dollars starting the year at .95, rising to .975, and then to 1 oz., my “negligible difference” between convertible and inconvertible dollars is a good approximation.
mike sproul says:
“The point of the RBD is that the value of money is equal to the value of the assets backing it. The quantity theory, in contrast, says that the value of money is determined by how much money is chasing how many goods in the economy. The RBD makes sense, and the QT doesn’t.
trying to make sense of the above, if the fed has $1 billion of gold (say) as its note backing, obviously the value of that gold is informed by the existing gold stocks off the fed’s balance sheet (say $10 billion). the rbd seems to be saying it’s possible to quarantine these two gold stocks, and examen each one separately. this cannot be.
Mike: “The point of the RBD is that the value of money is equal to the value of the assets backing it.”
Using your stock analogy, the RBD is clearly wrong. Otherwise, the prices of stocks wouldn’t fluctuate as wildly as they do. They should remain at the value of the underlying assets of the company, that is, the book value. But very few stocks trade at book value. Most trade at various multiples of book value.
Newson: “the rbd seems to be saying it’s possible to quarantine these two gold stocks, and examen each one separately.”
Not only that, but the RBD argues that if you have gold backing each dollar, you can still print more dollars as long as you get an asset in exchange for the new dollars. Then the dollars would be backed by a combination of gold and other assets, such as land.
“if the fed has $1 billion of gold (say) as its note backing, obviously the value of that gold is informed by the existing gold stocks off the fed’s balance sheet (say $10 billion). the rbd seems to be saying it’s possible to quarantine these two gold stocks, and examen each one separately. this cannot be.”
That’s not what the RBD says. What it does say is that if the Fed owns 1 billion ounces of gold, which it holds as backing for 1 billion paper dollars, then each paper dollar will be worth 1 oz.
Naturally, the value of the gold owned by the Fed will be affected by the world’s total gold stock, so if the world’s gold stock were to increase from 10 billion ounces to 11 billion ounces, then one ounce of gold, which previously could have bought 1 ton of wheat, will afterwards be able to buy (say) 0.9 tons. Likewise the paper dollars, being backed by gold, will fall in value by the same amount.
I don’t know what you’re thinking when you say “quarantine”. Are you talking about the fact that the Fed owns 1 billion in gold, while the other 9 billion is in private hands? I suppose that’s a quarantine in some sense, but you seem to be carrying the meaning way beyond that.
“Using your stock analogy, the RBD is clearly wrong. Otherwise, the prices of stocks wouldn’t fluctuate as wildly as they do. They should remain at the value of the underlying assets of the company, that is, the book value. But very few stocks trade at book value. Most trade at various multiples of book value.”
Stock prices fluctuate because people’s opinions about future profits fluctuate. If it were possible to accurately count future profits on the asset side of a balance sheet, then we wouldn’t see discrepancies between a firm’s book value and its market value. Stock prices reflect a firm’s assets in the same way that a bathroom scale reflects the weight of a person who is always moving on the scale: The reading will never be perfectly accurate, but you’ll still see bigger average numbers for a fat man than for a thin one.
Mike: “Stock prices fluctuate because people’s opinions about future profits fluctuate.”
Exactly! And the purchasing power of money reflects its future value as well.
Mike: “If it were possible to accurately count future profits on the asset side of a balance sheet, then we wouldn’t see discrepancies between a firm’s book value and its market value. Stock prices reflect a firm’s assets in the same way that a bathroom scale reflects the weight of a person who is always moving on the scale: The reading will never be perfectly accurate, but you’ll still see bigger average numbers for a fat man than for a thin one.”
If that’s true, then what assets do the .com companies, like Google and Yahoo have that keeps their stocks at something like 100 times earnings?
Many things influence the price of stocks and the value of assets is only one of many and one of the least important ones. But you’re straying from your point, which is that the issuance of stock (or the quantity of stocks in circulation) does not affect the price of stocks and that’s where you’re wrong. Every analyst knows it has a very strong effect, much stronger than the value of the underlying assets. Some stocks will sell below the asset value while others sell at multiples of 3 times assets. Your defense of the RBD depends completely on the relationship between assets and stock prices and that relationship is very small.
mike sproul says:
“Naturally, the value of the gold owned by the Fed will be affected by the world’s total gold stock, so if the world’s gold stock were to increase from 10 billion ounces to 11 billion ounces, then one ounce of gold, which previously could have bought 1 ton of wheat, will afterwards be able to buy (say) 0.9 tons.”
- isn’t this just the same as the quantity theory of money? that is, the more plentiful gold (and also gold-dollars) is chasing after the same goods and services, and so commands a lesser wheat price.
when iraq swapped from the swiss dinar to the saddam dinar after the first gulf war, the kurds continued to use the obsolete currency as money. there was no more being printed (unlike the saddam dollar, which was printed at a brisk pace), and it was hard to counterfeit.
from the top of my head, tsarist bonds were used as money long after the heads had rolled, following the bolshevik revolution.
these examples seem to favour the qvm theory. supply of paper fixed, no asset backing of the notes. in other words, i believe the us dollar’s value in theory could be stabilized without convertibility as long as the money supply could be kept constant. the only “asset backing” would be the legal tender laws. history has shown this never happens except when the monetary regime is dead (in the tsarist and swiss dinar examples).
re: convertibility, i’m flogging a dead horse, but i see your example as flawed. here’s my view of how things would pan out:
scenario #1: i hand over my 100oz silver for paper, convertible in year’s time. not only have i locked in an interest rate (thereby potentially exposing myself to opportunity loss should rates increase), i am also at counterparty risk for the entire time. i am therefore conferring large benefits on my bank, and will demand a commensurate reward for the risks, demanding to be paid more, or to having to pay less, as the case may be.
scenario #2: i hand over my 100oz to my convertible bank, and get my paper bills. now my bank doesn’t know when i may choose to convert, and so bears all the risk of mismatched durations between my deposit and the loan it makes with my silver. the counterparty risk is less because i can whisk the silver out at short notice if i suspect there are prudential issues. these are benefits to me and i’m going to demand less return (or accept to pay more, as the case may be).
i don’t think you can just compare npv of like interest streams to judge this case. because of the inherent riskiness of fractional reserve banks, the option value of convertibililty must be high.
Newson:
“isn’t this just the same as the quantity theory of money? that is, the more plentiful gold (and also gold-dollars) is chasing after the same goods and services, and so commands a lesser wheat price.”
You’ve hit on the difference between the law of demand and the quantity theory. The law of demand says that when more gold is dug out of the ground its price will fall. The law of demand does not say that the creation of gold certificates will affect the price of gold, but the quantity theory does say that. (The RBD says that the creation of gold certificates will not affect the value of gold.)
“when iraq swapped from the swiss dinar to the saddam dinar after the first gulf war, the kurds continued to use the obsolete currency as money. there was no more being printed (unlike the saddam dollar, which was printed at a brisk pace), and it was hard to counterfeit.”
There’s a similar story from WWII, where some Navy sailors bought food from islanders using monopoly money. When they visited the island years later, they found the monopoly money still being used. My answer is that this can happen out of ignorance. In the same way, if the GM factory blew up tomorrow, and investors on an island didn’t hear about it for awhile, they would continue to value GM stock even when it was worthless in the rest of the world. Unfortunately, I’ve never heard enough information about these cases to make a systematic study, but I’d be willing to bet that these kinds of money always lose value once people learn that the money issuer is defunct. That’s certainly what happened to the privately-issued paper money of frontier days.
(Before I forget: A bank run is less like a choke chain and more like a bomb strapped to the dog.)
“i don’t think you can just compare npv of like interest streams to judge this case. because of the inherent riskiness of fractional reserve banks, the option value of convertibililty must be high.”
Adding in factors such as counterparty risk, mismatched duration, and being locked in will certainly change the numbers, but I don’t see where it would change the fundamental result. In a world where these factors are neglibible, the difference in price between convertible and inconvertible dollars will be negligible. When those factors become significant, then convertibility will make a significant difference to the value of the two kinds of money.
Mike: “The law of demand does not say that the creation of gold certificates will affect the price of gold, but the quantity theory does say that.”
The quantity theory says no such thing. You will not find any advocate of the general quantitative theory, especially Mises, Hayek or Rothbard, who have said anything similar. The quanity theory says that if you increase the supply of gold certificates, and the volume of gold remains the same, the value of the gold certificates will fall relative to gold, but the certificates will not affect the value of gold in exchange for other goods.
Mike: “The law of demand does not say that the creation of gold certificates will affect the price of gold, but the quantity theory does say that.”
The quantity theory says no such thing. You will not find any advocate of the general quantitative theory, especially Mises, Hayek or Rothbard, who have said anything similar. The quanity theory says that if you increase the supply of gold certificates, and the volume of gold remains the same, the value of the gold certificates will fall relative to gold, but the certificates will not affect the value of gold in exchange for other goods.
Fundamentalist:
You’re probably thinking of gold certificates issued on 100% reserves. I don’t know of anyone, myself included, who has ever claimed that those are inflationary. I was talking about gold certificates issued on fractional reserves. The writings of Austrian economists are saturated with claims that fractional reserve certificates would be inflationary.
Mike: “The writings of Austrian economists are saturated with claims that fractional reserve certificates would be inflationary.”
That’s true. But Austrians don’t claim that the certificates change the price of gold relative to goods, but the price of gold relative to the certificates. An increase in gold certificates, without a corresponding increase in gold reserves, will cause the certificates to lose value relative to everything. But the value/price of gold won’t change. Gold will continue to purchase the same volume of goods as before the increase in certificates. For example, assume an acre of land sold for an ounce of gold, or one gold certificate. If the number of gold certificates doubles, an acre of land will still sell for one ounce of gold, but two gold certificates because gold certificates would now be worth just half an ounce of gold.
PS, The price of gold relative to goods changes very slowly, only with the increase of the supply of gold, or about 2-3% per year. That’s why many Austrians compare the price of a commodity, such as oil, with how much gold it’s worth in order to determine the real inflation that has taken place. The price indices are too unreliable and leave out asset price inflation and the devaluation of the dollar against other currencies. Gold’s stability provides an excellent benchmark for measuring the increase in the supply of paper money and credit.
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