Is Indirect Convertibility Impossible?: Comment

Abstract

Norbert Schnadt and John Whittaker (1993) criticize proposals for defining the dollar by a broad basket of goods but making money redeemable otherwise than directly in this composite of Indirect would be more convenient for all parties involved. Each dollar of face value of banknotes and deposits would be redeemable in whatever (changeable) quantity of some specified redemption had an actual market value equal to the total value of the dollar-defining basket. This convertibility into a basket's-worth of medium would keep a one-dollar banknote or deposit always equal in value to the basket itself. In challenging this idea, SW and Schnadt and Whittaker, we, and others devoted a session to it at the January 1992 American Economic Association meetings. This worry turns out to be a red herring in the central meaning of that metaphor. Following the earlier literature, S&W suppose that a bank redeems each dollar of notes and deposits in enough gold to be worth, at its market price, the total market of the composite medium of account. They recognize that if this basket's total somehow came to exceed $1, gold's hitherto prevailing market would exceed, in the same proportion, its price implied by the quantity of gold delivered for each dollar bill at the bank's window. Gold's market price, they ar-