From: starr@genie.slhs.udel.edu (Tim Starr)
Subject: Re: gold standard
Organization: UDel, School of Life & Health Sciences
Date: Fri, 9 Oct 1992 08:12:11 GMT

In article <1992Oct5.123940.1@ssrl01.slac.stanford.edu> tcox@ssrl01.slac.stanford.edu (Tony Cox - (415)926-3105) writes:
}
}   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?"

I'm not so sure this is really the origin of currency notes.  They're ware-
house receipts for whatever commodity money is at a given time and place.

}   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.

You're confusing terms.  I think you mean currency above, not money.

}   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.

Here's that same confusion again.  You mean currency based upon a commodity
standard.  You seem to be taking currency to be equivalent to promissory
notes.  I'm not so sure this is the case, and will check with a more
knowledgeable acquaintance.
 
}> }   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.

There's a high search cost that prevents most people from discovering how
worthless FRNs are, that is, they have to learn about the theory of money and
credit from a non-Keynesian or Monetarist or neoclassical source, but from
the Austrian school of economics.  This cost is going down, but not fast
enough.

}> }   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. 

Alright.  The reason to base currency on a commodity is that promissory
notes have to be promises of SOMETHING, as opposed to promises of nothing,
which is what future U.S. tax revenue may well be.

}> }   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...

I've only heard three proposals for monetary standards in this discussion.
Two of them are commodity-based: either single (gold) or a diverse set of
commodities (a basket).  The other remains your ill-defined proposal to
have international competition in currency issuance.

}> }   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.

This last will have to be accunulated in incredibly high quantities to be
exchanged with any others, of course :-).

}   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.

I part company with you on requiring trade with the government.  My concept
of limited government excludes such coercion.

You can have the Madonna scrip.

}   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.

How can the size of the economy be measured without a commodity-based
monetary standard?  I don't think it can be.  If this is impossible, then
your whole scheme falls through.

}> }   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.

What?

}> }   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.

You don't distinguish between domestic and international trade, but legal
tender laws do.  Suppose you were a German grocer when the Bundesbank
inflated 4%, and you wanted to switch to a more stable currency, assuming
there was one.  Tough noogies, even if enough of your customers went along
with it for your profits to exceed the 4% loss we'll assume you'd have
suffered otherwise.  Any customer you refuse to deal with on the grounds
that they're only trying to pay you in marks will have grounds for legal
action against you.

There is no grocer near me that accepts marks (staber than FRNs) because of
legal tender laws.

}> 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.

But there are no constants in the social sciences, because man has volition.
Thus taking factors to be constant is false.

}> 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).

My point was that you seemed to be implicitly condoning this transfer from
currency haves to "owes".

}> 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.

I "spoke" without malice.  It just seems that your case is basd upon
measuring the unmeasurable, a classic positivist fallacy.

}> 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.

Well, nanotech may enable cheap gold synthesis, and nanotech has been
pubshed abut for some years now, so this may already be occurring.  I
thought this was dealt with well by the possiblity that the commodity which
the monetary system may be based upon would change.

}> } 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.

My point was to compare the risk of inflation between central banks and free
ones.  I understand "The Experience of Free Banking" is carried by Laissez-
Faire books.  It would probably answer your question in detail.

}
}   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....

Actually, isn't that "Whose"?

}> } 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?

Sure.  As soon as a better commodity comes along, we should base our currency
upon it.  I just don't know of a better commodity.

}> } 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

Let's put it this way: you get an A+ when you can show me how to measure the
size of an economy without a commodity monetary 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
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