The Money Thread - what defines money, and what ought to define it?
jmski52
Posts: 22,899 ✭✭✭✭✭
In replying to another thread, Norseman88 reminded me of a question that I've been thinking about - concerning money. What actually defines it?
Is it true that there isn't enough gold and silver in existance to satisfy the world's need for a medium of exchange? Why isn't it a simple matter of assigning a value and then living with that value?
If a pair of boots costs 1 ounce of silver or 1/100th ounce of gold, what's the problem? Or even 1,000,000th of an ounce - what does it matter as long as it is universally understood?
Assigning a value to silver or gold is really not much different than the government assigning a value to a piece of paper, except that the government can't print unlimited silver and gold, to finance their nefarious undertakings, and politicians therefore would have a devil of a time trying to buy votes. International trade would be facilitated without the need for exchange rates and middlemen.
Seems to me, that gold and silver as money would solve a few problems.
Your thoughts?
Is it true that there isn't enough gold and silver in existance to satisfy the world's need for a medium of exchange? Why isn't it a simple matter of assigning a value and then living with that value?
If a pair of boots costs 1 ounce of silver or 1/100th ounce of gold, what's the problem? Or even 1,000,000th of an ounce - what does it matter as long as it is universally understood?
Assigning a value to silver or gold is really not much different than the government assigning a value to a piece of paper, except that the government can't print unlimited silver and gold, to finance their nefarious undertakings, and politicians therefore would have a devil of a time trying to buy votes. International trade would be facilitated without the need for exchange rates and middlemen.
Seems to me, that gold and silver as money would solve a few problems.
Your thoughts?
Q: Are You Printing Money? Bernanke: Not Literally
I knew it would happen.
I knew it would happen.
0
Comments
So this is a ramble through a few points from a gold bug's point of view.
My late father was an economist: a classical economist (ie economics in the tradition of Adam Smith) with bullionist inclinations. To him, "real money" was gold. He regarded as false the idea that the government will never renege on its commitments. That's because he had seen the UK and US governments renege on the convertibility of gold twice in his lifetime--in the early 1930s and the early 1970s. They never fail to give you the banknotes they promised, but all too often they devalue the banknotes first.
My daughter was an economist: a neo-classical economist (similar to, but significantly developed from, the Smith tradition) with monetarist inclinations. The "quantity of money" is an important factor (as is the velocity of money) that can be measured in a number of ways (the infamous M0, M1, M2 and M3), because various types of bank deposits need to be counted as money for various purposes.
(I'm not an economist, though I read a lot. My daughter described me as an "unreconstructed Keynesian"--not a term of admiration from a neo-classicist. My father was more polite, but probably felt the same.)
In between these points of view is the claim that "base money" comprises cash and deposits with the central bank. I associate this view with money-market practitioners and supply-side economists. To these folk, other bank deposits are "credit", not real "money". The government needs to ensure that amount of base money in the economy matches the demand for that money. Too little base money and the enonomy will contract (really horrid); too much base money and inflation will take off (horrid, but not as awful as a slump). This view is outlined clearly in the first half of Nathan Lewis's book "Gold: the Once and Future Money."
To a Keynesian supply-sider, the challenge that faces Mr Obama in the US and Mr Brown in the UK is to increase the money supply to prevent a slump, and then, at just the right moment, to reduce the money supply to prevent inflation's getting out of hand. Sadly the right time to make the change is when the future has just started to seem less gloomy; announcing that you propose to choke off the first signs of growth is never popular with voters.
On a gold-bug analysis, the rise in the gold-silver ratio recently means that the precious-metals market believes that Messrs Obama and Brown will succeed in preventing a slump, but fail to prevent significant inflation.
The best book I know on the whole subject of money was written as a textbook for the first of those two semester-long lecture courses: "A History of Money" by Glyn Davies.
Later,
John
i'd say "money" would be something that has an accepted standard of measure of value that is recognized by a/its sovereign nation and minted/printed by that nation.
what ought to define it? i dunno that is one complicated puppy right now.
<< <i>It didn't in the past ... what make you believe, it will in the future? >>
There was ZERO inflation between 1850 and 1913. Seems like gold/silver actually worked quite well.
"Have you ever asked what is the root of money? Money is a tool of exchange, which can't exist unless there are goods produced and men able to produce them. Money is the material shape of the principle that men who wish to deal with one another must deal by trade and give value for value. Money is not the tool of the moochers, who claim your product by tears, or of the looters, who take it from you by force. Money is made possible only by the men who produce. Is this what you consider evil?
"When you accept money in payment for your effort, you do so only on the conviction that you will exchange it for the product of the effort of others. It is not the moochers or the looters who give value to money. Not an ocean of tears not all the guns in the world can transform those pieces of paper in your wallet into the bread you will need to survive tomorrow. Those pieces of paper, which should have been gold, are a token of honor--your claim upon the energy of the men who produce. Your wallet is your statement of hope that somewhere in the world around you there are men who will not default on that moral principle which is the root of money, Is this what you consider evil?
"Have you ever looked for the root of production? Take a look at an electric generator and dare tell yourself that it was created by the muscular effort of unthinking brutes. Try to grow a seed of wheat without the knowledge left to you by men who had to discover it for the first time. Try to obtain your food by means of nothing but physical motions--and you'll learn that man's mind is the root of all the goods produced and of all the wealth that has ever existed on earth.
"But you say that money is made by the strong at the expense of the weak? What strength do you mean? It is not the strength of guns or muscles. Wealth is the product of man's capacity to think. Then is money made by the man who invents a motor at the expense of those who did not invent it? Is money made by the intelligent at the expense of the fools? By the able at the expense of the incompetent? By the ambitious at the expense of the lazy? Money is made--before it can be looted or mooched--made by the effort of every honest man, each to the extent of his ability. An honest man is one who knows that he can't consume more than he has produced.'
"To trade by means of money is the code of the men of good will. Money rests on the axiom that every man is the owner of his mind and his effort. Money allows no power to prescribe the value of your effort except the voluntary choice of the man who is willing to trade you his effort in return. Money permits you to obtain for your goods and your labor that which they are worth to the men who buy them, but no more. Money permits no deals except those to mutual benefit by the unforced judgment of the traders. Money demands of you the recognition that men must work for their own benefit, not for their own injury, for their gain, not their loss--the recognition that they are not beasts of burden, born to carry the weight of your misery--that you must offer them values, not wounds--that the common bond among men is not the exchange of suffering, but the exchange of goods. Money demands that you sell, not your weakness to men's stupidity, but your talent to their reason; it demands that you buy, not the shoddiest they offer, but the best that your money can find. And when men live by trade--with reason, not force, as their final arbiter--it is the best product that wins, the best performance, the man of best judgment and highest ability--and the degree of a man's productiveness is the degree of his reward. This is the code of existence whose tool and symbol is money. Is this what you consider evil?
"But money is only a tool. It will take you wherever you wish, but it will not replace you as the driver. It will give you the means for the satisfaction of your desires, but it will not provide you with desires. Money is the scourge of the men who attempt to reverse the law of causality--the men who seek to replace the mind by seizing the products of the mind.
"Money will not purchase happiness for the man who has no concept of what he wants: money will not give him a code of values, if he's evaded the knowledge of what to value, and it will not provide him with a purpose, if he's evaded the choice of what to seek. Money will not buy intelligence for the fool, or admiration for the coward, or respect for the incompetent. The man who attempts to purchase the brains of his superiors to serve him, with his money replacing his judgment, ends up by becoming the victim of his inferiors. The men of intelligence desert him, but the cheats and the frauds come flocking to him, drawn by a law which he has not discovered: that no man may be smaller than his money. Is this the reason why you call it evil?
"Only the man who does not need it, is fit to inherit wealth--the man who would make his own fortune no matter where he started. If an heir is equal to his money, it serves him; if not, it destroys him. But you look on and you cry that money corrupted him. Did it? Or did he corrupt his money? Do not envy a worthless heir; his wealth is not yours and you would have done no better with it. Do not think that it should have been distributed among you; loading the world with fifty parasites instead of one, would not bring back the dead virtue which was the fortune. Money is a living power that dies without its root. Money will not serve the mind that cannot match it. Is this the reason why you call it evil?
"Money is your means of survival. The verdict you pronounce upon the source of your livelihood is the verdict you pronounce upon your life. If the source is corrupt, you have damned your own existence. Did you get your money by fraud? By pandering to men's vices or men's stupidity? By catering to fools, in the hope of getting more than your ability deserves? By lowering your standards? By doing work you despise for purchasers you scorn? If so, then your money will not give you a moment's or a penny's worth of joy. Then all the things you buy will become, not a tribute to you, but a reproach; not an achievement, but a reminder of shame. Then you'll scream that money is evil. Evil, because it would not pinch-hit for your self-respect? Evil, because it would not let you enjoy your depravity? Is this the root of your hatred of money?
"Money will always remain an effect and refuse to replace you as the cause. Money is the product of virtue, but it will not give you virtue and it will not redeem your vices. Money will not give you the unearned, neither in matter nor in spirit. Is this the root of your hatred of money?
"Or did you say it's the love of money that's the root of all evil? To love a thing is to know and love its nature. To love money is to know and love the fact that money is the creation of the best power within you, and your passkey to trade your effort for the effort of the best among men. It's the person who would sell his soul for a nickel, who is loudest in proclaiming his hatred of money--and he has good reason to hate it. The lovers of money are willing to work for it. They know they are able to deserve it.
"Let me give you a tip on a clue to men's characters: the man who damns money has obtained it dishonorably; the man who respects it has earned it.
"Run for your life from any man who tells you that money is evil. That sentence is the leper's bell of an approaching looter. So long as men live together on earth and need means to deal with one another--their only substitute, if they abandon money, is the muzzle of a gun.
"But money demands of you the highest virtues, if you wish to make it or to keep it. Men who have no courage, pride or self-esteem, men who have no moral sense of their right to their money and are not willing to defend it as they defend their life, men who apologize for being rich--will not remain rich for long. They are the natural bait for the swarms of looters that stay under rocks for centuries, but come crawling out at the first smell of a man who begs to be forgiven for the guilt of owning wealth. They will hasten to relieve him of the guilt--and of his life, as he deserves.
"Then you will see the rise of the men of the double standard--the men who live by force, yet count on those who live by trade to create the value of their looted money--the men who are the hitchhikers of virtue. In a moral society, these are the criminals, and the statutes are written to protect you against them. But when a society establishes criminals-by-right and looters-by-law--men who use force to seize the wealth of disarmed victims--then money becomes its creators' avenger. Such looters believe it safe to rob defenseless men, once they've passed a law to disarm them. But their loot becomes the magnet for other looters, who get it from them as they got it. Then the race goes, not to the ablest at production, but to those most ruthless at brutality. When force is the standard, the murderer wins over the pickpocket. And then that society vanishes, in a spread of ruins and slaughter.
"Do you wish to know whether that day is coming? Watch money. Money is the barometer of a society's virtue. When you see that trading is done, not by consent, but by compulsion--when you see that in order to produce, you need to obtain permission from men who produce nothing--when you see that money is flowing to those who deal, not in goods, but in favors--when you see that men get richer by graft and by pull than by work, and your laws don't protect you against them, but protect them against you--when you see corruption being rewarded and honesty becoming a self-sacrifice--you may know that your society is doomed. Money is so noble a medium that is does not compete with guns and it does not make terms with brutality. It will not permit a country to survive as half-property, half-loot.
"Whenever destroyers appear among men, they start by destroying money, for money is men's protection and the base of a moral existence. Destroyers seize gold and leave to its owners a counterfeit pile of paper. This kills all objective standards and delivers men into the arbitrary power of an arbitrary setter of values. Gold was an objective value, an equivalent of wealth produced. Paper is a mortgage on wealth that does not exist, backed by a gun aimed at those who are expected to produce it. Paper is a check drawn by legal looters upon an account which is not theirs: upon the virtue of the victims. Watch for the day when it bounces, marked, 'Account overdrawn.'
"When you have made evil the means of survival, do not expect men to remain good. Do not expect them to stay moral and lose their lives for the purpose of becoming the fodder of the immoral. Do not expect them to produce, when production is punished and looting rewarded. Do not ask, 'Who is destroying the world? You are.
"You stand in the midst of the greatest achievements of the greatest productive civilization and you wonder why it's crumbling around you, while you're damning its life-blood--money. You look upon money as the savages did before you, and you wonder why the jungle is creeping back to the edge of your cities. Throughout men's history, money was always seized by looters of one brand or another, whose names changed, but whose method remained the same: to seize wealth by force and to keep the producers bound, demeaned, defamed, deprived of honor. That phrase about the evil of money, which you mouth with such righteous recklessness, comes from a time when wealth was produced by the labor of slaves--slaves who repeated the motions once discovered by somebody's mind and left unimproved for centuries. So long as production was ruled by force, and wealth was obtained by conquest, there was little to conquer, Yet through all the centuries of stagnation and starvation, men exalted the looters, as aristocrats of the sword, as aristocrats of birth, as aristocrats of the bureau, and despised the producers, as slaves, as traders, as shopkeepers--as industrialists.
"To the glory of mankind, there was, for the first and only time in history, a country of money--and I have no higher, more reverent tribute to pay to America, for this means: a country of reason, justice, freedom, production, achievement. For the first time, man's mind and money were set free, and there were no fortunes-by-conquest, but only fortunes-by-work, and instead of swordsmen and slaves, there appeared the real maker of wealth, the greatest worker, the highest type of human being--the self-made man--the American industrialist.
"If you ask me to name the proudest distinction of Americans, I would choose--because it contains all the others--the fact that they were the people who created the phrase 'to make money.' No other language or nation had ever used these words before; men had always thought of wealth as a static quantity--to be seized, begged, inherited, shared, looted or obtained as a favor. Americans were the first to understand that wealth has to be created. The words 'to make money' hold the essence of human morality.
"Yet these were the words for which Americans were denounced by the rotted cultures of the looters' continents. Now the looters' credo has brought you to regard your proudest achievements as a hallmark of shame, your prosperity as guilt, your greatest men, the industrialists, as blackguards, and your magnificent factories as the product and property of muscular labor, the labor of whip-driven slaves, like the pyramids of Egypt. The rotter who simpers that he sees no difference between the power of the dollar and the power of the whip, ought to learn the difference on his own hide-- as, I think, he will.
"Until and unless you discover that money is the root of all good, you ask for your own destruction. When money ceases to be the tool by which men deal with one another, then men become the tools of men. Blood, whips and guns--or dollars. Take your choice--there is no other--and your time is running out."
Money is a tool. A construct. Its best use appears to be when it is plastic and dynamic. Money is dirty. Money is worthless. It's rotten cotton. Stinky ink. Digits in a machine. Gas in the tank that gets you from A to B. Why would you worship gas? It's just a tool.
A couple of popular mantras in the metals world: Gold is money. Silver is money. That's a devaluation of gold and silver.
Gold and silver aren't money. Gold and silver are wealth.
--Severian the Lame
Money is a tool. A construct. ... It's rotten cotton. Stinky ink. (ie banknotes) Digits in a machine. (ie bank deposits) Gas in the tank that gets you from A to B.
That captures neatly (and much more concisely than anything I write
Gold and silver are wealth.
Indeed they are. They are what economists call a "store of value". There are other stores of value: common stock in a well-managed company like Acme is another--though different in that it will probably to produce an income and may possibly decline in value to zero. The ownership of land is another. People should keep their wealth diversified across a number of different stores of value.
Some excellent means of exchange are rotten stores of value: Federal Reserve notes in the mattress spring to mind. Some excellent stores of value are inconvenient means of exchange: buying a house with silver dollars springs to mind.
Where I disagree with Weiss is that he seems to identify "money" with a means of exchange, and "wealth" with a store of value. My observation is that, throughout history, people have used their word for money to cover both of these purposes. (Money has several other purposes as well, but means of exchange and store of value are two of the most important.) So to me gold is money: an useful store of wealth, appropriate for a part of one's wealth, and a not-always-convenient means of exchange.
Finding a form of money that met both needs exercised the the minds of the people of the last few centuries BC. Attempts were made to define money in terms of a number of things of value. As 57loaded says, salt was one of these, and the Latin word for "salty", salarius, came to be used for a soldier's pay. Farm animals were another, very popular, choice: probably the most common Latin word for money, pecunia, comes from the word for sheep, pecu. Land was another choice. The snag was that these things fluctuated in value rather too much: the fluctuations over time made them less useful as stores of value; the fluctuations as one moved from place to place made them less useful as means of exchange.
Two things worked better than the rest. The metals silver and gold. And that's why they were used: for no better reason than they worked. They too fluctuated in value to some extent--in particular changes in the price of gold in terms of silver caused problems for countries that used coins made of both--but, if the price of gold soared in a country, it nearly always said much more about the value of the currency than it did about the value of gold.
This conclusion, that gold and silver had a value as the foundation of a monetary system-- a reliable store of value and a workable means of exchange--remained largely unchallenged from about 600 BC up to 1914.
I don't think I really want to see metals-backed currency. It would either have to be so diluted that it would make fiat money look worthless (ex. 1 grain =$100), or it would tie up the free flow of money by limiting credit, loans, etc. Maybe. I think.
Actually, I don't agree with this either. But I've said enough for one day.
Later,
John
I do agree that historically gold & silver have been money. But they aren't now. It's evident in how you had to use the past tense so much in your reply. And it's also self-evident:There is no place on earth where gold and silver are used as a medium of exchange on any kind of a scale where they could still be considered "money". How can they be money if they're not used as money?
As I tried to get across in my somewhat esoteric post: I personally don't see that as a bad thing. It moves gold and silver from the means to the end. Fiat is servant to gold & silver's master. The ultimate Gresham's law.
It's possible and perhaps likely that the last ~100 years are an anomaly in human history, that paper money and computer credits will fall away and gold and silver will return. Or we may see a currency emerge, every bit as modern as our current currency, that is represented and exchanged electronically, but which is in fact backed by gold and silver. But for right now, gold and silver represent wealth. "Money" is just chits on a score card.
--Severian the Lame
Touché.
I may not agree with this, either. A metals-backed currency would be alot less diluted than the one we have right now.
A metals-backed currency would force people (politicians and financiers included) to honor their committments instead of weaseling around the real issues with inflated currencies or leveraged debt that nobody understands.
Gosh, if you wanted to finance a war, you'd actually have to pay for it up front. Only just wars could stand this test.
As for limiting credit, why would that be the case? A fully-convertible currency wouldn't preclude anyone making a home loan or a business loan. Not at all. The amounts might be different, and the terms might be different, but those are simple adjustments that the capital markets would make almost instantaneously. It simply means that there wouldn't be nearly as much "wiggle room" or incentive for gross speculation.
The main caveat that argues against a paper fiat currency isn't the inconvenience of silver or gold. It isn't even the prospect of hyperinflation to pay for the debt burden and overspending by politicians.
The main argument against fiat currency at this time is the unsecured nature of electronic credits. Think about it. "Money" can printed in denominations of a trillion at the whim of the printer, or it can be rendered worthless or stolen instantly at the touch of a key. That really throws a wrench into the definition of money, if you think money should be printed or electronically transferred at all.
I knew it would happen.
<< <i>Gosh, if you wanted to finance a war, you'd actually have to pay for it up front. Only just wars could stand this test. >>
If I do recall, the civil war was financed and they were on a gold standard back then...
What it 'ought' to be is something which cannot corrupt.
<< <i>
<< <i>It didn't in the past ... what make you believe, it will in the future? >>
There was ZERO inflation between 1850 and 1913. Seems like gold/silver actually worked quite well. >>
Only worse, it was mostly DEFLATION.
Knowledge is the enemy of fear
<< <i>
<< <i>
<< <i>It didn't in the past ... what make you believe, it will in the future? >>
There was ZERO inflation between 1850 and 1913. Seems like gold/silver actually worked quite well. >>
Only worse, it was mostly DEFLATION.
If you retired today on a fixed pension, which would you rather see occur, inflation or deflation? How is deflation "worse"?
If you work hard all your life and save as much as you can.....inflation is your penalty. Deflation would be your reward....again, how is that "worse"?
<< <i>
<< <i>
<< <i>
<< <i>It didn't in the past ... what make you believe, it will in the future? >>
There was ZERO inflation between 1850 and 1913. Seems like gold/silver actually worked quite well. >>
Only worse, it was mostly DEFLATION.
If you retired today on a fixed pension, which would you rather see occur, inflation or deflation? How is deflation "worse"?
If you work hard all your life and save as much as you can.....inflation is your penalty. Deflation would be your reward....again, how is that "worse"? >>
I would have to agree with you that if you're retired and like most elderly people have the bulk of your holdings in interest bearing holdings like cd's, treasury and municipal bonds then deflation would be much better than rampant or even fairly high inflation.
<< <i>In replying to another thread, Norseman88 reminded me of a question that I've been thinking about - concerning money. What actually defines it?
Is it true that there isn't enough gold and silver in existance to satisfy the world's need for a medium of exchange? Why isn't it a simple matter of assigning a value and then living with that value?
If a pair of boots costs 1 ounce of silver or 1/100th ounce of gold, what's the problem? Or even 1,000,000th of an ounce - what does it matter as long as it is universally understood?
Assigning a value to silver or gold is really not much different than the government assigning a value to a piece of paper, except that the government can't print unlimited silver and gold, to finance their nefarious undertakings, and politicians therefore would have a devil of a time trying to buy votes. International trade would be facilitated without the need for exchange rates and middlemen.
Seems to me, that gold and silver as money would solve a few problems.
Your thoughts? >>
Let me clarify my position on backing paper money with PM's, I do not think at the current valuations that there is enough Gold and Silver to back the trillions of dollars floating around out there however if the value of Gold and Silver were truly adjusted upward to reflect the true rate of inflation over the years then I do think there would be enough to back the fiat currency. I suppose they could even start making Silver and possibly Gold coins with smaller percentages of metal content and assign realistic values rather than the laughable 1 dollar a Silver eagle carries or the laughable 50 dollars a Gold eagle carries. I also think they should start making $500 and $1,000 bills again backed of course by Gold and Silver.
Somone else stated something here that got me thinking the other day and I must say that I agree, they said that there isn't enough actual paper money to cover everything as much of the currency is simply electronic money transfered back and forth. Amusing isn't it that many of us rail about all the fiat currency when a huge portion of it isn't even currency but actually electronic fictional currency.
Societies and economic systems are like eco systems and in a sense are governed by the laws of biology.
The more diverse the eco system the more stable it is, one species has a dramatic decrease in population or becomes extinct, the overall negative impact to the system as a whole is mitigated.
The more diverse the economic system is the more resilient the system as whole is to failure of any one given ecomonic entity. When a system is heavily dependent upon the action of a single controlling entity (organization) the negative impact is much more severe when that controlling entity becomes unheathly or dies.
All human organizations mirror biological entities, they seek to expand (grow), eventually growth ceases and at some future point contraction leads to its demise (death).
While functional the central controlling entity can negatively or positively impact all forms of exchange, but upon its complete demise some forms of exchanges will become worthless, others will retain value, and some may increase in value.
Free markets, with multiple economic entities, generally experience fewer negative consequences when any individual entity fails when compared to centrally controlled markets with fewer economic entities.
One would think envirnomentalist reconginze the correlation.
They could use whatever percentage they wanted, as long as they were consistant. In reality, gold and silver may be a whole lot more valuable than the Comex says they are. If they are ever chosen as money again, I suspect that the values will be somewhat shocking.
There's no particular reason why the percentage of a coin needs to be low. If they only made 1/10th oz. coins, the coin might represent a month's wages. If the currency were backed 100% by pm, then a 1/1,000,000th oz. (0.000001 oz) paper bill at $50,000/year in salary would still be worth $20.00.
If it's a fiat bill, it's only worth what the gov't can con you into believing what they say it's worth. If it's 100% backed by pms, then it's worth what it's worth all on its own merits. Eh?
I knew it would happen.