RoR: Forum

I agree that there a number of things that could be used as money because of their tangible worth. But gold is still the best and is still practical.

Steve, I have no problem with gold being one source of currency in a totally free market of currencies. If the market resulted in gold being the dominant currency, again, fine with me. But, I doubt that dominance of gold as almost the sole medium of exchange would occur, because there are various attributes that an ideal currency would have, and no currency, including gold, possesses all those attributes (a non-comprehensive list of those attributes from: http://chestofbooks.com/finance/banking/Banking-And-Currency/The-Functions-And-Attributes-Of-Money-Continued.html):

(1) Value of material;

(2) Portability;

(3) Indestructibility;

(4) Homogeneity;

(5) Divisibility;

(6) Stability of value;

(7) Cognisability.

to which I'd add an eighth quality: there must be enough of it to handle the volume of economic transactions that occur.

Thus, currencies that are good at some of these attributes are going to be less good at others. Paper money backed by some tangible commodity is light and easy to put in a wallet, but suffers from destructibility and counterfeiting problems.

Shares of stock can be particularly good at the ability to retain and even increase in value, but suffer from problems with volatility and cognisability (people being able to instantly recognize it and know what value it has compared to other currencies), not to mention transaction costs of redeeming it.

And so on. A free market of competing currencies would shake out which of these attributes are most highly prized.

Where gold falls shortest is in divisibility: it is so pricy that even a tiny coin is worth a lot, more than the amount to buy most items, much less make change. That is why coins used to be in gold, silver, and copper, to account for the various sizes of purchases. The divisibility problem could be gotten around somewhat by having credit cards that make purchases in tiny fractions of an ounce of gold, with the gold not actually changing hands for most transactions -- for example, buying a loaf of bread that is advertised for 0.XX grams of gold using a plastic card backed by gold in a vault somewhere.

Also, in a completely free market for currency, it is inevitable that competition would result in a variety of currency types -- it takes a government-enforced monopoly to enforce sticking to just one currency. In particular, I would say that really large corporations like WalMart or Starbucks would be likely to try and make shares of their stock into a form of currency, and would have the market power to make that happen. For example, WalMart would love to pay both their employees and vendors with shares of stock, and to eliminate a lot of credit card charges by accepting shares of stock from customers, either as paper or metal currency denominated in shares of stock or as credit cards. And, when buying gift cards to hand out at Christmas, which recipient wouldn't prefer cards that were backed by actual shares of stock, which makes them convertible into cash if you didn't frequent that store?

And, with the advent of computers and the internet, it is now practical to have quite a few different sources of value backing currency, since when you made a purchase the cash register or credit card swiper could instantly convert that currency into a common standard of reference like gold. For example, when I went to Canada a while back and made credit card purchases, each purchase was instantly converted from Canadian dollars to American dollars at the instantly prevailing exchange rate. When I got my credit card bill, basically every transaction had a slightly different exchange rate, which I didn't have to calculate.

Anyhow, the point of a free market in currency is to not even try to dictate what market share each potential type of currency would have, but just let the quasi-Darwinian process sort out winners and losers. I suspect that the result over time would be dozens of different stores of value, with gold being the reference currency against which they were all measured and converted.

Post 21

Friday, March 4, 2011 - 7:43pm

Jim,

The only area where we appear to have a little bit of a disagreement is in practicality. Gold is the most malleable of the metals and can be drawn finer than any other metal and is capable of being used in very fine gold plating that is stable and durable.

A coin could be about the size of a nickel and have about 28.35 mg of pure gold in the plating. That is is 1/1000th of an ounces. Who cares what exchange ratio exists with the dollar? That is just a market function under the right laws (actually, under the elimination of those laws that we shouldn't have in the first place). At today's cost of gold that coin would be equivalent to around $1.40's worth of goods (probably too little to make counterfeiting profitable).

I'm sure there are ways to weave gold thread into a rag-paper type of certificate. And we are a credit card market place now - that means we swipe our card and x milligrams of gold are moved from our account to the merchants accounts. (Just numbers till one of us goes into the bank and asks for some metal.

Post 22

Friday, March 4, 2011 - 7:45pm

Jim:

there must be enough of it to handle the volume of economic transactions that occur.

Please see Sam, Bill and my response to this.

Where gold falls shortest is in divisibility: it is so pricy that even a tiny coin is worth a lot, more than the amount to buy most items, much less make change. That is why coins used to be in gold, silver, and copper, to account for the various sizes of purchases. The divisibility problem could be gotten around somewhat by having credit cards that make purchases in tiny fractions of an ounce of gold, with the gold not actually changing hands for most transactions -- for example, buying a loaf of bread that is advertised for 0.XX grams of gold using a plastic card backed by gold in a vault somewhere.would use would most likely be

Bill pointed this out:

"On a gold standard, people would probably be trading gold receipts, rather than the physical metal, and these paper receipts could be scaled to reflect whatever denomination one chose. You wouldn't have to restrict the receipts to an ounce of gold per receipt. You could have receipts for (say) 1/1000 of an ounce of gold, or for whatever amount is practicable. If gold were valued at $1,000 an ounce in today's dollars, then a paper dollar could simply serve as a receipt for 1/1000 of an ounce of gold. In that case, you would need 1,000 of them to redeem an ounce of gold, but you could also have $1000 receipts as well, which would simply say, "Pay to the Bearer on Demand" One Ounce of Gold."

Post 23

Friday, March 4, 2011 - 8:08pm

Jim:

The divisibility problem could be gotten around somewhat by having credit cards that make purchases in tiny fractions of an ounce of gold, with the gold not actually changing hands for most transactions -- for example, buying a loaf of bread that is advertised for 0.XX grams of gold using a plastic card backed by gold in a vault somewhere.

You're correct in the above but you haven't recognized that the electronic transfer of funds is as important as it even now is. Just because people don't normally pay small amounts such as for a pack of chewing gum by debit card doesn't mean that it isn't feasible or even economical. IMO, the portability problem doesn't exist.

Sam

Post 24

Friday, March 4, 2011 - 8:21pm

Steve, I think we are essentially in full agreement. I hadn't thought of the plating approach, though that would have the drawback of wear on the coin eventually removing much of the actual gold and leaving just the valueless slug. Plus, plating would make the gold less valuable because separating it from the base metal would be so difficult that it wouldn't be economically practical if you wanted to use the gold for the practical uses that give it some of its value (such as plating electronic components to prevent corrosion, or making jewelry).

Again, no matter what you use, there is always some tradeoff between the various functions and attributes of an ideal currency. Plating a base metal is no different.

A credit card approach, backed by gold deposits, would be a better way of tackling the divisibility problem, but then you aren't technically trading physical gold, you are trading a kind of ethereal proxy for gold that, with some difficulty, could be converted into the actual metal. Not that that is necessarily a problem, but one of the points of owning physical gold is that if things get dicey, you can physically grab your gold and flee and make untraceable purchases that don't give away your location to the authorities -- call it the "Jews fleeing Nazis" scenario.

I'm not convinced by the arguments that there is enough gold in the world to cover all the value that it would need to pay for. Perhaps right at this instant there might barely be enough, but I foresee a continuing explosion in the value of things produced and the average wealth of individuals in the world, especially as computers get exponentially more powerful and more creative uses are found for that newfound power. It is not inconceivable that during the lifetime of people born today, the value of all the things produced annually in the world could increase tenfold or a hundredfold or a thousandfold or even more. Would the amount of physical gold increase by that much? I seriously doubt that.

I mean, I look at the relative poverty of my youth, when physically obtaining enough calories to eat was a huge problem for our family, and owning even the most primitive computer was unthinkable, and we didn't own a TV at all for a decade, and then we got this crappy little 13" black and white TV, versus now where I'm typing this on one of I think five or six computers we own (we're so wealthy I don't even know what that number is without giving it some thought), and it is a really powerful and well-built iMac, and my kids are watching TV in the other room on a 55" flat-screen hi-def TV, and I'm able to carry on stimulating conversations on esoteric topics like this with a handful of like-minded people plucked out of a sea of statists.

Life got mind-blowingly better for me, and I suspect my kids will look back on this as the equivalent of the crappy 13" black and white TV days.
(Edited by Jim Henshaw on 3/04, 8:29pm)

Post 25

Friday, March 4, 2011 - 9:01pm

Jim:

I'm not convinced by the arguments that there is enough gold in the world to cover all the value that it would need to pay for.

You don't seem to have grasped the concept that the purchasing power of an ounce of gold isn't constant. Bernanke doesn't get it either (I expect that he really does but doesn't want to express it publicly.) The purchasing power will increase in step with the needs of the of the economy. If economic activity expands by a factor of two the purchasing power of the ounce will double. Instead of requiring 5kg of gold for the purchase of a house it will only require 2.5kg. If there were only 100 ounces of gold in the whole world it could still function as a currency, but each ounce would have enormous purchasing power.

Sam

Post 26

Friday, March 4, 2011 - 9:18pm

Jim,

1. Plating doesn't have to be with pure gold - it can be alloyed with a tough, wear resistant metal. We've had gold coins in may countries for many decades - in the end if someone offers you a coin that looks too worn, you just don't accept it. Before long people are trading in worn coins at the bank before the coins get too bad.

2. The ability to melt it down isn't relevant. If you wanted pure gold, like a 1 ounce bar, just take enough gold plated coins to the gold store and buy the bar. Smelters have no problem melting down and separating the alloys, but the reason to do so, and the market pressures involved in melting down things to recover their gold is drastically reduced when a gold currency exists. No more would people need to trade fiat paper money in exchange for gold that has to be recovered from somewhere and then cast in a recognizable form so that people will buy it as a protection against a fiat currency.

3. You are right that there will always be trade-offs. And we agree that the market place lets us find the most satisfaction for the most people (least trade-offs).

4. In a free market banking system there would be wide variety of account types. And you can have paper certificates that are promises to pay gold, you can have EFT shares of gold, and you can also have some physical gold. You pick what best suits the particular purpose (invest for profit, balance a portfolio, speculate on price changes, protect against inflation, or fleeing nazis)

5. The reason that there is enough is that even tiny amounts still statisfy the requirments you listed for a medium of exchange. 1/1000 of an ounce - no problem. 1/10,000 of an ounce - no problem. I would point at not just exponential increases in computer power and the explosion of applications, but also the nascent science of nano-manufacturing - which might generate a far greater explosion in wealth. But we live in the digital world already so we can just keep adding zeros to the denominator - it works. The physical gold does not ever have to increase by one penny. This is the greatest thing about a real money - increases in the supply of goods and services per capita without a corresponding increase in the money means everyone that has any money is richer. That is a real increase in wealth from the only place it could come - human inovation expressed in more and better products for the same or less money.

Post 27

Friday, March 4, 2011 - 11:13pm

Sam -- I'm not buying the notion that the value of the existing stock of gold is exactly equal to the value of all goods and services produced, regardless of how much of each is available. That violates my understanding of how economics works.

Gold is a scarce resource that has various uses, and is valuable because of those uses, and because of its scarcity is not used for lesser uses such as paving streets. It is not valuable simply and solely because of its scarcity. It is not infinitely valuable. I would not buy an ounce of gold for $1,000,000. I would have other preferences for those scare resources, and so would pretty much everyone else.

Post 28

Friday, March 4, 2011 - 11:38pm

Steve -- I agree with most of what you said. In particular, I think you have nailed how creative means could be used to overcome the fractional problem with gold as a means of exchange.

I'm not sure I fully understand your point #5, so perhaps it would be helpful to elaborate my understanding of why I think Sam is wrong, and see if you disagree or not.

My point in the above post addressed to Sam is that gold is not infinitely valuable, and that with an explosion of wealth a free market for currency would have to find other means of expressing that value created in the currency exchanged.

While it is helpful for stability of currency for money to be based on something real and valuable, money is not wealth, but rather a means of facilitating mutually beneficial exchanges that increase wealth. That is why, despite all its flaws, fiat money still sorta staggers along and works in a half-assed way despite not being backed up by anything real at all.

So, currency could be stocks, it could be fractional ownership of the expected wealth to be generated by a creative individual, it could be computer processing time, it could be partial ownership of the physical products being created, it could represent some fraction of a visit to enjoy a high-end courtesan's favors, it could be many different and creative ways of capturing all that value created. At some point in a wealth explosion, gold would of necessity become a shrinking portion of the currency pool. If technology reached the point where someone of Bill Gates' current wealth was considered to be middle-class or even kind of working-class poor, gold simply wouldn't cut it as the sole means of currency, because there simply wouldn't be enough. Money is a type of commodity, and people simply would value the sum total of all the other stuff being created far more than they would value the sum total of the commodity of gold-based currency.

Post 29

Saturday, March 5, 2011 - 12:36am

Jim wrote,

Sam -- I'm not buying the notion that the value of the existing stock of gold is exactly equal to the value of all goods and services produced, regardless of how much of each is available. That violates my understanding of how economics works.

Gold is a scarce resource that has various uses, and is valuable because of those uses, and because of its scarcity is not used for lesser uses such as paving streets. It is not valuable simply and solely because of its scarcity. It is not infinitely valuable. I would not buy an ounce of gold for $1,000,000. I would have other preferences for those scare resources, and so would pretty much everyone else.

Under a gold standard, gold IS the money. You don't buy an ounce of gold with paper dollars. You buy goods and services with an ounce of gold or however many ounces the goods and services exchange for.

Post 30

Saturday, March 5, 2011 - 1:02am

Jim,

Bill's last reply is really the answer to the question you asked me. When gold is the money, then it's value is in what it can be exchanged for.

If gold takes the place of the dollar, you would measure everything else in terms of gold - "What do you want for the 2018 Chrysler 650 on the corner of the lot?" "Oh, I can let that go for about 10 ounces. Just two years ago, a new Chrysler like that would have set you back 12 ounces. Now the nano-bot built engines last longer and cost that much less. Are you ready to buy today?"

Post 31

Saturday, March 5, 2011 - 5:23am

John Armaos (post 17):

Otherwise I'd like to hear if it's at all possible how a fiat currency could survive if competing with a commodity backed currency.

�Apparently you don't understand or deny Gresham's law.�And please explain to us why the Canadian Maple Leaf hasn't replaced the U.S. dollar as the circulating currency in the U.S. and hasn't become the dominant circulating money in Canada. :-)

(Edited by Merlin Jetton on 3/05, 6:46am)

Post 32

Saturday, March 5, 2011 - 7:12am

I just posted this in another thread... thought it was worth posting here.

The majority of leeches have democratic power over the producers.

The leeches force producers to exchange values with USD. The only way that producers can trade other values for they values they create, is to trade their produce for USD. Hence the USD has value in the market.

The leeches have majority voted to take ~40% of the income of producers. The leeches are spending USD in a irresponsible manner. They permit themselves to spend more than they earn. The leeches claim bankruptcy or similar, and claim that they need not repay their debts.

The leeches permit themselves to create USD out of thin air. They force the producers to accept the newly created money as payment for their debts that were set in a price which was based on the previously existing monetary base.

Unfortunately, we are currently lacking a good solution as to how we (the producers) can defend ourselves from tax enforcement and gold/other backed currency confiscation.

Post 33

Saturday, March 5, 2011 - 7:20am

Sorry guys, but I agree with Jim Henshaw. At some point the economy will be creating so much value that it would economically make sense to perform nuclear physics to create gold from other atoms, and hence gold would no longer function as a currency. But I don't think that's something we need to be concerned about.

The problem isn't that we need to switch to a gold backed currency. The problem is that the leeches do not permit us to trade in anything other than USD.

It would be cool if we could have gold backed currency, computational time based currency (bitcoin), information storage capacity based currency, electrical power based currency, oil based currency. But... we don't... because the leeches would confiscate. So the problem isn't really "What should the alternative to USD be". The problem is "How do we defend ourselves from leeches?"
(Edited by Dean Michael Gores on 3/05, 7:23am)

Post 34

Saturday, March 5, 2011 - 7:30am

Jim:

My point in the above post addressed to Sam is that gold is not infinitely valuable

The value of gold is directly related to its scarcity. If gold is scarce as a medium of exchange as determined by the need for liquidity in the economy then its purchasing power will increase correspondingly.

Merlin:

Apparently you don't understand or deny Gresham's law. And please explain to us why the Canadian Maple Leaf hasn't replaced the U.S. dollar as the circulating currency in the U.S. and hasn't become the dominant circulating money in Canada.

I understand your point about Gresham's Law but in both the US and Canada the only legal currencies are their respective dollars.

As an aside, Canadian Tire Money is an interesting phenomenon but it can't be enforced in settling debts.

Sam

Post 35

Saturday, March 5, 2011 - 7:52am

It seems everyone here is in agreement the free market ought to be the arbiter for what kind of currency would be preferred. The disagreement seems to be what that currency would likely look like in a free market. Fair enough. But let's look at history here. We have thousands of years of commodity currency in gold and silver to draw upon. I don't think it was by accident these precious metals were chosen as a preferred medium of exchange for millennia. Why were these metals so attractive as a preferred currency?
(Edited by John Armaos on 3/05, 7:53am)

Post 36

Saturday, March 5, 2011 - 8:16am

John Armaos, fill in the blanks for the below:

(1) Value of material: what is gold/silver/copper used for? Lots of things beyond jewelry.
(2) Portability: gold/silver/copper ordered in scarcity and portability
(3) Indestructibility: Gold/silver/copper are atoms with very stable nuclear properties, so they do not change form very quickly. Most losses are due to how they are handled: if handled poorly the metal can wear off.
(4) Homogeneity: Gold/silver/copper are atoms are practically all the same.
(5) Divisibility: Gold/silver/copper are made of atoms, which are quite small and can be divided into all sorts of quantities.
(6) Stability of value: New technologies are constantly coming out that make old technologies worthless. Sometimes the new technology uses more metal, sometimes not, which can make the non monetary value of the materials variable.
(7) Cognisability: In pure forms, gold/platinum can be easily verified by measuring density.

Post 37

Saturday, March 5, 2011 - 8:27am

Thanks Dean, well I'm sold, precious metals is an excellent choice for currency :)

Post 38

Saturday, March 5, 2011 - 10:39am

I think Dean's post #33 did a better -- nay, brilliant -- job of restating what I've been arguing all along. Sanction!

Let me try restating the restatement, in case anyone still isn't buying Dean's argument:

I think the mistake some people are engaging in here is the statist fiat currency indoctrination that we were all subjected to when we were little kids (and thus accepted uncritically because no adults called bullshit on that and explained to us what was going on), but substituting gold for USD. USD -- fancy printed pieces of paper backed by nothing tangible at all -- only have value because the government forcibly prohibits any competing currency from circulating other than other fiat currencies issued by other governments. And people only accept it because we need SOMETHING to function as a medium of exchange that works better than the inefficiency of barter. Replacing USD with gold, with the government enforcing gold as the only currency, means you have replaced a completely valueless fiat currency with a fiat currency that has some value, but not necessarily the full value that the government insists it has.

In a completely free market, though, that wouldn't work. Gold would be one commodity among many competing to be a means of exchange. It would compete against platinum, against silver, against rare earth metals (if they can be encased so as to not be poisonous), against (insert physical commodity possessing most of the attributes of an ideal currency.) And while gold has many qualities of an ideal currency, and thus has some value just because of that, it still is a commodity, and people in a free market will still evaluate it against all other commodities based on what the gold can be used for.

If I owned a huge, fancy beachside mansion in Kahala (or a mansion in Beverly Hills, or wherever), and Steve came up to me and offered to buy it off me in exchange for a piece of gold the size of a dime, I would decline to sell it for that because I value the commodity of the mansion way more than I value the commodity of that scrap of shiny metal. And in a free market, no one else would value that scrap of shiny metal as being worth a Kahala mansion, either, because in a free market only things that had actual value could be exchanged, certainly not fiat money, even fiat money in the form of gold.

(Edited by Jim Henshaw on 3/05, 10:47am)

Post 39

Saturday, March 5, 2011 - 10:48am