Can gold and silver circulate as money simultaneously? As long as each have a value independent of one another, maybe. Supply / demand for each will be determined by both their demand as money and their non-monetary uses. This will change the demand for each metal differently with respect to the goods it can be exchanged with.
Now, to say that 5 ounces of silver has equal value to one ounce of gold will fail as money. It is obvious price fixing of two separate commodities that have individual unique supply & demand. The under valued metal will grow scarce and be hoarded as per Gresham’s law. Having said that, how does one perform economic calculation of profit and loss if there are two independent monies? The exchange rate between gold and silver will always be changing. When foreign companies borrow foreign currencies there are always exchange rate risks to profit and loss, and exchanging labor for wages in one currency while having to pay a debt in another currency is also a risk. If one were to borrow money, will they borrow in gold or silver? When they earn money will they demand gold or silver? They could diversify and trade in both monies, or they could just simplify the scenario and single out one and stick with it. I believe it would be easier and likely that one would be singled out as the chosen money.
I prefer the idea of a single commodity money over Hayek’s free market currency basket concept.
As well as in case of inflation, in case of a deflation not all prices will will change simultaneously for the same percent. Even the natural deflation threatens of infringement of the relative prices, what causes cyclical flucftuations.
People originally used gold because of its physical properties: uniformity, divisibility, a keeping. But if we come back to the gold standard, we will not use gold. Even at the today’s prices the least coin will approximately cost USD100. And with transition to the gold standard the price will essentially jump up and will be constant to grow further. So we will use either banknotes or electronic (non-cash) money. Gold will be used only in calculations between banks.
So why in that case any other raw resource or a set of resources cannot be used as the reserve goods? Don’t you think, use of a basket of several key price indicators will not provide stabler money (and the price of gold always fluctuated)? Isn’t better to put eggs in different baskets?
It is necessary to remember, that gold in transactions will practically not be used. We will use banknotes. These banknotes will grant the right to their owner to get certain quantity of gold. But if the emitter will go bankropt, he will not be able to fullfill liabilities. So gold standard does not give a 100% guarantee.
Now we will consider system of competitive currencies (Hayek’s proposal). The competition will force the emitter to support the currency at certain level (for example to support stable the price of a basket of the goods).
So what of the gold standard?
At the same time private money has few advantages:
larger flexibility to global changes (for example, reduction in price of procedure of synthesis of gold);
Possibility of producing stabler money (probably the competition will allow to receive a universal measuring instrument of the general work cost );
We cannot estimate probably, some advantages today at all. After all the free market is the most powerful generator of new conveniences and possibilities.
Sorry for me english. Will be thankfull, if you will show my mistakes.
Cyclical fluctuations are the result of intertemporal discoordination as the result of new credit coming on to market for loanable funds. Unless you can somehow prove that deflation will somehow causes this discoordination, it simply is not true that deflation will cause cyclical fluctuations, by which I presume you mean the boom bust cycle.
Electronic money is only feasible because it can base itself on the dollar, Mises’ regression theorem shows that any good that is used as a medium of exchange must have, at some time, had use value. This simply isn’t true and as such the idea of electronic currency replacing the dollar in untenable.
What are “several key price indicators”? That’s an entirely subjective question and the goods in question can only be arbitary. Besides that, a “basket of goods” attemtping to act as money goes against the entire function of money, which is to permit an extension of the division of labour by removing the restriction of a double coincidence of wants that was formerly imposed upon trade. The holder of two currencies that represent different baskets are in a state of barter vis - a - vis one another, not only that but any calculation in terms of these currencies, will not, and can not be entirely rational.
Now, you’re also not addressed how this currency would come about. A medium of exchange becomes a money because it is more highly saleable than the rest of its competitors, and yet, a basket of goods can never be more saleable that its competitors because one of its competitors will be the most saleable good in the basket.
As for stability of the accounting unit, why would gold not fulfil this purpose? It has been argued that in a gold standard we would see a falling price level, as long as this was foreseen be entrepreneurs there is nothing wrong with this.
Actually it’s highly likely, due to the necessity of renewing bank notes (e.g. B buys good from A, B gives banknote to A, B stops paying the money to the bank for storing the gold that he has paid to A, unless A immediately withdraws note from the bank, A will have to a premium) it is likely the most small transaction will be conducted in gold and individuals will constantly be withdrawing gold.
As for going bankrupt, this is not possible if the issuer of notes maintains a strict 100% reserve policy, so it is a seperate issue from that of whether or not it is feasible to have a gold standard, raising that issue only obfuscates the issue at hand.
And Hayek has been refuted by Hoppe, Rothbard, Mises and others. His suggestion doesn’t even conform to Mises’ regression theorem. In any case, what level is this and how do you measure it?
If the relative price of product A will be temporary higher it will cause too much production of it. Of course, it is not such a big problem as undercharged interest rate, but it is still a problem.
I wrote in that paragraph about alectronic money and banknotes based on gold.
That qustion becomes objective, when free maket (not you or me) will decide what is the answer.
The currencies will have their own commodity prices. As the price of any product, that commodity prices will depend on various other prices (sacondary. primary all prices of course are the functions of rarity).
There is no big difference between money and non-money. Protected banknote isn’t only a piece of paper. Such money can be similarly rare as gold.
That basket has mostly informational function. People will decide in short term what money are better according to the difference in their fluctuations. In long term, more global factors weill be decidive. And that will show what measure is better (among different baskets and models, including simple gold).
Why they will do it?
Gold coins will be imposiible to use in small transactions.
In big transactions we usually do not use cash. It is not only because of goverment restrictions, but also because of inconvenience and danger.
Every money except the cost of gold will have additional cost (in private coinage system). And that cost can fall off anyway.
Talking about FRB, in competitive currency system, it will be almost impossible. In monopoly gold standart system it requires additional decision of goverment. Another advantage of Hayeks proposal - it will kill FRB.
It is very hard question: what money are best? Stable in their quantity, or dependent on number of people and labour productivity. As I wrote before, market will decide.
Before it was very hard to measure the price of labour. So people didn’t use that in money supply. But may be the quantity of money have to correspond with it.?
What do you mean, “hence discoordination” I’m sorry to tell you but discoordination its everywhere in the market, the fundamental point of an economy is to bring about coordination, although, in reality that never happens. So to say that deflation is bad because it results in discoordination is silly, especially when the flexibility of prices is the result of the actions and preferences of individuals and nothing else. If relative prices are distorted astute entrepreneurs will correct this and be rewarded with profit.
It almost sounds as if you’re about to say we need inflation to deal with the issue of sticky wages, not suprising since FRB advocates often come across sounding like Keynesians.
And consumer preference will asset itself and those who produce too much will find themselves with surpluses, as a consequence they will be forced to cut back on production and most importantly lower prices. A sound, appreciating currency, is nothing negative, it fits Mises’ requirement of sound money as regards economic calculation. I don’t see what the issue is.
But in that case gold would be the medium of exchange, whether or not gold is traded in that form is not even relevant.
The free market does not decide anything, only individuals do, thus, since they have difference preferences, what bundle is optimum is an impossible question to answer. Unless of course, you adhere to some pre-subjectivist medievil notion of what value is, as most mainstream economists do in practise.
Yes, and the prices of those currencies against one another will resemble barter.
Then the basket won’t be money, and it will be outcompeted. If some individuals wish, for whatever foolish reason, to “measure” wealth with different baskets that fine. But unless then can meet the challenge posed by Mises’ regression theorem and fit their model into Carl Menger’s origin of money they will be wrong.
That’s the problem with Hayek’s proposal, it doesn’t fit the praxeological origins of money, nor can it fit in the regression theorem as described by Mises’, you haven’t met these challenges either, and until you (or others to whom I’ve issued this challenge) do, I’m going to continue thinking I’m correct.
Of course. The market will react. Some producers will suffer.
But today’s bust is also market reaction. To another discoordination.
Discoordinations aren’t so bad (they are good lessons), but if it is possible to reduce them (not causing them), we wish they will be smaller.
Al;l that paragraph was about: in the case of gold standart we will not use gold fisically, but mostly through banknotes and non-cash (even 100% reserved).
Any individual can’t change market alone. Using market, I meaned a number of indiduals.
Every producer does it every day! In competitive money system there will be number of currencies, everyone will choose better (stable). In one region may 2-3 currencies (or even more). And they will be close to each other.
Like there is not big difference betweem money and non-money, there is not also big difference between barter and non-barter.
The solution of this problem is easy enough. It was offered by Hayek in ‘Denatiolization of Money’.
As is known, the euro and dollar have for today recognised purchasing capacity. The emitter at first should guarantee an exchange of its currency for a quantity of dollars and (or) euro (the choice of several currencies will help him to get more customers). Thus the new currency will receive value from existing currencies.
Further it is possible to expect with a high probability falling of cost of the state currencies (euro and dollar). But our private emitter will be able to held value of the currency, not repeating errors of the Central Banks. It will not contradict to the regression theorem, for the same reason, as the cost of gold is higher as the cost which it would have if it would not be used as money.