From: tcox@ssrl01.slac.stanford.edu (Tony Cox - (415)926-3105)
Subject: Re: Currency systems
Organization: SSRL, Stanford Synchrotron Radiation Lab
Date: Wed, 30 Sep 1992 18:33:24 GMT

   In article <1992Sep30.035212.2889@genie.slhs.udel.edu>,
   starr@genie.slhs.udel.edu (Tim Starr) writes:
> In article <1992Sep28.131532.1@ssrl01.slac.stanford.edu> tcox@ssrl01.slac.stanford.edu writes:
> }Ah! At last some common sense in this discussion! Thanks Russ.
> 
> Common, yes, but perhaps not so sensible.
> 
> }Basing one's currency system upon precious metals or other commodities is
> }clearly only required if no one has any confidence in those silly bits of paper
> }that circulate around. If I tried to issue my own TonyDollars, sound
> }investors would like them backed by something more substantial than my
> }good word on repayment - my house or car for example.
> 
> That wouldn't be your primary problem.  Getting busted under legal tender laws
> would.

   Well, suppose I wrote you an IOU which said something like "I promise to
   pay Tim Starr, on demand, the sum of one dollar". I am not aware of any
   law I would be breaking. I would be quite keen to issue you several hundred
   in exchange for valuable consideration. Care to take me up on this?

> 
> }Thus, the Dollar, the Pound, etc. etc. have taken on inherent worth of their
> }own, and DO NOT NEED to relate to anything in the real world to have value.
> 
> This is nonsense that could only come from someone who's illiterate about the
> theory of money.

   Lets hope this discussion doesn't degenerate into name calling, as I find
   the quality of debate on a.i to be generally very high. However, I am
   prepared for you to 'literate' me if you can.

   Perhaps I should have said "DO NOT NEED to relate to anything
   _tangible_ in the real world". Do you have any problem with that
   analysis? We all know that the major currencies are no longer backed
   by gold, so exactly WHAT tangible asset does your dollar bill, or
   pound sterling entitle you to?

   As far as I can see, the note only entitles you to retrieve more of
   the same from the government. The pound stirling bears the legend "I
   promise to pay the bearer on demand the sum of one pound". Your
   dollar bill can also be used to settle your account with the various
   US governmental agencies ("This note is legal tender for all debts,
   public and private"). As you cannot force any private party to trade
   with you, the "private" part is rather moot - a private party takes
   dollars only if they are confident that they have some transferable
   net worth, basically, that they can eventually use them to settle
   their debt with the government, or trade them with someone who needs
   to settle such a debt.

   My point is that the value of money today is based entirely on the
   CONFIDENCE of the various parties concerned. There is no legal
   impediment to the Federal government announcing that in future they
   would only take payment in "BonerBills" (although this would require
   a constitutional amendment). What would you do with your $$$'s in
   that instance?

   The 'value' that the dollar has on world markets factors many market
   guesses, including the confidence that the government will not do such
   a thing, and that the government will not crank up the printing presses
   and shower all and sundry with more such notes as you have in your wallet.

   This is why the Brazilian currency is devaluing as we type, whereas
   the US currency remains relatively robust. Is there any mystery here?
   People seem to like dead white folks with beards leering at them from
   their banknotes.

   An interesting point here is that the retreat from the gold standard
   seems to have occurred at roughly the same time as the growth of the
   size of governments. This supports my hypothesis that the only
   absolute worth of modern currencies is in their ability to settle
   accounts with government. Since the dollar and pound didn't go into
   absolute free-fall when taken off the gold standard indicates to me
   that the market shares my views.

> 
> }Arguments for a return to the gold (silver, platinum, wheat, car or whatever)
> }standard seem to be made by people who wish to remove control over the money
> }supply from the government issuing the coinage. Very laudable aims, or course,
> }for the reasons frequently expressed on a.i. But there are safer ways of
> }achieving the same aim.
> 
> There are none, and you don't even bother to propose any.

   My original post pointed out the correlation between degree of
   independence of the central banks of various major countries and the
   robustness of their currencies. It seems to me that independent
   central banks hold the key to a stable money system.

   Again, since the value of the more robust major currencies have shown
   a stability of value superior to that of gold (which has devalued 50%
   over the last 10 years) your "There are none" borders upon rant.

> 
> }Linking the dollar to the price of gold (for example) can clearly be
> }destabilizing. Had the $ been linked in the late seventies (when gold topped
> }$800/oz.), the money supply may well have shrunk by half (gold is now around
> }$350/oz.). More likely would have been an unnaturally high price for
> }gold, and a windfall for South Africa and Russia at the expense of the
> }US. And for what?
> 
> Why do you think the price of gold was that high?  It was because of the
> inflationary monetary policy of the Carter Administration.  The price of
> gold remained stable for centuries in England when it was one th gold standard.

   Gold, like all commodities, rose in value because demand exceeded
   supply. I have said before that gold is rather pretty. People like
   it, and believe that others will trade for it. In that, it is no
   different from dollars or pounds. You are betting that people will
   continue to value gold for its inherent trading power, just as
   currency speculators are betting that dollars have inherent trading
   power.

   To say that the price of gold remained stable when England was on the
   gold standard is a pure tautology. The only way that this didn't
   induce severe economic difficulties was because the quantity of gold
   in circulation was roughly constant and supply/demand were in
   approximate balance - the South African gold mines where not on-line
   initially, and when they were, they developed under British control
   (and industrial processes which needed to consume gold were not
   invented at the time).

> 
> }As Russ points out, you can return your personal finances to the gold
> }standard by exchanging all those fragile dollars at your local bank. You
> }can also trade with like-minded folks by swapping gold options and gold
> }futures. The fact that this is not a commonplace occurrence should tell
> }you something about what others think of the gold standard.
> }
> }Tony Cox, Stanford, CA.
> 
> The main reason this doesn't occur is that it's far more convenient to employ
> checks and credit cards, which are substituting for Federal Reserve Notes (FRNs)
> to an increasing degree.  
> 

   Rubbish.
   The market can come up with mechanisms to make financing convenient -
   that is how credit cards and checks (cheques) came into being in the
   first place.

   It has been pointed out before that this type of 'return to the gold
   standard' is not viable because of capital gains tax laws. True, but
   this ought to be considered as a failing of the tax laws rather than
   a coherent argument for the return to the gold standard.

> 
> Tim Starr - Renaissance Now! - Think Universally, Act Selfishly
> starr@genie.slhs.udel.edu
> 
> "True greatness consists in the use of a powerful understanding to enlighten
> oneself and others." - Voltaire

   How true.

Tony Cox, Stanford, CA
Xref: sparky alt.individualism:5568 sci.econ:7794