RoR: Forum

Sam Erica wrote: "and even advocates that individuals be able to print their own money. If you think that the latter is outrageous then, clearly, you must read this book."

What is outrageous about individuals creating their own money? What is there in the nature of government that mandates a monoply on the issuance of money? In fact, governments are among the least able of all entities to issue money because they do not produce wealth.

Think through the supply chain from the mine to the bank. It costs resources to mine gold. It costs resources to mint it into coins.

In Rothbard's terms, as long as an individual had 100% gold backing for their notes (or base coin "tokens" or plastic encrypto sticks or whatever), what difference would it make?

There is some inconvenience in 300 million or 9 billion separate kinds of banknotes, but really, that would never happen. What would happen would be more like our "personalized" credit cards with your favorite cartoon character and your own mugshot. For that matter, the world did not stop spinning when we had checks of our own design. I still use checks and I order them printed the way I like them.

For a good supporting book from a totally different context see Fractional Money by Neil Carothers. Writing in the early 1900s, he advocated gold-based currencies where the actual circulating media would be coins of other composition for convenience. When you spend gold coins, you wear them down. Historically, it was not a big problem because gold was only used for huge transactions between large entities. As the industrial revolution extended prosperity, British gold sovereigns did circulate and did get worn down. The problem was that by law, gold coins were passed by weight, not by count (or "tale"), so worn coins were worth less -- which they are. Better, then to circulate substitutes.

Post 1

Monday, July 18, 2005 - 6:09am

I agree with much of Rothbard's writing, and certainly that private commodity backed currency would be much better ethically and economically than the current government fiat currency. I never quite understood his complete opposition to fractional reserve banking though, as it seems completely consistent with laissez-faire capitalism if its fractional reserve nature is public knowledge.

Just this morning there is a very interesting alternative approach posted over at the Mises Institute. It's an analysis/partial-defense of the Friedrich Hayek proposal for competing private fiat currencies - an idea which no doubt Rothbard would have detested. I can't say I'm a believer in the Hayekian idea, but it has made me think more about the importance of certain aspects of a monetary system.

http://www.mises.org/story/1854

Post 2

Monday, July 18, 2005 - 6:36am

Maybe I am ignorant here, but wouldn't a gold standard currency be impossible because the value of capital exceeds the value of gold that exists by an exceptional amount? I actually don't think that there are any significant problems with today's currencies and the economics seem to be working fairly well. I would much rather spend time on working to eliminate excessive taxation, subsidies, and other government interference that is far more harmful than worry about something like this. Remember, a lot of this became popular back in the days with rampant inflation, which has not been an issue in the US for many years now.

Post 3

Monday, July 18, 2005 - 8:37am

Kurt Eichert wrote: "... wouldn't a gold standard currency be impossible because the value of capital exceeds the value of gold that exists by an exceptional amount?

Without actually checking the facts, we might agree that Manhattan is "worth more" than all the gold ever mined.

The problem is that the standard of measurement is not gold. If gold were the basis of our global economy, then, as more and more goods and services are created, the value of gold climbs. It takes less and less gold to buy more and more because there is more to buy, all of it competing for gold. Savings would be greatly encouraged. Consumption would be discouraged. (Do you agree that inflation encourages consumption?)

So, whatever it cost to build "Manhattan" yesterday, it will cost less to build it tomorrow. Therefore, you cannot say that the total value of all goods and services exceeds the total value of all gold. In fact, that is actually impossible in terms of static values.

However, also, the velocity of money would not go away in a gold economy. If I hold gold today and produce with it today and repay it with interest -- and profit to me -- from the new wealth I create, then, you do the same and so on, then yes, we will have created far more wealth accumulatively than the immediate value of gold right now.

Post 4

Monday, July 18, 2005 - 9:36am

"Remember, a lot of this became popular back in the days with rampant inflation, which has not been an issue in the US for many years now."

True in that if you look at the published CPI, it hasn't been as high recently as a couple decades ago. However, CPI was significantly revamped under Reagan and again under Clinton to change what and how it measures to downplay price infation.

Bought a house recently? The massive inflation in housing prices has been excluded from CPI since the 80s. Bought gasoline? Again, not reflected in CPI. In the 90s there were some other more involved (IMO devious) tweaks to reduce CPI such as concerning substitution effects.

Also, the Fed is still happily creating money, only much of it has been being acquired by foreign central banks instead of spent right now.

"Wouldn't a gold standard currency be impossible because the value of capital exceeds the value of gold that exists by an exceptional amount?"

I understand the sentiment, and think gold standard alone would be too restrictive compared to also having other commodity standards to spread that effect. The value of the underlying standard would be bid up for its use as a medium of exchange instead of just ornamental or industrial uses. (I see Michael M has beaten me to the punch and explained that in more depth) The biggest thing I don't like about commodity backed currency is that it would make using gold (or other metals) as corrosion resistant material, excellent electrical conductors, etc. more difficult due to the expense.

What I consider absolutely ideal would be a non-inflatable electronic currency, but I've never come up with a way to do that.

Post 5

Monday, July 18, 2005 - 9:44am

Aaron:

To quote Rothbard: "In my view, issuing promises to pay on demand in excess of the amount of goods on hand is simply fraud, and should be so considered by the legal system. For this means that a bank issues "fake" warehouse receipts � warehouse receipts, for example, for ounces of gold that do not actually exists in the vaults. This is legalized counterfeiting; this is the creation of money without the necessity of production, to compete for resources against those who have produced. In short, I believe that the fractional reserve banking is disastrous both for the morality and the fundamental bases and institutions of the market economy."

In addition to this, my own view is that depositors in a fractional reserve bank are assuming a collective risk that they have no control over. Consider if the sole function of banks was to manage depositor's accounts and provide services such as monthly statements, safekeeping, etc. with no ability to make loans. Citizens wishing to get loans would go to venture capitalists and other loan agencies and individuals who would assume the risk Then, the risk would be attributed to those whose business was to assume risk.

I agree that Hayek's idea of private fiat currency is very hard to accept.

Kurt:

"Remember, a lot of this became popular back in the days with rampant inflation, which has not been an issue in the US for many years now."

That is true but I don't think for one moment that we will not have crises like this in the future.

"...but wouldn't a gold standard currency be impossible because the value of capital exceeds the value of gold that exists by an exceptional amount?"

I concur this Michael on this, but stating it another way, it all depends on much gold is worth in today's currency. I have no idea on the validity of the following figures but suppose that the total amount of the world's currencies, translated into dollars, that is necessary to carry out all the financial transactions was five trillion dollars and the amount of gold that could be released to accommodate it was a billion ounces, then the going price of gold would be $5,000 per ounce. Fluctuations in production of new gold, the velocity of money, increases in efficiency of production of goods and services would be reflected in the number of ounces of gold that it would take to buy a Mercedes or a Snickers bar. It would be meaningless to talk of the price of gold because business transactions would be basically barter � trading a service or product for a commodity � gold.

Sam

Post 6

Monday, July 18, 2005 - 10:02am

"In my view, issuing promises to pay on demand in excess of the amount of goods on hand is simply fraud, and should be so considered by the legal system. For this means that a bank issues "fake" warehouse receipts � warehouse receipts, for example, for ounces of gold that do not actually exists in the vaults."

I agree with Rothbard if and only if the fractional reserve bank is misrepresenting itself as a 'warehouse', ie. a 100% reserve bank. That largely applies to the current banking system with fractional reserves but government insurance propping it up and being presented as a stable storage of money.

When I invest in stocks, bonds, etc. I have to agree to a standard disclaimer that they may lose value and I am assuming the risk. A legitimate FRB would just disclaim to depositors that only fractional reserves are maintained, and the depositor assumes the risk (that of a run). I do not believe FRBs would have much popularity in a truly free-market system, but I do not see them as fraudulent if the fractional reserve policy is disclosed.

Post 7

Monday, July 18, 2005 - 11:54am

Kurt,

The basic answer to your question "wouldn't a gold standard currency be impossible because the value of capital exceeds the value of gold that exists by an exceptional amount?" is that the total physical quantity of the monetary medium doesn't matter. Whether there's only one pound or 50 billion tons of gold affects the unit value but not the total value.

Post 8

Monday, July 18, 2005 - 12:26pm

"Whether there's only one pound or 50 billion tons of gold affects the unit value but not the total value."

I don't follow. Are you just stating a more precise and extreme example of what Michael M and I had mentioned? ie. if all currency was 100% reserve gold-based and only one pound of gold existed in the would, a quarter pound of it would buy everything in the US of A?

Post 9

Monday, July 18, 2005 - 12:52pm

Michael said: If gold were the basis of our global economy, then, as more and more goods and services are created, the value of gold climbs.

At that point, then, gold ceases to have the actual value that it truly has, and then someone who gets some physical gold, which in reality should be worth say $400 (for its use as a material) now has something worth $4 million. This presents problems in and of itself. For example, actually finding gold itself may have an artificially high value compared to its true worth, creating an economic mis-alignment with too many resources devoted to getting what is otherwise a somewhat useful and pretty metal.

I am sorry I don't have more details on the economic arguments, but I think Greenspan is correct. This gold standard concept is bad and dated economics from the 19th century. I will do some research and come up with a better answer, though.

Post 10

Monday, July 18, 2005 - 12:57pm

Aaron, that would depend on whether or not everything in the US of A was for sale.

Just to throw in a complication, don't neglect the effect of marginal value. The value of 10 units of a good is not necessarily 10x the value of one unit. (After you've eaten nine cheeseburgers, would you be willing to pay as much for the tenth as you did for the first?)
(Edited by Rick Pasotto
on 7/18, 1:11pm)

Post 11

Monday, July 18, 2005 - 1:02pm

*laugh* OK, I'll buy that.. for about a picogram of gold.

Post 12

Monday, July 18, 2005 - 1:07pm

Kurt,

Your statement "At that point, then, gold ceases to have the actual value that it truly has, and then someone who gets some physical gold, which in reality should be worth say $400 (for its use as a material) now has something worth $4 million." doesn't make any sense.

The value of any commodity is whatever a willing seller and a willing buyer agree to. It doesn't matter if that commodity is gold or apples or manure. There is no such thing as "the actual value that it truly has". Value varies by the marginal quantity under consideration and the goals and situation of the valuer.

Post 13

Monday, July 18, 2005 - 1:43pm

Ok, here are some economic reasons why this is a bad idea:

First of all, the $ is a commodity in the same manner as gold is, or any other fungible commodity. As such, to regulate it by artificially pegging it to another commodity is to make the market in both commodities more rigid than they should be, which decreases overall wealth. This is pretty well-known economics that you can probably find in econ 101. The fact that inflation can happen does not change this, because this provides no benefits (to the government inflating its currency), especially when other currencies (such as the $) are available uninflated. It simply makes for a much better economic system to allow currencies to fluctuate, and a return to a "gold standard" would be every bit as artificial as the current system with none of the benefits. Bottom line is that this is not a valid economic argument, and I think the only reason anarchists hold on to it is because then they wouldn't need government, or so they think in their logical construction of an impossible peaceful anarchic society.

Post 14

Monday, July 18, 2005 - 2:11pm

I've long been for commodity-backed (not necessarily Au) currency as the way to combat the underlying crimes of theft via inflation and misrepresented FRB system. But the more I think about the ad absurdum case of gold based currency with 1 pound of gold in the world, the more I'm coming around to Kurt (and Hayek)'s way of thinking.

At only gold used as medium of exchange and only 1 pound of gold mined since start of time, there would be an utterly obscene emphasis on attempting to produce more, since microscopic quantitied would be so valuable. Mining and prospecting would be heavily (over)invested in. Indeed, at that point of scarcity and value there would be builds of massive particle accelerators to produce gold from relative waste metals like platinum or iridium. It was obviously an extreme hypothetical case, but I think the idea that you cannot use a commodity which is too rare and has other important uses is an important take-away. Even at real-world quantities, gold may well be too rare for a worldwide basis of exchange without major economic distortions toward creating more of it, and perhaps all precious metals put together would fall in the same category.

I still see the currently unachieved ideal as something like non-inflatable electronic currency, since it could be created initially plentiful but have no other real world uses. In the current real world, though, that doesn't exist, and what would be best is certainly not government based inflation but is probably not universally accepted precious metal backed money either. This Austrian is really starting to like the sound of Hayek's idea.

Post 15

Monday, July 18, 2005 - 2:14pm

Kurt:

We seem to be talking about two different things here:

1. that the dollar is still in existence but it is pegged 100% to the gold reserves of the US. (good) Other countries have their own currencies which may or may not be related to gold
2. the dollar (and no other currencies) no longer exists and the whole world trades with physical gold or 100% gold receipts.(better)

In case 2 it is meaningless to talk about the value of gold in terms of the dollar. If gold is scarcer and more in demand for commerce then its trading power will increase and instead of a Mercedes costing 200 oz. of gold it may now cost only 100. Thus the supply will always be adequate for business to continue.

"As such, to regulate it by artificially pegging it to another commodity is to make the market in both commodities more rigid than they should be, which decreases overall wealth."

In case 1 when the dollar is pegged at 100% to gold they are equivalent and they are not two different commodities. The warehouse receipt merely makes it more convenient to transfer wealth.

Sam

Post 16

Monday, July 18, 2005 - 2:53pm

Aaron:

Rick was trying to make an extreme example. I concur that if there was only one pound of gold in the world it would not be feasible to base commerce on it � but it must be rare.

If I recall, the total gold in the world would fill a cube 100 ft. on a side. That's a million cubic feet.

If my figures are correct that's 1,000,000 (2.54 x 12)*3 = 28.300 x 10*9 cc.

density of gold is 19.33 gm/cc

This gives 547. x 10*9 grams.

1 gram of gold = .032 oz.

547 x 10*9 x0.032 = 17.5 x 10*9 oz. and at todays price of about $420 is about $7,350 x 10*9 i.e. $7 trillion

Sam

Post 17

Monday, July 18, 2005 - 4:48pm

Kurt writes:

First of all, the $ is a commodity in the same manner as gold is, or any other fungible commodity.

Not quite. In a gold standard, the dollar is (a specific weight of) gold.

As such, to regulate it by artificially pegging it to another commodity is to make the market in both commodities more rigid than they should be, which decreases overall wealth.

What you write there has nothing to do with a gold standard. There is no "pegging" with a gold standard. Just as the meter is defined as a certain length so the dollar would be simply defined as a specific weight of gold. That definition would never change.

Different currencies may be defined as different weights of gold but the exchange rate between them would always be constant just as the conversion between meters and feet is constant.

Advocacy of the gold standard has nothing to do with anarchism.

Post 18

Monday, July 18, 2005 - 4:54pm

Aaron, if there were only one pound of gold in the world then gold would never have been used as the monetary medium. Please try to focus on and understand the principle being illustrated.

Post 19

Monday, July 18, 2005 - 4:58pm