I thought you probably did, I was just trying to make you think about how money could be “backed by” a basket of commodities - if money is the commodity, and not the piece of paper, how it can it possibly be more than one commodity? What if you try to buy and sell using money instead of money substitutes: do you have coins made of gold hollowed out and filled with oil, etc.?
Paul,
I see your point. It would be odd to say that one dollar is equal to 60% of a pint of oil + 40% of an ounce of gold.
However, I was under the impression that there was a possibility to get rid of the fiat system through a basket of commodities. At least I have heard that informally through severall sources which I do not recall at this time.
Perhaps I am looking for a detailed comparison between the virtues of oil and gold as candidates to eventually replace fiat.
One dollar used to be worth x silver and y gold, and we either had exclusively silver or exclusively gold used depending on whether the exchange rate was fixed in favor of one or the other, between its market and legal rates.
oil and gold would be an odd combination, considering the consumption demand for oil. i don’t think it would work well - any redemption claims would probably negociate a settlement for the owed oil in gold, or vice versa, depending upon the weight ratio. What is more easily exchanged: gold coin or oil canisters? Which is more durable, portable, divisible, etc.?
All savings must come from the production of or exchange for goods. One may invest in money, capital goods, a business, stocks, bonds, mutual funds, a basket of commodities, a claim to a basket of commodities. Each individual is free to save/invest how he pleases. No one can be guaranteed a future market value of that which he invests in, however.
This is different from money, which is a medium of exchange. Money is not inherently valuable in that it represents a claim to a real good, or is a real good.
Taxes, regulations, subsidies, privileges, price-fixing, and other interventions distort the choices people make, and prevent them from preserving wealth.
…Now imagine this, let’s say there’s a bank run because a bank, possibly the central bank, has led a doomed inflationary course, issuing more claims to goods than it has available. This would mess up the production of those commodities. Then, would the people who cashed out be able to facilitate trade easily using that as money? No way. Gold backing was valued because gold was money. When people cashed out, the bank was out, not them…unless it was largely unbacked. The government’s primary interference is in trying to protect such banks, and this is way deeper than bailouts.
What if there’s pressure to deflate the currency, to consume some of the oil reserves backing it? Such a deflationary move would severely distort credit and pricing, as people would invest in money instead of spending it. What if energy demanded the oil reserves reach severely low levels?
Metals are much better as money than oil because they are not consumed.
The current supply of gold is the product of thousands of years of mining. Additional mining is able to increase the supply only marginally, ensuring the price will be stable.
This is not true of oil, a decline in output would cause a spike in oil prices.
Market-produced money doesn’t necessarily have to be this way. For example, Wal-Mart could form their own kind of money. Call it the Wallie. They’d establish that one hundred Wallies is worth exactly a gallon of Walmart milk, a dozen eggs, a bag of socks, a 50 pack of blank CDRs, and a quart of motor oil. Anyone could cash in their Wallies at their local store for the above products.
I think one of the fallacies you happen to hold is that there has to be one money. No reason why people shouldn’t use more moneys, e.g. commodities they use to exchanges goods and services. Gold, as any other good used as a money - with the exception of fiat money of course- has at least two uses, the use of a money and other uses like jewelry, industrial uses and the like. WIth respect to the use of money, gold is a clear commodity. In its money function you can replace it with whatever you like and others are wiling to accept. Iron, Caori shells, weat, zigarettes or horse shoes.
In history there have been always different moneys in the market, gold and silver being the most prominent. Now if the amount of gold would increase that would mean the scarcity of it would decrease. This won’t happen on a single day - only possible with fiat money as you can see following the news for the last weeks-. Shifting away from a commodity as a money is a process that allows for a smooth transit. Clearly the more gold inflates - that is the more gold is on the market- the less it is worth. Yet, it would never happen that any free market money would be worthless from one to the other day. This can only be achieved by coercion -legal tender laws for example-.
The reason gold had been picked is also not only its relative scarcity but because of its devisiblilty and because it is hard to counterfit - yes you can make coins with a lead kernel, but even that is not easy to do-.
The whole idea of a money having an inherent value is fallacious. For if a money had inherent value, why not labour? The answer is that for something to be a money all that is needed is the willingness of a bunch of people to except it for exchanging goods. Now, because there is a real tendency by some individuals to save - time preference- they look for commodities that fulfill the requirement of not to rot to fast. Gold doesn’t rot, wheat, pork halfes and fiat money(inflation) does. If now, for some reason the virtual rotting process of gold was going to increase - that means it becomes less scarce- the people would start to look for something else.
Money is by definition the dominant medium of exchange in a market. There might be two or three commodities used as money, and I think this is what you mean (e.g. silver, gold, platinum), but to be dominant these must be the most widely used. Otherwise they’re just media of exchange.
-Jon
You are sure correct with this remark Jon. I tried to get around the common idea that there is only one possible media of exchange. And the definition even says explicitly the “dominant” which implies other media of exchange as well. My point was though that if a new “dominant” medium of exchange evolves this takes place in a process over time, rather than through a sudden event.
Interesting that 70 years ago the zeitgeist was that Gold was too important to let us Plebians own and must be put into government vaults. Today we are told it is obsolete and not to mind that it sits idle in government vaults.
The more things change, the more they stay the same, I guess.
That is so true.
What is the point of having gold sitting idle in government vaults? What is the current reasoning behind that absurdity ?
It doesn’t have “inherent” value; but it has value today only because it had value yesterday. You can’t just replace it with something else - even by government decree - without completely screwing up the price structure and throwing everything into chaos.
Gresham’s law.
The government hoards the good money(gold) and uses bad money(paper notes) to pay its bills.
I agree this is a very important point.