From: cbbrowne@csi.uottawa.ca (Christopher Browne)
Subject: Re: Inflation
Organization: Dept. of Computer Science, University of Ottawa
Date: Sat, 23 Jan 93 18:35:07 GMT

In article <1993Jan23.170436.10269@athena.mit.edu> cmk@athena.mit.edu (Charles M Kozierok) writes:
>In article <2401@blue.cis.pitt.edu> wbdst+@pitt.edu (William B Dwinnell) writes:
>>
>>Two points:
>>
>>1. Curexxx "Curreny as currency" DOES indeed have value. The extremely
>>persistent myth that physical, tangible goods are the only things
>>which have the elusive (and quite nebulous) quality of "value" is
>>simply false.  It is true that money (currency), such as bills and 
>>coindxxx coins have little value if used for things other than
>>excvhxxx exchange (although they do have some value in this sense:
>>citizens of the Confederacy used to light fires with their paper
>>money!), but nothing has "value" outside of the contect ofxxxxxx
>>the context of a market.
>
>this makes no sense to me. why does currency have intrinsic value?
>all it is is a piece of paper. if it cannot be traded, then it is
>useless (except as kindling, as you mention). i think maybe the
>definition of "value" is the problem. when i say currency has no
>intrinsic value, i mean it is useless *other than* for being traded
>for something tangible. if you disagree, please explain why.

I think you're saying the same thing, but just missing one another
along the way.

The original assertion: "Only commodity based currencies have any
value is a common myth."

William said that this is a myth.  Fiat currencies may not have any
value outside of exchange (if they get expressed in material form,
that material could have some value), but when they are used, they DO
express value.

You said basically the same thing.

>as for "nothing has value outside of the context of a market" -- that
>is false. a pound of butter has a lot of value to me. so does your
>money -- as kindling, or insulation, etc.

Maybe he should have said something like "No currency has value as a
currency outside the context of a market."

Butter may be USEFUL, but does not have any particular economic value
outside the context of a market.

>>2. To some extent, interest rates drive inflation. Yes, money which
>>bears interest has some of that value eroded by inflation, but the fact
>>is that interest is part of what makes iunfxxx inflation happen.
>
>interest is simply rent for the use of a dollar. if that dollar
>will be worth 4 cents less a year from now, then i will include that
>amount in the rent i charge. you'll have to explain how it works the
>other way around. i don't see it.

Supposing the basic interest rate is 4%, and there is no other source
of inflation, then it would be rather difficult to have an inflation
rate of below 4%, expressed as follows:

If I have $100, and keep it in the form of currency for 1 year, then
at the end of that period I still have $100.

Unfortunately, that won't buy me as much as I'd have if I had lent out
the money at the interest rate of 4%.

Holding money costs 4%, and this will encourage the inflation rate to
grow toward 4%.

The presence of interest WILL result in some inflation.

Interest is a "monetary" influence in the economy, and there is no
contradiction in having it cause some inflation.

-- 
Christopher Browne                |     PGP 2.0 key available
cbbrowne@csi.uottawa.ca           |======================================
University of Ottawa              | Genius may have its limitations, but
Master of System Science Program  | stupidity is not thus handicapped.
Newsgroups: sci.econ