This is $900 worth of inputs at today’s prices. The McLaren F1 example is predicated upon a different price matrix
I don’t believe I’m doing that. Maybe someone else is doing that here, but any hypothetical “prices” I’ve suggested were rhetorical devices, only.
Right - money is whatever the markets choose. But in that regard, anything that two parties wish to exchange or use as a medium of exchange is or ought to be acceptable, and no favoritism should be conferred upon any individual medium of exchange. A “gold standard” IMO is really the absence of a standard. It may not be, although I happen to believe that gold would (as it has in the past) be the medium of choice.
First, a medium of exchange is different from a money supply. When the medium of exchange is in proper balance, the media of exchange circulating (what people want to call money supply) equals desire to trade. The medium of exchange facilitates trading activity at whatever it naturally wants to be.
That said, a properly managed medium of exchange behaves according to the relation:
DEFAULT = INTEREST + INFLATION
The manager makes loans of exchange media; he measures DEFAULT; and he collects INTEREST in direct balance to DEFAULT. By so doing, he assures INFLATION of his media is zero.
The manager of the medium measures the “requisite number” which is DEFAULT experienced. It’s not a plugged number, it’s an easily measured number. And to maintain balance, the manager collects INTEREST equal to that number.
As I have shown, gold can not be money because the manager of the exchange medium can not adjust the amount of gold to equal the desired trading activity. That’s exactly the problem. If trade becomes more brisk, the medium manager (the market actually) can only adjust the trading value of the media. In the case of gold this means less gold trades for more stuff. Further, it means someone can trade a can of beans for some gold today and at some later day can acquire more than one can of beans for that same gold. Why, because the gold must now support more traders and becomes value in-and-of itself. This is a violation of the relation governing a medium of exchange.
We have the opposite problem with an unbacked medium of exchange not managed by the relation (i.e. our system today). Because DEFAULT can and does exceed INTEREST in our system, we have INFLATION. It means someone can trade a can of beans for some dollars today and at some later day can not acquire a full can of beans for those same dollars.
Anyone can create a medium of exchange. All that is required is to have your media become trusted. Bankers in the olden days garnered (and abused) this trust. But if you openly manage the medium which you create and follow the relation and are totally open with your lending activity, DEFAULT experience, and INTEREST collections your medium will be naturally trusted and used. Why? Because INTEREST will be competitively low, exchange media will be in free supply, responsible traders will be favored and fairly treated, and INFLATION will be zero.
It’s very much like running an insurance business. All the same prudent mechanisms need to be employed. However, the big difference is this: with insurance, the agreement is between just you and the insurance company. With an exchange medium, the agreement is between the manager of the medium and the entire economy using the media to facilitate trade. That’s why we can have many insurance companies but we can’t have many managers of exchange medium.
Right now we sort of have several managers of exchange media. They are American Express, Master Card, Visa, Discover, Carte Blanche, and Diner’s Club. To a lesser extent we have the old banking system with its demand deposits and checks. These are kind of retailers. Unfortunately, the wholesaler is the Fed and the US Treasury. They are not following the relation DEFAULT = INTEREST + INFLATION so the system is being gamed and we are all being cheated through INFLATION and/or high INTEREST as a result. The responsible traders (i.e. those who don’t default) must cover for the irresponsible traders and must feed the parasites operating the system who demand tribute with every transaction.
Whether by design or ineptitude, the Fed and Treasury cause the so-called business cycle. If they had to follow the relation there would be no business cycles.
I don’t think this is the premise of the argument.
It is the premise of the original question I answered, that being “what if our currency was backed by gold”. My answer: strangulation.
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.
You deduce incorrectly. First, money can be a form of wealth for it can be exchanged for things which people view as wealth. You talk of a money supply. I talk of a medium of exchange which has an infinite supply, the actual media in existence at any time equaling the economy’s desire for trade? How does it equal that? People intending to trade “borrow” the media to facilitate the trade and “pay it back” when the trade is completed. It is created and extinguished with each completed trade.
Your deduction assumes a fixed supply of media. When managed correctly, the supply is not fixed. Further, it is not adjusted using some crystal ball.
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."
When the medium of exchange is properly managed his premise and deduction are false.
It seems you just proved his argument. I am little confused as to what you are saying.
Where’s the confusion? He starts with the premise that the amount of gold is fixed and so can be assumed to have any value necessary. I show that in reality the amount of gold is not fixed and there is a specific value it has deriving from what is needed to increase the supply. How do I prove his argument by refuting his premise? I am a lot 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.
I actually don’t know how to interpret the essay. He is indirect in his approach and all over the map with his subject. He sets up straw men, then slays them. The essay was offered up to me by you as a credential I needed to have before I could give the answer “If our currency was backed with gold, the economy would be strangled”. Nothing in the essay refutes that answer. Anything that comes close to refuting it begins with a false premise.
The cost of acquiring a commodity backed media of exchange determines its value in exchange. Should that cost go up significantly (as in the case where we’re not finding any new gold) or go down significantly (as in the case of a move to silver), the value changes. That’s the problem with using a commodity as exchange media (or the backing thereof).
Commodity exchange media does not support the exchange medium management relation, that being DEFAULT = INTEREST + INFLATION. Nowhere in this relation does the amount of exchange media appear. It is trading activity that dictates the amount of the media. The relation assures that once the numeraire is adopted, it never changes due to exchange media itself.
Okay, let’s assume that, even if we dug up all the gold in the earth, it wouldn’t facilitate trade for more than 50 years(that is, within fifty years even grain-level pricing would be far too crude); now what? Assuming no legal tender laws, another commodity(such as silver) would be selected as the currency of choice(and so on every time a commodity became too scarce to have fine-level pricing); would the transistion be painful? Yes, but it would be necessary.
Todd, your condemnation of commodity money forgets one thing: its use as currency competes with other uses(such as jewelry), which are more likely to buy new commodity than money-users.
This is $900 worth of inputs at today’s prices. The McLaren F1 example is predicated upon a different price matrix
Oh really? I though it came about with someone arguing that the value of gold is arbitrary, therefore the availability of it (now about 1 oz per trader) is not an issue. What’s this different price matrix you speak of?
I don’t believe I’m doing that. Maybe someone else is doing that here, but any hypothetical “prices” I’ve suggested were rhetorical devices, only.
You’re making no sense. Say something concrete. The McLaren F1 example and the Manhattan city block example were forwarded as something you could claim the value of an oz of gold to be. My claim, and it’s absolutely indisputable, is that the value of gold derives from the effort required to obtain it, not from what someone may feel like dictating it to be. . Right now that’s about $900 per oz.
The market would favor a media of exchange which brings nothing to the exchange in-and-of itself. Commodities don’t have that characteristic. Their meaning in the exchange changes with the supply and demand of the commodity itself over time. If that’s what you mean by “absence of a standard” then I agree with you on that one point. Actually, I think silver would be the medium of choice now. Gold is in such short supply with respect to the economy’s trading desire that it is no longer practical. In the olden days when it served that purpose, there were far fewer traders.
Assuming no legal tender laws, another commodity(such as silver) would be selected as the currency of choice
Oh really? Why is a commodity our only choice? Why isn’t an open method of keeping score which cannot be gamed a valid choice?
Yes, but it would be necessary.
It is absolute “not” necessary, and today were are smart enough to know why. We don’t have to have, and we don’t want to have, a medium of exchange based in a commodity. It’s a score keeping problem. Let’s focus on the score keeping and the score keeper. Remember, one of the history’s most successful score keepers was the tally stick.
Regardless of the uses, whether as media of exchange or as an ingredient in a product, the value of the commodity is determined exclusively by the cost of obtaining it. Taking gold in particular, I can grind up computers to get gold with less effort than digging for it, so that would be my choice for obtaining it these days. The fact that commodities have other uses is a dead give away that they are not suitable as a media of exchange. Commodities bring value in-and-of themselves to the trade rather than being a disinterested facilitator. Changes in a commodity’s uses distorts trades which take place over time (like buying a house with a stream of 360 monthly payments).
They were not.
The value of everything is subjective. The opportunity cost required to obtain it has far more to do with its value than does the absolute “effort required to obtain it.” (see: diamond/water paradox)
Why do you claim commodity money’s a bad thing? The fact of the matter is that your scorekeeping has to be done in some objective unit and, absent legal tender laws, banknotes don’t fit that description. As for your claim that value is the cost of obtaining something, that’s a fallacy I’d expect from Marx: while value tends to cost, human action determines whether it evers gets close.
I don’t know how to be clearer than what I’ve already written. When the commodity value is allowed to vary (as it does with supply and demand for the commodity i.e. I can get more or less stuff with the same amount of the commodity at different times regardless of the supply and demand for the stuff), the trades it backs up also must vary. But I don’t want my trades to vary with the commodity. I want the trade to be independent of the value of the commodity. It’s no big deal if the trade takes place in a matter of days. But some trades (e.g. buying a house), takes place over many years. If over those years, the commodity becomes very scarce, it becomes difficult or impossible for me to complete the trade as promised. Or conversely, if the commodity becomes very abundant, it is easy for me to complete the trade, but the person I’m trading with gets screwed. A medium of exchange must remain constant in that regard over all time. Further, the amount of the medium may remain constant but the number of people using it in trade can change. This affects the value of all in-process trades. We don’t want that.
Thus, commodity money is a bad thing.
Then don’t “absent legal tender laws”. Rather manage the medium of exchange (i.e. legal tender) using the proper relation: DEFAULT = INTEREST + INFLATION as I have written. Frankly this can be done without laws. You could do it yourself right now. Some small areas have tried to do it (e.g. Ithaca dollars in Ithaca, New York) but those people aren’t managing it properly and thus it is failing. The reason for having laws do it, (and I think a real US Fed should do it … not the private bank cabal we have in the Fed now) is that it would be less confusing and more efficient … just like speaking a single language in this country is less confusing and more efficient than supporting several as we now do. And since the relation is so simple and the important elements (DEFAULT and INTEREST) so easy to account and report, corruption would be difficult.
Now corruption is easy with all the hand waving about the current supply and needs for money, the current INTEREST rate and the current INFLATION rate based on a certain basket of goods. And notice, no one is keeping track of DEFAULT … a clear indication that they just don’t get it!
Expect it from whomever you like. I can’t think of much, if anything, that I agree with Marx on. Didn’t he think all value was labor based?
Reviewing the bidding: The question was posed “what if our currency had to be backed by gold.” My answer was the economy would be strangled because there is less than 1 oz of gold on average for each trader. Right now that is about $950. The average person couldn’t begin to do the trading he does with just $950 outstanding at any one time. And most people have more than $950 in saving so no run for gold could be serviced.
Then someone said that $950 per oz was arbitrary. We could say an oz was worth a McLaren or a block of Manhattan. I said you can’t just say what an oz of gold exchanges for. If you said I could get a block of Manhattan for it, I’d be melting down old computers as fast as I could and soon I would have a block of Manhatten. That would be my human action. And it would any other rational person’s human action. And that action would be real close to an existing mine’s action.
You want a neutral money. A money that can be used to reckon the prices of every other good in the known universe, but which is miraculously neutral with regards to any of them. Economics FAIL. I’m sorry, this is crankism. I’m done with this nonsense.
Correct. And I know how such a medium of exchange can be brought into existence and managed over all time … with no miracles. If that isn’t what you want, why not? And what is it you do want?
I presume you meant “Economies” fail. Agreed, and when you look into their basis, their medium of exchange and the management and operation thereof, it’s no surprise they fail. The game is rigged to start with.
Crankism: Is this the new smear of the times? Perhaps we should make this the subject of a new thread and play this so-called crankism out in an open discussion.
Maybe we could begin with this vitriolic post and it’s comments (“Prepare for the rise of money crankism” by Jeffery Tucker … http://blog.mises.org/archives/008787.asp).
As I read the above cited post and its comments I find them riddled with false premises and assumptions.
I think it would be constructive to view them through the lens of the relation for a properly managed medium of exchange … that being DEFAULT = INTEREST + INFLATION, where DEFAULTS are measured and INTEREST collections imposed to balance them.
This comment I find particularly interesting and easy to address.
To RichardJ
By Patrick, from your manifesto:
“Where an increase in the money supply is required to maintain monetary value—because of a growth in the underlying economy—government will spend the newly created debt-free money into the economy in the form of financing capital works, paying the salaries of public sector workers and so on.”
The problem is that this increase in the money supply will have the effects described by the Austrians - those who first receive the new money will be unfairly advantaged and, even worse, it will distort the structure of production and kick off the business cycle.
Good to see you’re familiar with the Mises Institute though. As a Briton I’m glad there is now a UK party which subscribes, albeit partially, to Austrian School economics.
Notice it makes the incorrect assumption that “newly created debt-free money” enters the economy through government spending. When you start with a false premise you’re likely to come to a false conclusion (Todd Marshall’s comment).
And what nonsense is it you’re not done with? You’ve offered no argument I need to defend. You’ve just shoved me into a class I didn’t even know existed (that of a money crank) … and when I look into what that class is I find my assertions easily defended.
Good luck with legal tender. We see where that has gotten us. Like I said at the beginning. Do your reading.
Bye bye.
A money that is not an economic good? Which neither impacts (nor is impacted by) the relative supply (or lack thereof) of all other goods and services in the world?
Do tell.
I have told. Think about it. Put your head in a different place.
Think of the medium of exchange as an environment where trade promises are made and performed against.
Think of the manager as simply the score keeper … the one who puts out the receipts for a trade promise and sees that the receipt is extinguished when the promise is fulfilled.
Think of the manager as the one who limits receipts to classes of traders according to the class’ DEFAULT history and collects INTEREST from those classes equal to those DEFAULTS.
Think of the media of exchange as just being those promises in circulation.
Think of the amount of such media in circulation at any time to be equal to uncompleted promises to make trades … i.e. trades in progress.
Think of the manager maintaining the relation DEFAULT = INTEREST + INFLATION for all trade promises over all time.
Think of the manager assuring DEFAULTS are extinguished by equal INTEREST collections such that INFLATION remains at zero.
It’s all about score keeping in the open. The only thing that has to be measured (not estimated) is DEFAULTS.
double-coincidence of wants?
You’ve still got a system which can be manipulated by the score-keeper. You’ve still got a system where someone is in charge of, essentially, creating “money” out of thin air, and the only thing that backs it all is the enforcement of pure debt contracts.
Defaults have to be estimated ex ante, unless you have a crystal ball that you’re not telling us about.