> 4) Suppose now that the moment of return to gold convertibility is very
far
> off in time, or perhaps may never happen. Isn't there still a possibility
> of speculation establishing the value of the liabilities of the State?
>
> Duncan
>
As posed no.
The speculative valuation of a currency that may return to the
gold standard is a valuation of a liability denominated in terms
of gold. As such it can be rated above or below par in terms
of gold.
If it was reckoned that there was a 500robability of returning
to the gold standard tomorrow and a 500robability of returning
to the gold standard in 1 years time, then if the rate of interest
was 10% the rational valuation of the dollar at its old $35 /oz parity
would be
0.5 + 0.5 * (1.0 -0.1)
(--- ----------------) = 0.95/35 = 0.027 oz gold
35 35
When the state gives no indication that it will ever
restore the gold standard, as with the dollar now, its speculative
value in terms of gold would be the integral from now to infinity
net discounted present value of 1/35 oz times the probability
of redemption in any one year.
Since the probability of redemption would be reckoned as very low
for every single year into the forseeable future, the dollar's present
value would on this basis be very low indeed - on a par with that
of Czarist state debt in the 1970s. Whilst the dollars value in gold
is well under 1/35 oz, it has not fallen to such nugatory levels,
so such speculation in terms of gold is unable to explain its current
purchasing power.