Wednesday 930

 

Mostly summarized from Gregory Mankiw’s Principles of Economics, 5th Ed.
PART 10 Money and Prices in the Long Run
Chapter 29 of 36 Money Growth and Inflation
Section 4 of 29
…
How is the value of money determined?
The answer is supply and demand.
In developing the quantity theory of money our next step is consideration of the determinants of money supply and money demand.
First we’ll consider money supply.
…
When the Federal Reserve Bank (the Fed) sells bonds in open-market (public) operations it receives dollars in exchange.
This contracts the money supply because now less money is in circulation, it’s being held at the Fed.
When the Fed buys government bonds it pays out dollars to the public in exchange.
This expands the money supply because now more money is in circulation.
When these paid-out dollars are deposited in banks
· banks hold some as reserves and loan out the rest
· the money multiplier goes into effect
· creating a further increase in the money supply
…
In this chapter to simplify the model we assume banks do not loan and therefore don’t affect the money supply.
So, in the model the Fed entirely controls the quantity of money supplied
… …
it pays out dollars
doru o harau
ドルを払う
… …
If dollars were gold-backed rather than government-backed (fiat money) how would the Fed control the money supply, interest rate and inflation rate? ChatGPT:
If the U.S. dollar were backed by gold, the Fed would have considerably less freedom to control the money supply, interest rates, and inflation.
It would have to maintain a fixed relationship between dollars and gold and ensure dollars could be exchanged for gold at the promised rate.
Here's how that would affect monetary policy:
1. Money supply:
The Fed could increase the money supply by purchasing government bonds, but its ability to do so would be limited by its gold reserves and the obligation to exchange dollars for gold.
2. Interest rates:
The Fed could still influence rates, but if it lowered them too much, investors might exchange dollars for gold, draining its reserves.
It might then have to raise rates to protect the gold standard.
3. Inflation:
Tying dollars to gold would constrain excessive money creation and help stabilize prices over the long run.
However, changes in gold supplies and economic production could still cause inflation or deflation.
The fundamental difference:
Under today's fiat monetary system, the Fed has considerable flexibility to manage economic conditions.
Under a gold standard, maintaining the dollar's fixed value in gold would take priority and restrict that flexibility.
… …
Why does the United States maintain substantial gold reserves? CGPT:
The United States maintains substantial gold reserves primarily because they are a valuable national asset inherited from the gold-standard era.
Although the dollar is no longer backed by gold, these reserves still serve several purposes:
-Financial security: Gold retains value independently of any particular currency or government's promise to repay.
-Emergency reserves: Gold could potentially be sold or otherwise used during an extraordinary financial crisis.
-International confidence: Holding substantial gold reserves contributes to the country's financial credibility.
-Diversification: Gold provides an asset whose value can behave differently from currencies and government bonds. The United States holds approximately 8,133 metric tons of gold, much of it accumulated when dollars were still linked to gold. It is owned by the U.S. Treasury, not the Federal Reserve.
The gold is not used to back each dollar or routinely control inflation.
The Fed manages monetary policy independently of these reserves.
… …
Why did the U.S. change to a fiat money system? CGPT:
The United States abandoned the gold standard in 1971 primarily because it could no longer guarantee dollars held by foreign governments could be exchanged for gold at the promised price.
During the 1960s, U.S. government spending, inflation, and overseas payments increased the supply of dollars held abroad.
Foreign governments could exchange those dollars for American gold at $35 per ounce.
Eventually, foreign-held dollars exceeded U.S. gold reserves, threatening a massive withdrawal of American gold.
On August 15, 1971, President Richard Nixon ended the dollar's convertibility into gold.
By 1973, the international fixed-exchange-rate system had effectively collapsed, replaced with floating exchange rates, completing the transition toward fiat money.
The principal advantage of fiat money is the Fed can adjust the money supply and interest rates without having to maintain a fixed gold price, giving it greater flexibility to respond to recessions and financial crises.
However, this flexibility creates the possibility of excessive money creation and inflation.