Thanks to the eagle-eyed Samizdata commentariat (Ian B), I read this article by Dominic Lawson, son of the former Chancellor of the Exchequer, Nigel Lawson. Lawson Jnr argues that the much-mocked notion of gold-backed currencies, which finally fell out of favour in the early 1970s during the Presidency of that economic ignoramus, Richard Nixon, is due for a comeback. He gives a rather quaint example of what is happening in Lewes, Sussex.
As an admirer of the writings of the Austrian economics school, I have a great deal of sympathy with this argument, although I do not think that gold per se needs to be the anchor of a currency. Given the vast gyrations in the price of gold in recent years, I do not see it as a very practical option for many, if not some, countries. What I do think, however, is that the idea that we can go on regarding money as a sort of metaphysical abstraction to be manipulated at will by Godlike central bankers needs serious reappraisal.
But remember that in times of massive stress – and inflation – gold, like silver and other relatively scarce substances of universally-recognised value, can win new friends. I will be keeping an eye out for stories of such “parallel currencies” in the next few weeks and months. If readers have examples, let me know. Surely this is an area for an enterprising economics PhD student to work on. Why not?
In the meantime, I see that Gordon Brown is now regarded as “statesmanlike” by spending gigantic sums of other folks’ money. I’d be more impressed if he came out and urged a big reduction in UK public spending. He’s also probably got some beachfront property in Arizona he wants to sell………..
Good point that it doesn’t have to be gold. I wouldn’t mind having a collection of commodity based moneys to choose from.
The argument about the value of gold fluctuating, however, does not strike me as particularly important. Much of the apparent “fluctuation” of the value of gold is actually a matter of gold staying in one place and the dollar bobbing up and down.
In the Roman Empire, you could walk into a tailor, give him a one ounce gold coin, and he would give you a fine toga, a leather belt, and a nice pair of sandles.
Today, if you sell a one ounce gold coin for about $900, you can walk into any tailor, and get a fine suit, a leather belt, and a nice pair of shoes.
Considering that the dollar has lost 96% of it’s value since 1912, I would say that’s a pretty good record.
Indeed, I do know of someone who is hoping to do a PhD on just this idea of complementary currencies. And here in Oxford the idea of a local currrency has been discussed again. It would probably not look much like money – probably more like a corporate loyalty card scheme (which are after all just complementary currencies, though in tiny denominations).
I saw a talk by John Nash yesterday, and he endorsed currency fixed to a basket of commodities. He also suggested that countries that manage their currencies well could see their currencies used more often, in a valuable form of competition. Good money drives out bad, as it were.
The price of gold fluctuates because its value as money fluctuates – at certain times it becomes more necessary, at other times less. This is because it is only used now as a store of value, and not a unit of exchange. But if it were also used as a unit of exchange, demand for gold would skyrocket, but once everyone had all of their money in gold, its price would be held stable by the vast reserves of gold that are not traded. The fluctuations with respect to the price of consumer goods (which is the problem now with using gold as your main unit of money) would be much less were everyone (or even a lot of people – say, some large economy, but even a small one would make the price of gold more stable than it is now) on a gold standard.
Having just done that thing of going to bed too early, lying there with brain a-buzz, and having to get up again, to find the thrill of a mention on samizdata’s front page, permit me to weary myself by waffling awhile. By the way, if the writers for samzidata are samizdatistas, what are we hoi polloi? The samizdateriat? 🙂
It seems to me that you don’t need to fix currency to anything, be it a commodity or a basket thereof. I’m partiuclarly concerned at the idea of baskets of things, because then somebody gets to choose and fiddle with what’s in the basket- as with the measure of price level we erroneously use to measure inflation. The thing is, as Rothbard pointed out, there is no “right amount of currency” in the economy because, as Ian B pointed out (in this very sentence) currency is a dimensionless unit. You can’t write a formula for what the money supply should be, since being dimensionless it can’t be expressed in other quantities. All that matters is that it be sufficiently granular; you could have only one pound in the economy, so long as you issued plenty of trillionth-of-a-pound tokens.
What does matter of course is changes in the number of currency units available. Rothbard again argues against there being any meaninfgful way to calculate what changes there should be in the money supply, dismissing arguments that it should change in proportion to production, or population, etc, as some suggest. I’m rather taken by this argument, even though I’m not Rothbardian in all things. In particular, if we require the money supply to grow in proportion to production, we need some objective measure of production. Since we can only practicably measure production in terms of value, which is itself measured in currency units, we’re completely stuck in circularity.
The thing about gold, is that the quantity of it varies. The gold supply gradually expands. It would be a remarkable coincidence indeed if the quantity of this rare metal mined just happened to be perfectly matching the required increase in the money supply, whatever that increase may be (which we’ve already ascertained we cannot meaningfully calculate).
I think it was Rothbard again who argued that the mistake in the 1920s was the Fed’s attempt to hold prices stable when increased production efficiency in the American economy meant that in real terms prices should have been falling- products were getting actually cheaper to produce (i.e. consuming less resources and labour in their manufacture etc) so holding prices stable could only be done by inflation. It seems to me that this should apply in general. Actual prices should in general fall with time as our society becomes more productive. There’s no reason I can see to hold them stable at all. A 2008 pound should buy more bread than a 1988 (or 1928) pound, or at least better quality bread. A pound should accrue value simply sitting in a biscuit tin on the mantlepiece.
So I think the argument against letting that happen is that if people could just get rich by doing nothing, they’d have no incentive to lend their money to other people. Interest rates would go negative, and all kinds of disasters would happen, like there’d be no credit. I could leave all that money I owe Visacard until it was worth less than a jaffa cake, then pay it back, instead of paying it all back now.
I don’t know what the answer to that is. But I’m sure we’d think of something. We’re quite clever, as a species.
So personally I’m kind of currently in favour of government issued fiat
*Ian B ducks to avoid bricks hurled by angry libertarians*
with the proviso that it be government issued, not bank issued, and not debt backed. If we want it to expand with time to avoid me cheating my credit card debt, we could set a constitutional expansion ratio which is permanently fixed- say, 1% per year. The new money could be easily spent into the economy by the government buying bombs and stationery and stuff like that. And we could get rid of central banks, and never owe them a penny in debt, compared to the current absurd situation wereby we’re all forever in debt to Mervyn King just for the privelege of having coinage. Which is monstrous.
But none of that is going to happen of course. Keynes roolz ok again, for the foreseeable. Boy, are we in the brown stuff.
Still not tired enough. I think I’ll pop out and break some more windows, public spirited citizen that I am.
Here’s another idea. The Greens have a great advantage in just having a colour that says it all. Why don’t libertarians call themselves The Golds? Gold is even more attractive than green, and tells others our preferred monetary arrangement in one colour! Red (communists), Green, Blue (conservatives), brown (fascists) and black (anarchists) are already taken, so let’s politicise Gold!
The major reason gold has gained its reputation for holding value is that throughout history the increase in gold supplies has been ROUGHLY equal to the rate of the growth of economies – and increasing money supply at the rate of economic growth by definition means no inflation. That this will hold true in the future is not certain, but is probably much more likely than hoping for governments’ adhering to sound monetary policy – the temptation to levy “inflation tax” is too great for most politicians because of inflation’s low visibility. Joe Taxpayer does not have to write a check for inflation tax, and does not see a deduction from his paycheck for it. And since said Joe is not very economically literate, it is easy to BS him into believing that the reason he is paying higher prices or was fired are evil speculators, evil foreigners manipulating their currencies, evil cartels colluding, etc.
The important points to keep in mind, IMHO:
(1) You can achieve an outcome analogous to (or better than) a commodity-based currency if you mandate supply of money equal to rate of GDP growth (some minor discrepancy because of lags in GDP data gathering is inevitable, but not very significant).
(2) Politically, as long as the US dollar is RELATIVELY stable, it will continue to trump gold as the world’s choice of currency for storing value. The development which I can foresee as toppling that house of cards would be the blowout of the US Social Security/Medicare system in about 20 years or so. The US government will have the choices of either making those MANY retirees work much longer, or cutting benefits, or jacking up taxes and borrowing, or some combination of those. Being politicians, I expect them to opt for trying to inflate their way out of the problem (what politician would touch that third rail of pissing off senior citizens for generations to come?), leading to the dollar falling out of favor for good. Then “prudent currencies” (those with some reasonable safeguards against inflation – be it commodity backing, or something else) will stand a true chance.
(3) One of the more sophisticated arguments against a commodity-backed currency you may hear is that while fiat currencies tend to be (hyper)inflationary, commodity-backed ones tend to be deflationary. There are many ways to deflate (pun intended) that argument. For one, there has never been hyperdeflation. Also, while inflation tends to encourage consumption, it tends to discourage saving. Moderate (no other has been known) deflation discourages consumption, but tends to encourage saving, and also to channel savings more efficiently into investment (higher required rates of return disqualify some marginal investment projects from investment) – which is arguably better in the long run.
All in all, I’d love to see morons like Greenspan and Bernanke stripped of their ability to micromanage the economy, but I do not see it happening any time soon enough to be worth discussing in earnest.
Best regards!
I have to add, I am impressed by Ian B’s conclusions, especially if this prominent fellow Samizadatista has no formal training in economics. But the “credit will dry out” fallacy is just that – a fallacy. If holding on to your cash gives you 1% real return, and an investment gives you more than 1%, you’s still loan out/invest. Under inflation, if holding on to your money gives you -1% return, you’d invest in a project with a real rate of return of zero. Hence my argument that marginal investment projects may get defunded, but the worthy ones will still get all the funding they need, and actually probably more funding, since there will be more “idle” money lying around.
Cheers, Ian!
Kitco.
Holding accounts in several physical metal commodities that play off each other, damping any long term manipulation of “markets”. Transferable between account holders by wire.
An understanding of failure to pay a debit of “credit” to be paid in predetermined pounds of flesh, closest to the heart, would quell the attraction toward “illusionary” growth markets, and “defaulted borrowing”.
Subsequent reductions in population growth would negate the delusional “need” for constant “growth”
(inflation).
Bartering the fruits of ones labors, as always, makes for a nice little “local” currency. If one has nothing to offer-like integrity-they starve.
The savings in “education” vs. apprenticeship would be realized immediately, as would the savings in “welfare” vs. charity.
Ahhh…for the good old days, when professional money lenders were considered to be of the maggot caste.
It fell out of favor during the rule of that clever fellow LBJ,nixon just made it official…
I paid attenion during that time period, germany gpromised it would no longer trade its wonderful excess (by trade) green chits for gold in 1967
look it up..
germany preferred vw jobs ..
UNC Press – Gold, Dollars, and Power, 1796-1873: The Politics of …The West German government had even taken the extraordinary step, in 1967, of publicly agreeing never to purchase gold from the U.S. Treasury in order
“Ahhh…for the good old days, when professional money lenders were considered to be of the maggot caste. “
A level of idiocy I’m surprised to see on this site. “Renting” someone your excess cash is no different than renting him a house or a tractor.
On privately-issued commodity-based competitive currencies: see F. A. Hayek — “Denationalisation of Money” (1976)
Ian B. — “It seems to me that you don’t need to fix currency to anything, be it a commodity or a basket thereof. I’m partiuclarly concerned at the idea of baskets of things, because then somebody gets to choose and fiddle with what’s in the basket- as with the measure of price level we erroneously use to measure inflation. The thing is, as Rothbard pointed out, there is no ‘right amount of currency’ in the economy because, as Ian B pointed out (in this very sentence) currency is a dimensionless unit. You can’t write a formula for what the money supply should be, since being dimensionless it can’t be expressed in other quantities. All that matters is that it be sufficiently granular; you could have only one pound in the economy, so long as you issued plenty of trillionth-of-a-pound tokens.”
It very much looks to me as if this conflates two completely different things: 1) whether money should bear a relationship to value, and 2) what that relationship is (i.e.: the proportion of value to money).
The first point above naturally occurs to me on reading the first clause of Ian’s very first sentence above, and then I fail to find the prospect of fraud sufficient economic rationale for disconnecting money from value. (Presumably, Ian’s “anything” would subsume this.) Constitutional skeptics may be excepted from understanding that some would actually make an honorable living at measuring value in a commodity-based currency, but even that has no bearing on a “need to fix currency to anything”. It’s a wholly different subject.
The point about “granular[ity]” is correct. Many times, I have seen people argue against commodity-based currencies, and most often gold, with the sort-of-idea that there isn’t enough gold. It can be very difficult to get them to grasp the idea that prices are not values, but only information about values, and that the information would naturally scale.
I’m sure many on this site have read Heinlein’s The Moom is a Harsh Mistress. In it the Bank of Hong Kong in Luna issued HKL dollars (not government issued) redeemable for a certain amount of gold, steel of a certain grade, potable water, et cetera.
‘I saw a talk by John Nash yesterday, ”
Is there a link to this somewhere?
‘I saw a talk by John Nash yesterday, ”
Is there a link to this somewhere?
Forgive me if this is unclear: my entire formal education in economics consisted of of loving TMiaHM, flinging Atlas Shrugged across the room as being unreadable, and multiple re-readings of my friend Paul Marks’ posts here.
Let’s say that a Quatloo is worth .01 Troy ounces of pure gold, or 1 pound of 4140 chromoly steel, or 5 US gallons of distilled water. That requires that .01 ounces of gold be worth 5 US gallons of water. Which is great up until the value of one of the backing commodities shifts in relation to the others. Say, nobody wants jewelry but everybody is buying guns, which means that the relative value of gold falls and the relative value of the steel rises.
Where this can get downright silly: I went to Costco last week and spent about 200 bucks: fifty pounds of flour, 25 pounds of white sugar, so many pounds of beef, chicken, cheddar, brie, lemons, limes, three flats of canned vegetables, a case of V-8, a sack of dry dog food, etc. So then we define a dollar as being 1/200 of my shopping cart. For that particular exchange at that exact instant in time, it’s a reasonable definition. Money is IMHO best measured by what it will buy in the real world, and the checkout lane at a grocery store is fairly real.
Now let’s say I want to go to the bank and redeem these crisp monotone pictures of Andrew Jackson for whatever the backing commodities are: each such picture being 1/10 of the shopping cart.
Is the bank teller then to hand me five pounds of flour, 40 ounces of sugar, 2.4 cans of tomato juice, etc?
Yo, Sunfish: I don’t know how to tell you this, but banking is different from barter.
Jeezis.
“Given the vast gyrations in the price of gold in recent years, I do not see it as a very practical option for many, if not some, countries”
Wow. Like this doesn’t have anything to do with the floodgates that are Central Banks’ printing presses, being flung wide open?
Billy,
You’re talking to a corrupt guy who couldn’t hold on to his lunch money as a kid or qualify for a real job and has to pencilwhip traffic tickets and beat minorities with sticks instead.
You’re going to have to explain how banking (assuming non-fiat money) is different from what I described.
Sunfish
In theory you are correct. However, the example you have given makes it all seem a little daft! That’s why historically people have tended to use gold/silver/copper/shells/grain etc instead of your shopping list.
As we are talking about fully backed money, the bank would need some way of paying out the specified commodity, whether that is gold in the vault or some kind of contract with the local grain merchant.
Money backed by baskets of goods would tend to be more complicated than using just a single commodity as lots of different things would need to be held in the vault or the bank would need many different contracts.
However, being paid in money backed by the things on your shopping list would provide some protection from your cost of living rising faster than your wages (you are essentially locking into the cost of your shopping when you agree to being paid in this type of money).
Hope this helps!
Sunfish
In theory you are correct. However, the example you have given makes it all seem a little daft! That’s why historically people have tended to use gold/silver/copper/shells/grain etc instead of your shopping list.
As we are talking about fully backed money, the bank would need some way of paying out the specified commodity, whether that is gold in the vault or some kind of contract with the local grain merchant.
Money backed by baskets of goods would tend to be more complicated than using just a single commodity as lots of different things would need to be held in the vault or the bank would need many different contracts.
However, being paid in money backed by the things on your shopping list would provide some protection from your cost of living rising faster than your wages (you are essentially locking into the cost of your shopping when you agree to being paid in this type of money).
Hope this helps!
My comment has never turned up here.
This is a pity as, although it was bad tempered and written in very harsh language, it was also entirely true.
For example, people who talk of money being “based on” gold (or anything else) are, whether they know it or not, useing vomit language.
“based on”, “standard” and so on do not prevent any of the main problems with the financial system (they just cover them up from the ordinary person).
As even Paul Johnson in “Modern Times” noted, such things are not really “laissez faire” they are “not in front of the children” statism.
By the way (to repeat one of the other points I made) how rich a “country” is has nothing to do with what people choose to make contracts in – i.e. for what they use as money.
In short:
Please do not talk of money being “gold BACKED” – either the gold is the money or it is not.
I hope that is polite enough.
Index or “basket” money.
Will not work – on this F.A. Hayek does not rule O.K.
AURUM – The new worldwide gold based monetary system.
It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning.
(Henry Ford, motorcar producer)
As everybody knows, wealth can only be produced from work. In times of unemployment work is lost and poverty is the result.
Our present monetary systems cannot lower government debt without creating high unemployment. This is because the means of exchange (money) is not similar to what it has to exchange (work and produce). Work or produce is lost when it is not used. Money is not. Therefore a new type of money with the possibility of bearing both positive and negative interest rates cannot be avoided if the problems of high unemployment and high government debt are to be solved. This new money is the Aurum. It’s value is to be kept at a twenty years simple moving average (SMA) of the price of 0.1 gram (100 mg) of gold.
Every country can introduce the Aurum without any international agreements, but it would help if all countries would use the same basis. Therefore a blue print on http://www.digigeld.webklik.nl