From: tcox@ssrl01.slac.stanford.edu (Tony Cox - (415)926-3105)
Subject: Re: gold standard
Organization: SSRL, Stanford Synchrotron Radiation Lab
Date: Mon, 5 Oct 1992 20:39:40 GMT

In article <1992Oct3.053705.19662@genie.slhs.udel.edu>, starr@genie.slhs.udel.edu (Tim Starr) writes:
> In article <1992Oct1.155550.1@ssrl01.slac.stanford.edu> tcox@ssrl01.slac.stanford.edu writes:
> }
> } {Rather large, I'm afraid}
> }
> } In article <1992Oct1.054648.29921@genie.slhs.udel.edu>, starr@genie.slhs.udel.edu (Tim Starr) writes:
> }> It seems that our disagreement with Tony Cox is one of structure, rather than
> }> content.  Us libertarians argue for free banking, and that the best base for
> }> currency is presently gold.  Cox argues for an ill-defined "independent"
> }> central bank, and fails to see the merits of the policy of such banks switching
> }> to the gold standard.
> }> 
> }
> }   Whoa! An Us vs. them debate, with me in a minority of one! I like
> }   this. Oh well, since you are paraphrasing my arguments, I'd better
> }   let you know that I too am a lib. party member. There is thus no need
> }   to argue your philosophical points with me, practicalities here are
> }   sufficient.
> 
> Well, that narrows the field some.  I'm a free banking proponent.  You?
> 

   Aha! A trick question! Trying to smoke me out as a closet statist,
   eh? I'll answer this question after your next comment.

> 
> }   I started into this thread stating my amusement, so I'm honour bound
> }   to start by explaining what I found so funny. It is just that many
> }   normally sensible libertarian-inclined posters have this stubborn
> }   attachment to gold as a currency standard, reminiscent of old time
> }   republicans and crusty old men who buttonhole you in coffee shops.
> }   They ignore in this the absolutely staggering changes within the world
> }   financial system which have occurred this century - even the shackled
> }   mixed-economy system has delivered! And this from people who should,
> }   if noone else, have had faith in the free market.
> 
> Understood, and agreed thus far.

   I'm not sure that you actually are getting my point, which is my
   fault because I should have brought it out more explicitly.

   Currency notes came about to answer the question posed by all
   sellers not involved in direct barter - "How do I know that you can
   pay me?"

   Carrying gold coin around makes the question unnecessary (like
   barter), but it is clearly much more convenient to carry notes -
   they are lighter, and can express multiples and fractions of the
   unit at hand.

   When currencies were backed by something concrete, these "notes"
   assured the seller that payment could be extracted, saying to the
   effect "Yup! Sure as eggs is eggs, the guy whats got this note has
   a bunch of gold stashed away somewhere and THIS is its claim
   ticket. Now you and I both know that this gold it too far away for
   you to pop over and have a look before you trade, but just look at
   me. See my flowing script and pretty colours? It would have cost
   this moron far more than I am worth to make me, so I must be
   genuine. And besides, its got a picture of some dead white guy with
   a beard on it, so whats the problem?"

   Now, today, there is ONE OVERRIDING DEVELOPMENT which makes the
   above "note talk" anachronistic, and to my mind rather blows the
   lid of traditional discussions of currency systems. That is, you
   can communicate with ease and very little cost over VAST distances.

   You can now accumulate gold, platinum, silver, real-estate, cars,
   stocks and shares etc. etc. AND PEOPLE CAN VERIFY THAT YOU POSSES
   THEM WITHOUT MAKING THE TREK OVER TO VIEW THEM WITH THEIR OWN EYES!

   This changes things to such an extent, that few people seem to have
   grasped the significance, those who yearn for the return to the
   gold standard being an obvious and rather topical case in point.

   Money was central to the economic system because it expressed a
   transportable "claim on some resource" - Gold being the resource
   for historical and practical reasons. As people just couldn't
   remember large number of different notes, we ended up with just one
   claimed resource, and one money system.

   There is no reason today for such a limitation, and so we are free
   to separate the "promise" from the "resource" as there are no
   practical reasons for linking the two together anymore.

   The point I am trying to get you to embrace is this: THERE IS NO
   REASON TO TREAT MONEY AS ANYTHING OTHER THAN ANOTHER TRADABLE
   COMMODITY. 

   In fact, we appear to be on an historical tract which will factor
   money out of the equation altogether. EXCEPT for reasons that I'll
   trace in a minute.

   So, do I believe in "free banking"? Well, I DO believe that anyone
   should be able issue claims on a resource, real or imaginary,
   without any state interference save only in so far as to uphold the
   contract between buyer and seller.

   To an extent, that happens right now! Companies issue stock
   certificates, Cities issue utility bonds, people issue personal
   cheques.  These are instruments based upon a promise, just
   like MONEY BASED ON THE GOLD STANDARD, just like TODAYS MONEY.
   As I have pointed out before, a promise is just a promise.


> 
> }   The impediments to this scenario are the usual governmental
> }   impediments which libertarians are keen to overthrow - capital gains
> }   tax affecting the transfer into and out of gold, currency export
> }   controls, and 'managed trade'. With these out of the way, you DO NOT
> }   NEED a currency based on gold; you just buy gold. The free market has
> }   made buying gold simple - just pick up the phone.
> 
> Accepting this, as I do, the question then becomes: will this be practiced?
> I think so, in which case there would be a gold standard, de facto.
> 

   "Will this be practiced?" 
   My argument doesn't depend on the answer to this question at all.
   Indeed, if you are confident that your contempt for the todays
   money is shared, the gold standard would be the result. I, on the
   other hand, would rather let the market decide.

> }   So why base the currency on Gold? Pure whim! There is NO difference
> }   in the final analysis.
> 

   (You removed the part about currency on the Gold standard being
   merely a PROMISE to give gold in exchange, just as todays money is
   merely a PROMISE to use it to settle government debt. There is no
   difference because both are based upon promises.)

> No.  As others have pointed out before, gold has advantages over other
> commodities.  Unlike silver, it doesn't tarnish.  Unlike apples, it doesn't
> grow on trees (the point being that its supply is highly stable).  And unlike
> platinum, it has a highly successful history of serving as money.

   You are off on a tangent here. I could have said "So why base your
   currency on a commodity". You are so keen on Gold that I used that
   as an example. 

> 
> }   Now, as there is no difference (are you still with me Tim?), we are
> }   free to discuss what agreeable properties we would like from our
> }   money, and then go on to discuss how to implement them.
> }
> }   Since the 'store of value' argument has come out in the wash, lets
> }   approach the solution from the medium of exchange point of view.
> }   Several people have pointed out that a money unit based upon "a
> }   basket of commodities" makes sense. This is proposed to compensate
> }   for the volatility of individual commodities (of which gold has been
> }   one, btw). The desire is for the money unit to be somehow
> }   resilient in value, and what better unit to tie it to that the
> }   overall size of the economy!
> 
> Actually, my layman's opinion is that the commodity basket standard will at
> best take quite some time to evolve, as it's a much more difficult concept
> for people to accept.

   More difficult than for people to understand the current system? Oh
   come on. (I'm not agreeing with your premise of the basket of
   commodities, BTW). Let me see now, "Well its like this. I give you
   this piece of paper, see? You can use it to settle your tax account
   with me. You may find that other people need to settle their tax
   accounts with me, and you can swap it with them for things you
   might need, say beer.".  "Beer? How did you guess?? I'll take it!"

   And yet, money still has value...


> 
> }   Now we come to my so called "Ill-defined independent central bank".
> }   The only 'ill-defined' part about it is the human input. Who decides
> }   how the economy is doing, and based upon what? Who polices its role
> }   to insure against fraud?
> 
> Not quite.  Please define independence.  My position is that without
> separation of Banking and State, there is no such thing as an absolutely
> independent bank, only relative degrees of freedom.


   Ok, time to fluff things out a bit more here, and remove the
   ill-defined bits. I need to digress first.

   In the 'free banking' system which I envision (and probably you,
   Tim, also), there are many different "Currencies" floating around.
   There are ones based upon gold, ones based upon silver, ones which
   entitle the holder to enter movie theaters - and probably ones
   which allow you have sex with Madonna.

   We do now, and we will under Libertaria, have a government. This
   government requires financing. Unlike any private party, WE ARE
   REQUIRED TO TRADE WITH THE GOVERNMENT. Private parties may decide
   that they will only trade for gold money (I'd probably only accept
   the Madonna script), but everyone must trade with the government
   and so we have a slight problem.

   How does the government collect taxes, our required trade? (Dont
   broaden the argument into the morality of this, just accept it
   without moral judgement for this discussion). It can either select
   one particular currency to use, favouring it over all others, or it
   can act as a currency exchange broker (For this round of taxes, 1
   gold $ = 10 silver $'s = 100 chicken $'s = 1/100 Madonna $'s).

   I for one, would not like the government to get into the currency
   exchange business, so it must pick a particular currency unit.
   But which one to use? Well, that movie theater may burn down, gold
   may be discovered to cause cancer, and heck - we might find out
   that Madonna has AIDS. Besides, picking a particular currency to
   use gives an unfair advantage to the holders of the 'resource' upon
   which it is based. Madonna could probably settle her tax bill in five
   minutes.

   Unfair advantage to all EXCEPT one EXTRA SPECIAL currency. That
   currency is based upon the actual size of the economy. This
   currency is special because it is not tied to a particular
   commodity - it is tied to an ensemble average of all commodities
   and services within the country (the GNP if you like). As such, it
   has the very agreeable property of being INDEPENDENT OF ANY
   COMMODITY OR SERVICE. You cannot influence the 'value' of such
   currency by buying or selling the commodity upon which it is based
   - you would only be doing so by selling or buying (respectively)
   some other commodity which factors into the index - a zero sum
   game.

   The government, as now, REQUIRES payment in this script which, as
   now, provides the basis for its value.

   Unlike now, however, the quantity of the script in circulation is
   INDEPENDENT OF GOVERNMENT ACTION. That avoids all the problems of
   politicians fiddling with the money supply.

   The quantity of money in circulation is dependent upon the size of
   the economy. Some acceptable method for assessing the quantity of
   money around, and the size of the economy must be determined. You
   then publish these methods so that ALL KNOW ON WHAT BASIS THE
   SCRIPT WILL BE ISSUED.

   The state is required only to ensure compliance with this contact.

   If the algorithms used to control issuing of the currency are in
   error, then the effect will be that people will start 'playing the
   speculator', and a retreat to a currency with a more robust
   algorithm will occur. That brings me to this...

> 
> }   Well, there is a well known Libertarian answer to that one - let the
> }   market decide. The market has decided, even in this distorted,
> }   imperfect world. The Mark does better than the Franc, the Pound and
> }   the Dollar. The greater the independence, the more confident the
> }   market, and the more resilient the value.
> 
> For international trade, yes.  But Germany recently inflated about 4% when
> it absorbed the former DDR, thereby robbing most West Germans.  For domestic
> policy, it's still fiat currency, and will be until we have free banking.
> 
   ... which has no restriction to international trade for it to remain
   valid.

> }   EVEN if all major currencies were back on the Gold standard, their
> }   values would change depending on the political wind blowing in the
> }   respective countries. If you can go on the gold standard again, you
> }   can certainly go off it. Any politician who mentioned a retreat from
> }   the gold standard  would cause a distortion in the currency
> }   value. This is why independence is so vital. Gold is again NOT
> }   SPECIAL.
> 
> Partly true, partly false.  It's much harder to inflate if gold coins are
> used as money, n'est-ce pas?  It's much easier to do so if banking is
> coercively monopolized, even if a policy of minimal inflation a la commodity-
> basket monetarism is practiced.  It's a lot harder to confiscate gold as did
> Roosevelt Minor than to perform a takeover of the Fed, the Bundesbank, etc.

   ... and harder still if my currency is used.

> 
> }> We argue for separation of finance and state (well, existence and state, but
> }> that's another case).  No bank is truly independent if coercively monopolized
> }> by the State.  It's correct to observe that coercively monopolized currencies
> }> which the State hasn't done much with are relatively stable, but as long as
> }> the State plays a role, the potential for such meddling remains.
> }
> }   Who said anything about a monopoly? Even in the current system, you
> }   can use Pounds, Marks, Dollars etc.
> 
> Bullshit.  I can't buy groceries with anything but FRNs at my local grocery
> store.  You keep omitting domestic trade!
> 

   Then change your grocer. I got a haircut last week in exchange for
   20,000 Indonesian Rupia (the barber's wife collects banknotes).

   Nothing I have said makes any distinction between domestic or
   international trade.


> }   If the State DOESN"T play a role, there is still scope for meddling, so
> }   what is your point? Fraud is a well know technique of enrichment.
> 
> Inflation is a form of fraud, and one of the worst.  Free banking could
> easily be protected against fraud, by competition, the best form of regulation.
> Suppose bank A inflates a bit.  Banks B, C, D, E, etc., are going to decrease
> their exchange rates with A, customers will flock away from A, and A will go
> out of business until it reverses its inflationary practice.
> 
> We're sort of seeing this now, but ONLY on the international level.  Domestic
> banking remains monopolized, at least until the International Bankers
> Conspiracy comes to fruition :-)...
> 
> }   The key to stability is competition, which is why free trade in
> }   currency is so important.
> 
> Exactly my point!  We need to remove barriers to competitive entry in domestic
> banking.
> 
> }
> }   Inflation is an irritating feature of money I'll agree, but hardly a
> }   show stopper. It leads to interest bearing cheque accounts (etc.
> }   etc.), but apart from the tax consequences of artificially inflating
> }   asset values, it is harmless. As long as the RATE can be predicted
> }   (well, as long as Inflation = fn(time) can be predicted), its NO BIG
> }   DEAL.
> 
> Pfaw!  Economists have how good a record of predicting the inflation rate?
> This is a absurd assumption.  First of all, there's no way to determine
> quantitatively how much, e.g., the Consumer Price Index, will be raised by
> increasing the money supply by 5 trillion FRNS, or any other amount.  All
> economics can do is predict qualitatively that nominal prices will rise.

   Well, I wouldn't claim that all the factors influencing the
   inflation rate can be quantified or predicted - clearly one facit
   of this is mass psychology. I can no more predict how people will
   feel about the utility of money than I can how they will react to a
   new kind of shoe. However, if these factors are taken as a
   constant, you know pretty well how the system will respond to an
   increase in money - if you add 10% to the money supply, prices will
   increase by 10% if the economy is the same size.

> 
> Secondly, inflation doesn't hit everyone the same way.  It has a ripple
> effect.  Think of it as a stone dropped in a still pool of water.  Those
> closest to the middle get wealth transfered from those furthest away from it.
> 

   Why should I try to visualize your ZEN inflation? There is no need
   to make a mystery out of what is a very simple and obvious
   situation.

   Inflation hits those who hold currency. Inflation helps those who
   owe others currency. (Modify this by interest contracts as you
   will). As such, inflation of currency is no different in any way
   from your devaluing IBM stocks. (Modify that by capital gains tax
   arguments as you will).

> Third, the rate remains at the mercy of any gang that can take over the
> bank monopoly (if it's "central", it's a monopoly, at least domestically,
> and there's nothing in principle that would preclude statists from global
> banking monopoly or oligopoly - in fact, there's a good case to be made that
> what we have now is an international banking cartel) to raise or lower to
> its own delight.  This has happened PLENTY in the past.  It's probably the
> highest risk of statism.
> 

   That is why it is important to publish the algorithms used to
   determine money supply, and to stick with them over an extended
   time period.

> }   You have made no convincing argument for a return to the gold
> }   standard that I can see, I'm afraid. In fact, I would go as far as to
> }   say that a return to the gold standard is CONTRARY to libertarian
> }   principles. So I have a few questions on your proposal...
> 
> Seems to me that our disagreement is based upon methodology.  I'm much more
> of follower of the Austrian school than you seem to be.  You seem more
> positivist.

   Well, I'm a physicist and I went to an English school. I have been
   called a Utilitarian, but that was used as an insult as well.

> 
> } 1) Why pick on Gold as having a special place in the system? My
> } attraction to libertarianism has always been based upon its even handed
> } approach to human relationships. Why give owners of Gold an advantage
> } in the market place? On the gold standard, owners of Gold (or gold
> } miners) have a GUARANTEED price for their product. Why should they have
> } advantages over (say) Milk producers? Why not a guaranteed price for
> } milk?
> 
> There has to be money, ergo something has to be the standard.  Even if
> it were a basket of commodities, you'd be guaranteeing the owners of either
> identical baskets or its constituent commodities the same sort of market
> for their possession.

   Aha! Got you. The better way is explained above! It is within your
   grasp now...

> 
> } 2) Suppose that someone comes up with a cheap way of extracting gold
> } (Oh Rubbish! says an earlier post). Well, suppose that Rumours start
> } that someone is experimenting with such a process (shades of cold
> } fusion, if you will). Energy stocks gyrated after cold fusion hit the
> } world. Why make your currency system fluctuate with peoples fears in
> } such a limited way. Surely you should base your currency on as large a
> } 'value sink' as possible?
> 
> Suppose we look at the facts.  Gold mostly comes from supernovae, a rather
> infrequent occurence.  We can either discover such gold, or synthesize it
> ourselves by a process which is presently more expensive than mining it.

   "Presently" doesn't cut it. The market will start to 'discount' the
   possibility of it occurring in the future as soon as you establish
   such a system.

> 
> } 3) Who decides how much gold to store, and how much currency to issue?
> } Will anyone who brings gold to the bank be able to exchange it for
> } currency? If not, why not? If so, and '2)' ever occurs, how do you stop
> } a massive expansion of the money supply.
> 
> Who decides it now?  The international banking cartel, with some competitive
> and political forces setting the reserve rates.  Free banking would probably
> have very high reserve rates, approximating 100%.

   We aren't on the gold standard now.

> 
> I don't understand your second question.  The problem with fiat currency is
> that it distorts pricing.  If there actually is more money, then this doesn't
> happen.

   I wont try to express in detail what I meant here. Most of these
   points were designed to show that a currency based upon gold has as
   much volatility as gold.

> 
> } 4) A process to generate cheap gold would be a license to print money.
> } The rewards would be so substantial that it would create an artificial
> } impetus to design such a process - the philosophers stone of the 21st
> } century. Why should libertarians tolerate such a market distortion?
> 
> See above.  If you actually produce more goods, then that isn't inflation,
> even if the commodity produced is the money standard.  Your basket solution
> doesn't eliminate this, it merely diversifies the product.

   Who's basket solution?
   Again, I think that you are within sight of the answer here. 
   Diversifies the product, yes,... and what could be more diverse than...,
   go on....

> 
> } 5) Suppose that a new industrial process comes along which uses large
> } quantities of gold. The owners of the factories come to you with
> } fistfuls of dollars to retrieve their gold (it is a very profitable
> } and useful process). Do you keep exchanging gold until it is all gone
> } and there is no money in circulation? Who makes that decision? 
> 
> Yah, according to contract between bank and depositor, the parties to the
> decision-making.  In this case, the standard would probably switch to whatever
> it is that the process results in.

   So you aren't on a gold standard for all eternity then? Only for as long as
   it is convenient eh?

> 
> } In short, you can corner the market in a commodity, or in trying to do so,
> } drive the price up to unnatural levels (re: Hunt brothers). Money tied
> } to this is susceptible to such machinations.
> } You just cannot do this if your money is tied to the size of the
> } economy - it is a zero-sum game.
> 
> I'd interpret the Hunts as an instance of why cornering the market in a
> good is a bad strategy.  They drove up the price of silver to high that it
> literally started coming out of the woodwork.  People melted down jewlery,
> silverware, etc., to sell it.  They made a profit at the Hunts' expense,
> since the Hunts' attempt failed, thus depriving them of the benefit they
> bargained for.
> 

   Indeed. I wasn't pointing out the Hunts as examples of what is sensible -
   just as an example of what is possible and what the consequences are!


> } Does this pass your Economic Literacy test, Tim?
> }
> 
> Pass, yes.  But not with flying colors :-).
> 

   Hell. I need at least an A+!


Tony Cox, Stanford, CA
 "This is nonsense that could only come from someone who's illiterate about
  the theory of money." - Tim Starr