There are no imports without exports. Drop the mercantilist fallacy of the arbitrary territorial boundary (State) and you’ll see that there is no problem other then the ones introduced by the governments.
When you sell (export) your labor to your employer, must you buy (import) back from the same employer?
The supply of money is of on no significant importance. The value of money is not fixed. It depends on it’s supply, demand to hold it, and the supply of goods. As production output is increased due to growth, so will the value of money change to accommodate that new volume.
Hm
Your assertion is fallacious. The media of exchange are dictated by the market. I said no standard is the standard. In America we are forced to use dollars via legal tender laws. Also, you don’t know the amount of gold available, nobody does. We don’t even know the amount of dollars available. Oh wait yes we do. Infinite. The amount of gold does not dictate the amount of trading that goes on. Supply and Demand dictates that. The OP was a question posed over a hundred years ago, and it was answered correctly by Bastiat. If you go ahead and read it, I and others here will be happy to answer questions you may have.
I apologize if I come off rude sometimes, I just get tired of the same questions being raised that have already been answered correctly. Research before you post. The wealth of knowledge contained here is unrivaled. Remember this. Any given supply of money will facilitate the exchange of any given amount of goods. Money is a medium not a commodity, and it does not dictate how much trade may go on. The market provides money where it is needed i.e. in an advanced economy.
Read the following:
Theory of Money and Credit.
Human Action
The Harmonies of Political Economy
Socialism
Liberlism
That should resolve your questions. Everyone of those works is available in the literature section at this website. Also, be sure to study up on the subjective theory of value.
Again I apologize for flippancy. Sometimes I can’t help it.
The supply of money “should” be of no importance. But it is … especially in the case of gold. When the media of exchange must be convertible to gold, gold becomes the media of exchange. When more trades want to be made than the availability of the media supports, the value of the media is raised artificially. If it is by a small amount, new gold production can bring back the old balance. If it is by a large amount, the value of the media changes. In the steady state what you say is true. In the dynamic state it is patently false.
When more trades want to be made than the media supports, things happen: 1) Some trades aren’t made … trade is strangled; 2) trades are made using different media (e.g. barter … or silver); 3) people holding the media become relatively rich vs. those not holding it (a musical chairs thing); 4) the supply of the media becomes important; 5) New unnecessary energy is deployed to increase the supply (because of the economic incentive).
All this happens needlessly and is disruptive to trading, just because of the media chosen. And what does it all mean? It means the media assumes a false value until a steady state (new supply equals new trading requirements) is reached … if it ever is reached.
Your statement “As production output is increased due to growth, so will the value of money change to accommodate that new volume.” is in direct conflict with your other statement “The supply of money is of on no significant importance.”
wrong it is not. do your reading
"The media of exchange are dictated by the market. ": Oh really? The market is then dictating “trading promises” made in the form of pieces of paper and accounting entries. The original question was what if that changed back to gold.
“In America we are forced to use dollars via legal tender laws.”: Isn’t this in direct conflict to the above quote from you?
“Also, you don’t know the amount of gold available, nobody does.”: Hmmm. Seems I have searched for that value many times and came up with about 6 billion ounces each time. (e.g. http://www.galmarley.com/framesets/fs_commodity_essentials_faqs.htm)
“The amount of gold does not dictate the amount of trading that goes on. Supply and Demand dictates that.”: Ideally this is true. But we haven’t seen ideally for a long time. And your statement begs the question “supply and demand of what”? If it’s of gold, then it very definitely affects the amount of trading that goes on.
"If you go ahead and read it, I and others here will be happy to answer questions you may have. ": Remember, this started by me supplying an answer … not begging you for one. I have absolutely no confusion on this subject. I have given concrete arguments and you reply not to those arguments but to my credentials (BTW: I have “Theory and History” and “The Theory of Money and Credit” in my library and have read and marked them up with things Mises says which are not supported by experience or facts … but I can’t debate with a dead guy).
Give me the Bastiat quote if you’re so familiar with the literature that supports your claim and refutes mine and we can work from that.
Apology for flippancy accepted.
The essay begins on page 109 and ends on page 134 of volume 1 of the complete Bastiat Collection available on this website. (The essay explains money not gold, but it refers to gold as money because gold was accepted as such, as it is today at the time the essay was written.)
Correct you did supply an answer, one based on fallacious assumptions. No I am not engaging in an ad hom attack. I replied to arguments and referenced the individuals that have refuted your arguments. I did not attack your credentials. I originally was telling alimentarius to read Bastiat, not you. My apologies for the confusion. ( I would suggest you read it though.)
My statement does not beg the question. It states simply that supply and demand dictate trade, not money. Supply and demand of goods. If I produce food and you produce tools, but neither of us have agreed on a media of exchange then we barter until the division of labor produces a market for money.
Anecdotally I can say that I have traded with gold and silver as media of exchange. I bought a car with 2 1/2 ounces of gold recently. In this case the market. (the seller and I) dictated the medium of exchange. I have other anecdotes as well. Fiat and legal tender beg the question; who should manage the money supply? A gold standard would be another form of fiat, albiet restricted by the supply of gold. Try and pay taxes with nails under a gold standard, or any standard other than a nail standard.
The point I am making is that the market regulates the media of exchange through the individual interactions of buyers and sellers. Yes, the world is not Ideal, we live in a world of fiat. ATBC explains how to operate in that world. Austrian economics explains that Fiat and legal tender are unnecessary for prosperity. The Fallacy is that the money supply must be managed. All the problems a managed money supply produces could be eliminated by elimination of the management.
The market dictates the medium of exchange not fiat. Gold just happens to be a convenient media of exchange, as it tends to fit the definition thereof.
Also, the fact that we use dollars in America is a direct result of government and its guns, not the market, so no my statement is not in conflict.
@ todd
Provide a margin of error with your 6 billion ounces and I accept it. Otherwise no can do. Not all gold is recorded. When Indian wives and their husbands and heirs start going broke, much more gold will be available for trade. When a gold magnate becomes available, gold will be as common as iron. Kind of like aluminum after electricity.
Margin of error? How about a factor of 10. Now you’ve got $9,500 to do all your trading. Is that enough? If it is, you need to beef up your savings a little bit (remember they would have to be backed up by gold even though they’re not involved in trade and you don’t want to allow them to be loaned, let alone margined, lest you want that gold right now.)
In regards to total supply I mean. I said you don’t know the supply of gold. You can estimate it. Fair? I’m not arguing with you on if we have a gold standard. I’m saying no standard (fiat, gold, silver, nails, whatever.) would ameliorate the problems of a managed money supply.
We need to start a new thread this one has been derailed,. Perhaps we could start with the question. Should the money supply be managed? That seems to be where we are going.
I work at night. Going to bed now, well soon anyway. I’ll post the topic tomorrow morning if you don’t.
What I mean is that money is not backed up by law of any sort. Gold, silver, fiat, nails.
You and I and everyone else decides what to trade with based upon our circumstances. A money will arise out of this and it need not be decreed by law. That is what I am saying. It starts with barter. If two cities are using media of exchange that are valued as worthless to each other, they will begin with barter if they want each others’ goods and then a new medium will arise between those two cities ad infintum.
Stop thinking of $9,500 in terms of today’s purchasing power equivalent (i.e., 10 oz. gold?)
If 10 oz. could buy you a McLaren F1, would you still be asking this question? What if 10oz. could buy you a Manhattan city block? You’re neglecting half of the equation…
Let’s say right now a McLaren F1 is worth $95,000. If 10oz of gold will trade for such a car, then gold is worth about $9500/oz in this trade. But I already know that I can trade less than $900 worth of labor, dirt, and arsenic for an oz of gold. Thus, I can trade $9,000 worth of labor, dirt, and arsenic for 10 oz of gold. Thus I can trade $9,000 worth of labor, dirt and arsenic for a $95,000 McLaren F1. If 10z would buy a Manhattan city block I could trade $9,000 worth of labor, dirt, and arsenic for a Manhatten city block.
You, sir, are neglecting what has to be traded for 1oz of brand new gold. That is why you can’t just apply any value to gold that you want to. You have to apply the cost of what it takes to produce new gold.
Saan criticized my credentials for not reading Bastiat before engaging in this dialog. So I went and read Bastiat. And here’s what Bastiat says that is the premise of his argument:
"But, suppose now, that you were the legislator, the absolute king of a vast empire, where there were no gold mines. "
Well if that’s what it takes for him to make his argument, it is a false argument. There “are” gold mines and there “are” people grinding up old computers for the gold in them. And they can do that today for less than $900/oz and so it would take more than 100oz of gold to trade for a $95,000 McLaren F1.
A little later he says:
"Gold is brought within our reach, just like iron, by the labor of miners, the investments of capitalists, and the combination of merchants and seamen. It costs more or less, according to the expense of its production, according to whether there is much or little in the market, and whether it is much or little in request; in a word, it undergoes the fluctuations of all other human productions. "
And further he says:
B. Thus, it is your opinion that the treasures discovered in California will not increase the wealth of the world?
F. I do not believe that, on the whole, they will add much to the enjoyments, to the real satisfactions of mankind. If the Californian gold merely replaces in the world that which has been lost and destroyed, it may have its use. If it increases the amount of money, it will depreciate it. The gold diggers will be richer than they would have been without it. But those who possess the gold at the moment of its depreciation, will obtain a smaller gratification for the same amount. I cannot look upon this as an increase, but as a reallocation of true riches, as I have defined them.
See? He says “the gold diggers will be richer…” How so? Well, when you said they could have a block of Manhattan for 10 oz of gold, they took you up on the trade. Where they used to just get a run down house trailer for those 10 oz, they can now get a block of Manhattan. So what do they do? They dig away before you come to your senses.
And what about you, who traded a block of Manhattan for 10oz of gold. Well, when things settle out, you will have trouble getting a run down house trailer for that 10oz of gold … just as before.
You just don’t arbitrarily claim something whose quantity is not fixed to have some arbitrary value.
The value of all goods is in constant flux, money included; if the supply was increased, the price would fall in due course. If we decreed a dollar was 1/9500 ounces of gold, then more dollars would need to be printed. The overall point remains: if it is inconvenient to work with a given currency, it will be subdivided or discarded completely(gold might be abandoned for silver in the wake of a population explosion, for example).
Again, returning to the original question :
“what would happen if our currency had to be backed by gold”.
My answer, still easily defended, is that trade would be strangled.
There isn’t enough gold to support the trading activity facilitated by our currency. Further, I have shown that you can’t just change the amount of currency that an oz of gold represents to yield more trading media. Why? Because the labor, dirt, and arsenic needed to yield new oz of gold dictates the amount of currency that the gold backs.
“The value of all goods is in constant flux, money included; if the supply was increased, the price would fall in due course.”
The value of goods may be in flux, but the value of a properly managed media of exchange (what you call money) is not subject to supply and demand.
The problem is we have yet to see a properly managed medium of exchange. Proper management means recognizing the relation that governs any medium of exchange, that being:
DEFAULT = INTEREST + INFLATION
The manager must do the following:
Measure DEFAULT. DEFAULT is media pledged to exchange where the exchange is not completed and the media is not fully returned.
Apply INTEREST equal to the measured DEFAULT. This collects back the media that was not returned as the result of an incomplete exchange
Following directly from 1 and 2, INFLATION must be maintained at zero and this will happen if 1 and 2 are properly exercised.
A properly managed medium of exchange brings nothing but facilitation to trading. The media has no value in-and-of itself. It has only value as recognized by the traders. No distorted value is ever given to the media, e.g. through creation of surplus or shortage of exchange media. Surplus occurs when DEFAULTS exceed INTEREST collections. Shortage occurs when INTEREST collections exceed DEFAULTS.
The amount of media in existence at any time has no constraints … it equals the economy’s desire to make trades. If no one wants to trade, no media need exist. If desire to trade is brisk, availability of media to facilitate that trading desire must in no way be restricted.
Such management “cannot” produce bubbles because as the bubble tries to form, DEFAULTS begin to occur and INTEREST charges dampen trading activity … irresponsible traders (DEFAULTERS) can’t make competitive trades because of their INTEREST expenses. Responsible traders (those who don’t DEFAULT) can trade INTEREST free.
Notice, this mechanism does not require monitoring of INFLATION at all. It only requires accounting for two things easily and objectively known … DEFAULTS experienced and INTEREST collected.
So back to the original question: “What would happen if our currency was backed by gold?”. The answer still is “trading would be strangled” because there is not enough gold to facilitate trading activity (less than 1oz per trader on average).
Looking beyond the question to the real question: “How do we prevent so-called price inflation and how do we facilitate a free economy?” Answer: Manage the medium of exchange by the relation:
DEFAULT = INTEREST + INFLATION
What is a properly managed money supply?
How will you know determine the requisite numbers to plug into your equation?
I agree if only gold can be money.
I don’t think this is the premise of the argument. The argument is that money does not equal wealth, but rather goods equal wealth. I deduce from this essay that it is pointless to attempt to manage a money supply, because when you have goods to trade, whatever media is being accepted as exchange will be brought to the goods wanting to be exchanged, the price will reflect the exchange value.
Another quote from the same essay.
"B. What harm is there in looking at money as the sign of wealth?"
" F. The inconvenience is this: it leads to the idea that we have only to increase the sign, in order to increase the things signified; and we are in danger of adopting all the false measures that you took when I made you an absolute king. We should go still further. Just as in money we see the sign of wealth, we see also in paper money the sign of money; and thence conclude that there is a very easy and simple method of procuring for everbody the pleasures of fortune."
It seems you just proved his argument. I am little confused as to what you are saying.
I intrepret the essay this way. Money facilitates exchange period. If you attempt to manage it, you add arbitrary value, and all the problems that occur with a managed money supply rear their heads.
Labor, dirt, and arsenic dictate the opportunity cost of mining new gold,and the wages/rents/etc.,and dictate therefore the price at which gold is likely to exchange, but where money/currency is strictly a numeraire, the price of gold or the cost of extracting gold does not determine the specie/currency ratio.