From: tcox@ssrl01.slac.stanford.edu (Tony Cox - (415)926-3105)
Subject: Re: gold standard
Organization: SSRL, Stanford Synchrotron Radiation Lab
Date: Fri, 9 Oct 1992 23:46:44 GMT

In article <1992Oct9.081211.10208@genie.slhs.udel.edu>,
	starr@genie.slhs.udel.edu (Tim Starr) writes:
> In article <1992Oct5.123940.1@ssrl01.slac.stanford.edu>
	tcox@ssrl01.slac.stanford.edu (Tony Cox - (415)926-3105) writes:
> }
> }   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.

   That is clearly their appropriate function, quite consistent with your
   warehouse receipts.

> 
> }   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.

   Ok. I admit my language leaves some room for ambiguity (it was late
   when I started my response). I don't think it is particularly
   material to my case, but I'll try to be more specific in future.


> }> }   The impediments to this scenario are the usual governmental

   [impediments to using a promissory note based on gold - tc]

> }> }   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.

   Tim. You really cannot believe that!

   FRNs (Federal Reserve Notes) DO HAVE VALUE. If you, with your
   knowledge, have reached that conclusion, then I suggest that you
   send me all of yours right now! Get your friends to do the same!

> 
> }> }   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.

   Well, I'll agree that they have to be a promise of something, but
   that something doesn't have to be a commodity.

   I believe (and noone has contradicted me so far) that the promise
   of todays money is _merely_ that it can be used to settle accounts with
   the government.

   Such a promise is not based upon what future US tax revenues may
   actually be, but upon what tax levies they may attempt to grab from
   us. The fact that the government in- and out- flows are such a vast
   component in todays economy, dwarfing all other trade, makes it by
   far the most dominant mechanism of exchange. So the promise is
   real, and substantial enough to lend credence to the monetary
   system.

   You and I may not like this, but it is a fact.

> 
> 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.

   I'm not sure that the proposers of the first two monetary standards
   would restrict other countries from issuing their own currencies,
   nor restrict domestic individuals from owning same.

   If that were the case, I would be arguing on a broader front. I
   think that this debate is not in essence one of free trade, so I'll
   hold back on a diversion off the topic until I hear otherwise.

   I don't think that my proposal is as ill-defined as you seem to
   think. It is, after all, only a modification of the existing
   system. Looking ahead in your responses, I think I'll defer
   discussion on that point until later. International competition is
   not central to my argument, anyway. It serves the role of a
   'checksum' for viewing the results of the proposed policy.

> 
> }> }   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 :-).

   You obviously havn't been checking out those hot video's on MTV ;-)

> 
> }   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.

   I would suggest that your counter-argument looses its vitality if you
   take that track. It is a fact that trade with the government is a
   coerced requirement at the present time. My proposal comes out of
   the real world.

   However, I think that it is good to pursue the asymptotic
   consequences of a steadily decreasing state size, if only to carry
   the validity along the lines which most Libertarians could endorse.

   I have said before that private parties should be able to trade in
   any commodity they wish. I have also pointed out that `promissory
   notes' based upon vastly different resources (houses, company
   stock, Utility bonds, cinema tickets) are becoming an increasing part of
   the modern financial system. As such, one could envision a barter
   system developing, without the encumberances of old-style barter
   (and without the existing tax consequences). In such a system,
   private `banks' might develop into escrow houses, possibly even
   issuing their own scrip to handle small-scale interactions.

   In as far as the currency backed only by a `promise to be settle
   a government debt' becomes less valuable as the market for settling
   accounts with the government decreases, these alternatives develop
   naturally under the usual forces of the marketplace which we both
   believe in.

   Look, it has taken us 70 years for the government to get from being
   6% of the economy to being 40%, and even if a Libertarian government
   was established tomorrow, it would take many years to get back to
   the 6% (or lower) without severe economic disruption and civil unrest.

   Face the fact that the government will be a significant part of 
   the economic life of this nation for the rest of our lives at least!

> 
> 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.

   You are right. If the size of the economy cannot be quantified,
   then the proposal fails. My argument hinges upon this, and so I'd
   better do a good job of convincing you, so here goes.

   How is the size of the economy measured now? Well, it is measured
   by looking at the total output of all goods and services within the
   nation. Not actually by monitoring each and every trade, of course,
   but by statistical means. If the country produces 500,000 cars each
   year, sells them for $10K each, you have a measure of the 'car'
   component of the GNP. Sum this over all products, commodities and
   services gives you a measure of economic activity.

   It remains an imprecise measure, as it is denominated in that
   wretched dollar. So you cannot then say that, if next year 500,000
   cars sell for $12K each (and so on across all the other sectors)
   that your economy has grown by 20% - of course not.

   What you would do (and what is done now), is to look at what
   comparable cars sell for next year (and for all sectors,
   naturally). If there are 550,000 such cars, your economy has grown
   by 10% in that area. You use that worthless $ to keep the RELATIVE
   score on how the different sectors are contributing to the whole.

   This all becomes part of the algorithm which is used to inflate (or
   deflate) the money supply. I'll agree that it is imprecise (please
   dont use Ill-defined again!), but if it is published and adhered to
   over a long time period, it would provide a good basis for currency
   stability.

   There are two 'checksums' which indicate how your algorithm is
   doing. The first is the inflation rate, which should drop towards
   zero, but would also be modified by peoples perception as to the
   utility of the currency wrt. other `promissory notes'. The other is
   the value of the currency on the world markets.

   I believe that the monetary policy of Germany ties money supply to
   inflation rate (measured again as an ensemble average), without the
   backing of a commodity. This is apparently rather successful, and
   indicates that my proposal is by no means _off the wall_.

> 
> }> }   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?

   I'm sorry. By the time I got to this bit, I was getting very
   sleepy. I cannot recreate the context now....

> 
> }> }   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.

   You should attack those legal tender laws then, as a restriction on
   free trade, I certainly do!

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

   I wonder if I should turn in my barber for taking my Indonesian
   currency the other day :-).

> 
> }> 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.

   And YOUR system is based upon peoples perceptions as to the
   utility of Gold! These factors affect both our proposals equally!

> 
> }> 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".

   I pointed out that now only foolish people keep currency in any
   quantity. The market has responded to the inflation. I am
   observing, not condoning.

> 
> }> 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.

   I know :-). "Measuring the unmeasurable?" You really do have Buddhist
   leanings, don't you?

> 
> }> 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.

   Now, on what basis would you mandate such a change then? I think
   that that opens the door for political influences to take control
   again, dont you? If the reds get their hands on all that Taiwan
   gold, you could probably get the political momentum up in this
   country to transfer to the Helium standard (of which the US has a
   clear advantage).

> }   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.
> 

   Same question. Do you have an answer? Seems to me that you are setting
   yourself up for a rerun of the LAST time that the standard was dumped!

> }> } 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 :-).

   So you have accepted the rest of my analysis! Phew!

   I got an A+! I GOT it!!! Wheeeeee!!

Regards, Tony Cox, Stanford, CA
Newsgroups: alt.individualism