What is Money?

From the Poll Discussions on "Kinds of Activism:"

Michael says: Moreover, the nature of money -- its being a store of human effort, a store of intelligent work -- suggests that if you are spending more than you are getting back, that you are wasting your life. That runs contrary to a basic principle of Objectivism. Every way I look at the problem, I see profit as a virtue that is not to be denied.

Joseph Rowlands wrote: Money is what you get when you trade your goods or services to other people. It is not an indication of how you value things, but in how others value what you sell. ... You can't pay for entertainment. You can't pay for a vacation. ... And that's because if money is the measure of virtue, then spending it is the biggest sin.

Alone, on an island, Robinson Crusoe would need money for the same reasons that he needs morality. Money is (1) a store of value and (2) a unit of account as well as (3) a medium of exchange.

Money's first attribute is its being a store of value. That is what allows money to be (3) a medium of exchange. On his island -- in the Defore story, actually -- Crusoe's primary money was food. If he could store food, his labor could be invested. When he discovered that he had accidentally sowed wheat which "took" he was overjoyed. (Historically, in fact, wheat (not gold or silver or even cows) was the first form of money.) In other times and places, stone arrowheads -- which require significant effort -- would be a form of "money" not for trade -- there is little evidence of that -- but as a store of labor for the individual who makes it.

It is also possible to "exchange" with yourself across time. You fish today and catch more than you need. Some you can dry. The chum you can bury to improve the soil into which you will plant your wheat later. Thus, in planning and carrying out plans, you effect economic trade with yourself across time.

Planting today means that you harvest tomorrow. Should you plant? Build a fire -- and tend it? Catch fish? Look for coconuts? What you do on an island is determined by how you value your time and the return on it. You need bookkeeping of some sort and that means that you must have a unit of account. You must have "money" if only as a conceptual construct: youi might not have "coins" but you need some way to count and account.

Even Ricardo's Law of Association applies because if you are going to undertake any complex task, then it is more efficient to break that down into repetitive actions, rather than carrying out the entire process in sequence. Sawing boards, drilling holes, braiding twine, etc., each should be done as a distinct task rather than sawing a board, drilling a hole, braiding a rope, and then drilling the next hole, and after four, going back and sawing the next board, and so on.

The laws of reality are not social conventions.

You pay for entertainment because it improves your self-experience. In suggesting ways to lose weight, Durk Pearson once said on the Merv Griffin show that a person could get rid of all the food in the house and buy a 50-lb bag of Purina Monkey Chow. It would be nutritious, but tasteless. That is sort of like the old joke where the doctor tells the patient to give up smoking, drinking, and sex. "Will I live longer?" the patient asks. "No," replies the doctor, "but it will seem longer." The point is that when Objectivists say that "life" is the "goal" of "living" it is unstated -- and unfortunately unexplored in great detail -- that by "life" they really mean "self-experience." In fact, the need (and it is a need) to avoid boredom is the limitation on Ricardo's Law of Association: given a choice, people will perform inefficient tasks rather than suffer boredom. That does not contradict anything in the nature of money but only helps to define the purpose of money.

Post 1

Friday, January 14, 2005 - 3:16pm

Michael,

Unfortunately, I have many disagreements with what you've written here.

Money acts as a store of value, but not just any store of value. It stores value in a specific way. That is, it allows you to keep something that you can use to trade with others in the future. It doesn't actually store up your work, or what you've supplied. It virtually does in a normally functioning society by letting you go and buy something later. That's why little green pieces of paper with faces on them are "a store of value", when in fact they're just paper.

A granary, which also stores value, is not the same as money.

In other words, using logical notation, All A is B does not imply all B is A, where A is money and B is a store of wealth.

Nor can you simply say that Crusoe uses money as a tool to trade with himself. The point about money in the market is that it provides you access to a multitude of goods, because most people are willing to accept it (they value it). If Crusoe ends up with more "money" than he can use or wants to use (too much food in a year), the excess food (if it cannot be preserved) is wasted. The money is only valuable if he himself finds it valuable...he can't trade it to anyone. So what you have is not a money system, but a barter system. Trying to equate the two, even in this strange circumstance, obscures the whole point of money.

In real life you trade for money, not because you intend to use the paper for starting a fire, or gold for making a necklace, but because you know you can trade it later to someone else for the things you do want. It starts, a la von Mises, by barter, then realizing that some items are easily bartered because many people want them, into full fledged money where people want the good for its exchange value itself, and not just because they intend to use it. Crusoe, in your example, is bartering. It would be foolish for him to value food for its exchange value, since he can only exchange it to himself. And sometimes he doesn't want anymore.

But, even pretending for a minute that food was somehow money for Robinson Crusoe, your initial argument that profit is always good would imply that Crusoe would always act in order to produce more food. The fact that he spends his food in order to buy shelter, read his bible, build a boat, etc. means that even he pursues other values at the expense of "money".

Your last paragraph tries to solve this, and although I have disagreements there as well, you've made the crucial point that there is a purpose to money and it's not the accumulation of money. The purpose behind accumulating money, let's just say 'life' for now, is the real standard of a person's value. Money is a tool. As a tool of measurement, it doesn't tell a person what he himself values, but what other people are willing to trade for money. The reason he can trade successfully with money is that his values are different from those other people.

I buy a hamburger not because I value it to be worth the $3 dollars, but because I value it higher than that. They sell it because they prefer the money to the burgers. I sell my labor for money because I value the money more than that labor. Money allows me to tell how much other people value things. The measurement is not my value of an object, but the "market value" of an object. My value derives from my life.

Going back to the activism discussion which spawned this topic, it's not true that activism needs to be profitable. If you can make it so, great. But the fact is that you are purchasing a value like any other. If you think the result of the activism is worthwhile, then it is appropriate to pay for it, like any other value or service.

Post 2

Friday, January 14, 2005 - 11:15pm

In the General Forum thread, "Morality is both Objective and Subjective," Joseph Rowlands wrote: Objectivism starts at a different point. Instead of looking for indicators of good or evil in people, morality is really a guide to living. We only have so much time and energy to spend on different actions. We have to have a method of comparing the different choices, and choosing between them. Morality is the tool we use to make those decisions.

1. Money is a tool for quantifying choices. Money is a tool for calculating morality.

Alone on an island, you do not need to keep a stack of coins and a counting board (checker board), but you do need a "unit of account" and a bookkeeping system of some kind, however "intuitive" it might be. (The more focused and rational your accounting, the better for you.)

There are many kinds of money and almost anything can be money. Just as an Objectivist here and now might click up www.kitco.com to see how gold is doing against the dollar and then go to www.xe.com to see how the US Dollar is doing against the Euro, so too, might Robinson Crusoe put most of his calculations in terms of wheat and still quantifiably value "progress toward the completion of a boat. " The common denominator might be hours, the one thing he has the most control over. Whatever conceptual tools Crusoe uses to quantify his choices, those tools are his moneys.

2. Money has social uses. So does morality. So does language. Do does clothing. However, the primary purpose of money is to enhance your life -- as with morality, language, and clothing -- not to lubricate your social interactions.

Collectivists point out that we learn language socially. Dictionaries show us what words mean and meanings change over time. Thus, words are social conventions that we adopt and we use language to live in society.

Objectivism teaches that even though our mothers taught us to speak and to button our shirts, the primary purpose of language is to think. Language is an individual skill. Alone on an island, Crusoe would need language.

(It is also true -- and not well addressed by Objectivism -- that there are other cognitive tools: shapes, colors, sounds, etc. People who develop extreme skill in music, cooking, etc., tend to do so by thinking with the abstracted sensora and percepta of those activities, rather than with "words." The fact remains that even a "language" of smells serves the individual smeller before any communication can take place.)

3. As a cognitive tool, money enabled a new kind of abstract thinking in ways not found in nature. The works of Denise Schmandt-Besserat on the origin of writing demonstrate that literacy and numeracy were invented together, with number driving the process.

The earliest writings are inventories and promises to deliver goods. Like language, we learn numeracy in a social context, but like literacy, the primary purpose of numeracy is to empower individual thought.

The use of the checker board and jeton accounting in the European middle ages had everything to do with money and little to do with trade. Bookkeeping --especially double entry bookkeeping -- is another example of a personal tool in support of cognition that later developed into socially powerful expressions that we call "money of account" (dollars, euros, etc.). The purpose of bookkeeping is not to enable taxation or to establish the evaluation of a company in a stock market. Similarly, the purpose of money is not to make it easier to Persons A, B, C, and D to make a round swap of apples for eggs for wool for fish, though money does have great utlitiy for that.

Post 3

Saturday, January 15, 2005 - 5:47am

I have to agree with Joe here.

In his first post, Michael focuses on the "store of value" function of money, stating that "Money's first attribute is its being a store of value". This is not right. Joe rightly points out that the "store of value" function derives from the "medium of exchange" function.

Michael wants to derive money from a Robinson Crusoe scenario, but this is not a useful starting point. The first two sentences Mises' monster treatise, "The Theory of Money and Credit" state the following:

"Where the free exchange of goods and services is unknown, money is not wanted. In a state of society in which the division of labor was a purely domestic matter and production and consumption were consummated within the single household it would be just as useless as it would be for an isolated man"

The first attribute of money is the medium of exchange, which is why money arises only under division of labour societies.

In his second post, Michael turns to the "unit of account" function of money. But again, the unit of account function of money is derived from the medium of exchange function. The "unit of account" function of money refers its use in simplifying the process of exchange. The unit of account function of money is really just a low-cost means of valuation in an exchange economy: it provides a conversion factor to value trade between two goods. In the absence of money (i.e. a barter economy) the price of every good would have to be determined in terms of a conversion factor into every other good.

Crusoe certainly ascribes a unit of account to his labours and leisure activities, but the fact that he does not use money to do so only confirms that money is not the only possible unit of account. Money is a unit of account, but not all units of account are money. "Hours" do not count as monetary unit of account, just as the valuation of goods in terms of barter prices do not count as monetary units of account.

Tim

Post 4

Saturday, January 15, 2005 - 9:12am

Tim Sturm wrote:
The first attribute of money is the medium of exchange, which is why money arises only under division of labour societies.

Imagine an economy where money is shallow trays of liquid nitrogen. Talk about "get rich quick"!

Money has to be storable over time. Iron has greater utility than gold, but it rusts away if you let it. Gold does not have that problem. In order to be traded, money must be durable to some degree. In other words, it must be a store of value.

In terms of Crusoe, I showed that money starts as a store of value. It also allows Crusoe to account. Money even lets him trade with himself.

The simple fact is that von Mises was wrong about the origins of money.

Ritual exchange is most likely the historic origin of money. Such ritual had nothing to do with division of labor.

The first division of labor societies of Mesopotamia were theocratic slavery societies in which some people performed no useful labor but were fed from the common store. That practice widened into customary promises made for the future. (Again, I recommend Denise Schmandt-Besserat's work the origin of writing.)

We know of communities of traders from Ur living among the Hittites. So, this division of labor exchange of durable money seems rapid to us. The span I am talking about is about 2000 years. That is not rapid. Therefore, when we talk about the historical origin of money, we are still far from the mark if we follow von Mises.

However, if we consider the "ontology of money" then consistent Austrianism demands that we accept money as a Crusoe concept, rather than as a social construct.

As for so-called "division of labor" societies, like speech or art or religion, it is hard to find any society that has no division of labor. However, if you read the investigations of Charles Opitz, you realize that the matter is not as described in von Mises.

1. Odd and curious money, descriptions and values.
2. An Ethnographic study of traditional money; a definition of money and descriptions of traditional money
3. Cowry shells, number one of a series.
4. Yap stone money, number two of a series
5. Kula ring, number three of a series.
6. Potlatch, number four of a series.
7. Wampum, number five of a series.
8. Traditional money from the Solomon Islands, part 1.
9. Traditional money from the Solomon Islands, part 2.

(Opitz is an American numismatist. While he is the guy to see if you want to buy a woodpecker scalp, personally, his interests encompass Morgan Dollars and all the usual stuff we collect.)

(Austrian economists were also wrong when they said that Truth, Beauty and sunlight are non-economic goods, but that is another topic.)

Post 5

Saturday, January 15, 2005 - 9:16am

Newsgroups: rec.collecting.coins

Date: 1999/06/11

Subject: MT: Wampum

Transcript No. 1745
June 11, 1999
WAMPUM
by Robert Leonard
Hiawatha is remembered today as the principal character in Longfellow's
poem, "The Song of Hiawatha." But there was an historical Hiawatha, who
deserves to be remembered . . . and he was the disciple of the prophet
Dekanawida, the inventor of wampum.
Dekanawida was born to the Huron tribe in about 1520. After the French
explorer Cartier arrived among the Huron in 1535, Dekanawida recognized
that the Europeans posed a threat to Native American ways of life. He
journeyed south to warn the Iroquois about the Europeans. Hiawatha, a
reformed cannibal, became his disciple and spokesman.
Dekanawida's plan was to bring together the five regional tribes--who
were constantly making war on each other--and to form a single nation, the
Iroquois Nation. To succeed, he needed some peaceful means for resolving
disputes. Compensation would have to replace retaliation. His solution
was to introduce wampum--North America's earliest money.
Wampum was tubular beads about a quarter of an inch long and less than
an eighth of an inch thick. Purple beads were also made . . . they were
worth twice as much as white beads because they could be made only from a
clam shell heart.
The first string of wampum was made in about 1570 as a gift to a chief
who agreed to hold a council. After 1600, wampum spread rapidly for use as
blood money, ransom, and ceremonial presentations. It was even used as
money by the English and Dutch settlers, who made it legal tender as early
as 1637.
Over the next few decades, coins became more plentiful in the Colonies,
and wampum passed out of use as currency early in the 1700s. However,
imitations were made for the western Indian trade as late as 1889.
This has been "Money Talks." Today's program was written by Robert
Leonard. "Money Talks" is produced and underwritten by the American
Numismatic Association in Colorado Springs, America's coin club for over a
century. Take a tour of ANA's virtual Money Museum on the web at
www.money.org. Copyright 1999 ANA

Post 6

Saturday, January 15, 2005 - 10:20am

Marotta,

I don't know what you mean by "store of value." Value to whom? I think Rowlands is suggesting that it's for the recipient, where you seem to be saying it's for the producer (who you say can be the same person as the recipient). Then in post 4 you say that gold is a better store of value than iron, even though iron is more useful. Again value to whom? Useful to whom? It almost looks like you're saying that gold is intrinsically more valuable than iron.

Next, I don't think anyone is disagreeing with you that Crusoe is greatly benefited by a method of accounting, but I don't see why we should call the units in that method money. Crusoe could just use grades or numbers as the units? If harvesting wheat is 1 or an A, and if building a shelter is a 3 or a B-, then Crusoe knows to harvest the wheat. All Crusoe really needs is a standard or set rubric by which to evaluate his ventures. I don't think of "money" as the necessary unit for this purpose.

See, I guess I share some of your concepts; I just don't stuff them all into the label "money."

Jordan

Post 7

Wednesday, February 2, 2005 - 11:43am

"Money is (1) a store of value"

What would happen to the value of your dollar if everyone stopped working? It would have no value. Therefore - money is not a store of value, but is a promise of future work.

Post 8

Sunday, February 20, 2005 - 10:18pm

William Egge wrote:
"Money is (1) a store of value"
What would happen to the value of your dollar if everyone stopped working? It would have no value. Therefore - money is not a store of value, but is a promise of future work.

That might raise questions about whether the dollar is really money.

You switched terms, from "money" to "dollar" and back to "money."

You may be right, though on the other grounds. If Rand's definition of "value" is correct, then what does it mean to say, "Money is a store of that which one wishes to gain and/or keep."

Perhaps money is not a store of value.

Post 9

Tuesday, May 10, 2005 - 9:44pm

Allow me to make some statements:

Money is a medium of exchange. That's it's USE. However, to be exchangable money must be of VALUE. To be of value, it must be a GOOD. A good in it's own right. It's goodness or value is what makes it exchangable. Cigarettes were used in POW camps as money for exactly this reason.

There's a subtle difference here re the money as a store of value argument. Money is not simply something that sits there storing value and waiting to be exchanged, it is a useful good in it's own right. In other words, if something that had been used as money suddenly became unacceptable as money it would still have value regardless. When POW camps were liberated cigarettes didn't become worthless they just became USELESS as money.

Yes, yes, money must be durable, malleable, etc, but that only relates to a good's suitability for USE as money. After all, a greenback is designed to be durable but it's not actually money (not in the classical sense).

A greenback is FIAT money. FORCED money. NON-CONSENSUAL money. It has exchangability not because it is a GOOD but because it has a big, nasty government gun behind it.

Sure, banks (in a free market) would issue notes but they would be redeemable in gold or any other good that was being used as the accepted medium of exchange.

Money was the MEANS that allowed the division of labour to take place. That said, these things must have evolved contemporaneously. It's impossible to imagine one without the other. As Mises correctly said, there was no need for money in non-division of labour society.

However, the things that became money, ie gold, were goods in their own right and therefore of value regardless of the non-existent division of labour in early societies. It was gold's goodness or value that made it USEFUL as a medium of exchange and it's other features such as durability, malleability and transportability that made it SUITABLE as money.

It's too easy to get bogged down in esoterics here. Remember, economics is praxeology. The study of human action: I have this. You have that. Now, what are we going to do about it?

Ross Elliot

Post 10

Wednesday, May 11, 2005 - 7:53am

Ross, thanks for your insights. It is a difficulty of dialectics that we only focus on the disagreements. In theory, we resolve the disputes and the agreements take care of themselves. One problem with that is that anything not disputed is assumed to be stipulated. That is not a valid assumption.

I agree that the purpose of money is to facilitate trade. I just understand that alone on his island, RobinsonCrusoe can trade with himself across time. This takes money out of the social sphere. Condemn greenbacks all you want, if everyone agrees to them, then they are money -- at least according to the socialists of both the left and right for whom nothing exists except that given by society.

Ross Elliot wrote: "After all, a greenback is designed to be durable..."
Actually, it is not. The printers' union strongly opposes circulating high value coins because coins last much longer than paper.

Ross Elliot wrote: "As Mises correctly said, there was no need for money in non-division of labour society."
You are in good company quoting LvM on this. That is the reason why it is important to differentiate LvM's excellent economics from his attempts at anthropology.

(1) You would be challenged to find any "society" (however defined) without a division of labor.

(2) I have cited here more than once works about the invention of money in post-neolithic Mesopotamia, for instance the books of Denise Schmandt-Besserat. The exchanges came first. The promises came first. To keep track of them, symbols and symbologies (numbers first) were invented.

LvM would have you believe that people were stuck for a way to move out of an undifferentiated social setting in which everyone did everything and then someone invented "money" and the next morning people woke up to new careers in agriculture and bricklaying.

Ross Elliot wrote: "... economics is praxeology. The study of human action: I have this. You have that. Now, what are we going to do about it?"

Actually, praxeology is individual action before it is social exchange. Here I am. Now, what am I going to do about it?

Post 11

Thursday, May 12, 2005 - 8:34pm

Michael:

"I agree that the purpose of money is to facilitate trade. I just understand that alone on his island, RobinsonCrusoe can trade with himself across time."

RC can't "trade" with himself in the present, he must delay his consumption until a future date. That's saving. Saving is not trade. Saving is capital accumulation which enables trade.

"This takes money out of the social sphere."

Nope. Re above. Money has no use out of the social sphere. Even the isolated hermit gold miner who has no contact with society for years keeps digging only because of the exchangability of his gold with the goods of others, ie socially.

"Condemn greenbacks all you want, if everyone agrees to them, then they are money -- at least according to the socialists of both the left and right for whom nothing exists except that given by society."

Greenbacks aren't "accepted" by everyone. They are FIAT. If the state relinquished it's monopoly on currency, that is, a free market was established in currency, then the greenback would in short time cease to be used, replaced by other notes that were redeemable in a real medium of exchange, ie gold. Socialist wet dreams would matter not.

Ross

Post 12

Tuesday, May 17, 2005 - 3:24pm

Ross Elliott wrote: "RC can't "trade" with himself in the present, he must delay his consumption until a future date. That's saving. Saving is not trade. Saving is capital accumulation which enables trade."

Should he plant wheat or should he fish or should he harvest coconuts or hunt goats -- and hunt them to eat or domesticate? What does he do with the excess that comes from success? Extra wheat can be stored for a long time and be eaten later. This is what you call "saving." However, it can also be stored and planted, or it can be made into beer, or it can feed the goats, or it can be spread around as bait for birds who can be killed and eaten -- or be domesticated. If eaten, their entrails can be used as bait for fish or can be buried to enrich the soil for the next crop of wheat. What to do? What to do? What to do? Money solves these problems by providing a tool for conceptualizing the exchange of value. It does not matter if the two people on either end of the process are the same person.

Ross Elliott wrote: "If the state relinquished it's monopoly on currency ... the greenback would in short time cease to be used... "

Nothing prevents you from creating your own money. I have written about this many times. You can find the laws summarized in The Coin World Almanac. (I worked on the current edition, but it goes back 25 years.) You can find them yourself, of course, via Thomas, for instance, or other government websites. One thing you cannot do is make money in the form of coins. (It is an old glitch in the laws.) You can only make coin tokens. However, you can make your own silver or gold rounds -- and many people do.

You can make your own paper currency -- and many people do. See for instance http://www.northernexpress.com/editorial/features.asp?id=138
or for instance http://www.schumachersociety.org/frameset_local_currencies.html The point is that you can create your own many. Many people do.

There is a free market in money and it is at work all around you. Most people prefer government money. Go to any coin store and buy all the silver one-ounce ingots and rounds you want. You can probably get 100 ounces for less than spot. Then, try to spend them for whatever you want at whatever rate you can negotiate. You will discover that there is a free market in money and most people freely reject gold and silver. We Objectivists claim that they are brainwashed by public education and government propaganda. So, we propose to save the world from itself by logically convincing them of the rationality of our proposals. Well, there is a free market in ideas, too.

Post 13

Tuesday, May 17, 2005 - 5:21pm

"There is a free market in money and it is at work all around you. Most people prefer government money."

Very interesting post. However, I thought legal tender laws mandated sellers accept government money even if they also allowed alternative currency, given it an undeniable forced advantage in how widely it is accepted. Is this not the case?

Post 14

Tuesday, May 17, 2005 - 5:32pm

I thought that United States currency was legal tender for all debts. Some businesses or governmental agencies say that they will only accept checks, money orders or credit cards as payment, and others will only accept currency notes in denominations of $20 or smaller. Isn't this illegal?
The pertinent portion of law that applies to your question is the Coinage Act of 1965, specifically Section 102. This is now found in section 392 of Title 31 of the United States Code. The law says that: "All coins and currencies of the United States, regardless of when coined or issued, shall be legal-tender for all debts, public and private, public charges, taxes, duties and dues."

This statute means that all United States money as identified above are a valid and legal offer of payment for debts when tendered to a creditor. There is, however, no Federal statute mandating that a private business, a person or an organization must accept currency or coins as for payment for goods and/or services. Private businesses are free to develop their own policies on whether or not to accept cash unless there is a State law which says otherwise. For example, a bus line may prohibit payment of fares in pennies or dollar bills. In addition, movie theaters, convenience stores and gas stations may refuse to accept large denomination currency (usually notes above $20) as a matter of policy.

(Bold added - MM)
( see http://www.treas.gov/education/faq/currency/legal-tender.shtml#q1)

Aaron asked: " I thought legal tender laws mandated sellers accept government money ..."

Post 15

Tuesday, May 17, 2005 - 11:52pm

Michael:

"Should he plant wheat or should he fish or should he harvest coconuts or hunt goats -- and hunt them to eat or domesticate? What does he do with the excess that comes from success? Extra wheat can be stored for a long time and be eaten later. This is what you call "saving." However, it can also be stored and planted, or it can be made into beer, or it can feed the goats, or it can be spread around as bait for birds who can be killed and eaten -- or be domesticated. If eaten, their entrails can be used as bait for fish or can be buried to enrich the soil for the next crop of wheat."

This, quite simply, is NOT trade. It is saving or it is the beginning of a discussion about marginal utility. There is NO need for money in a non-trade environment such as RC's island.

"Money solves these problems by providing a tool for conceptualizing the exchange of value."

Actually, I would have said that money provides a way of ABSTRACTING the exchange of goods. Money, to be money, must represent the value of a wide variety of goods. Just as the abstraction RECTANGLE represents a wide variety of right angled parallelograms.

"Most people prefer government money... You will discover that there is a free market in money and most people freely reject gold and silver."

That's outrageous. Michael, you seem to have forgotten Gresham's Law: bad money drives out good. That is, the most valued currency will be hoarded (saved, unused) while the debased currency will be readily exchanged. THAT is why all state monopolies suffer shortages, or in the case of currency, inflation-discounting.

If you're suggesting that the plethora of government regulations and the massive bureaucracy that is required to enforce them re the Federal Reserve system are examples of a free market in money then you're deluded. The taxing power of government as the ONLY basis for the solvency of the greenback is NOT more ethical than the redeemability of private currency issued by private banks. Could you claim a free market in bread if all bakers had to compete with the government baker that subsidised it's operation out of tax revenues and self-serving regulations?

"We Objectivists claim that they are brainwashed by public education and government propaganda. So, we propose to save the world from itself by logically convincing them of the rationality of our proposals. Well, there is a free market in ideas, too"

I'm obviously a bit thick. What exactly does that mean?

Ross Elliot (one "t", please)

Post 16

Wednesday, May 18, 2005 - 9:46am

Ross Elliot wrote: "That's outrageous. Michael, you seem to have forgotten Gresham's Law: bad money drives out good. That is, the most valued currency will be hoarded (saved, unused) while the debased currency will be readily exchanged."

Ross, you are hardly alone in your beliefs. To indicate the kinds of contradictions that arise from the popular assumptions, consider the above about Gresham's Law. First of all, you do not state it completely or correctly.

If paper is less valued than gold, then you would find it easy to spend gold on the street. It would be so easy that it would be against your self-interest to do so. You would be losing money. So, go to Walmart with a gold coin. Go to the local hardware store.

You might have some success going to a farmer or independent machinist. Rightwingers such as NORFED have these trade networks, just as the lefties do with their "community currencies." You have to find these special partners specifically because most people reject gold. Most people want FRNs because they are more liquid. FRNs are the money of common choice. Gold has too many problems.

Agreed that I would accept an ounce of gold in preference to FRNs if you asked me to perform some work for you. However, I would also have to factor in how much I want to save --- the primary purpose of gold: saving -- and how much I would have to sell in order to get the FRNs that everyone else wants.

Furthermore, the existence of rightwing trade circles and leftwing community currencies further disproves the "pseudo-Gresham's Law" that you stated.

Properly stated, Gresham's Law does explain the problem with bi-metallism. It can be widened to consider any two monetary media under those circumstances where the law causes an imbalance in the market. That imbalance does not exist with gold and FRNs.

(Edited by Michael E. Marotta on 5/18, 9:47am)

(Edited by Michael E. Marotta on 5/18, 9:50am)

Post 17

Sunday, January 14, 2007 - 11:07am

Discussing the Gold Dinar...

Sam Erica wrote: Well, not exactly. Discounting inflation, the lender undertakes risks of not getting paid...

Yes, that is true, of course. Economics is like physics. They both describe the real world. So, you and I are talking about "force" and I say "mass times acceleration" and you reply, "work divided by distance or else the change in momentum."

I am looking to increase my wealth in the future.  I notice that most people seem to prefer the present. So, I go around offering to give people one dollar here and now, if they will give me $1.05 next year at this time. Even if I factor in "risk" (not getting paid) and ask for $1.06, the essential thing is that I value the future more than the present and forego the dollar today in the expectation of $1.05 later.

The Austrians from Auburn on Roderick T. Long's Yahoo forum pointed out to me that the consistent explanation for my point of view is that the lender does not discount the future as heavily as the borrower. Both prefer the present to the future as an axiom of human action, but they value the future differently, so the lender has a "comparative advantage" from their different "opportunity costs" relative to the value of a dollar here and now. That is fine. However, to me, "force" is better understood as a "change in momentum" or "mass times acceleration" because those are more basic concepts. In other words, the lender values the future more than the borrower does -- and we agree on that -- and so, I set the borrower's expectations as the baseline of measurement and say that the lender values the future more than they value the present.

The advantage to that is that in turn explains how businesses find profit in the future. We know that at the macro scale, business is future oriented.  Businesses anticipate situations. Government is focused on the past. Governments punish people for what they did.   Governments waste resources attempting to change the past. Government is an attempt to achieve the metaphysically impossible.

Making all of this relative to the gold dinar, we can say that shariah law is erroneous in not allowing interest. But reality is not to be cheated. The good Muslim does not charge "interest" but only charges "fees." They also can "take an interest" i.e., buy into your business, in return for the loan. All of that is demanded or allowed by the nature of money.

Post 18

Monday, January 15, 2007 - 8:54am

Michael:

Early man learned to store his seed grain over the winter to provide for sowing his crops in the spring. He had the discipline to forego gorging on his harvest so that he could live another year. This is hardly "valuing the future more than the present". It just doesn't fit. "Valuing the future" is just a floating abstraction.

I favor the definition of capital as "deferred consumption". It's succinct and this is exactly what early man did. They were capitalists, whether they knew it or not.

The other thing that lenders want to be compensated for besides inflation and the risk of not being paid is that their capital is tied up for the period of the loan. Lenders enter a loan agreement with the expectation that they won't need their funds for the duration of the loan but if unexpected emergencies turn up they have no recourse.

Lenders want to be justly compensated and when an agreement is reached it signifies that the borrowers agree that the terms are just.

Sam

Post 19

Sunday, January 21, 2007 - 8:02am