Money’s just how you keep score
Money is inherently worthless. Sure, some can be melted into components or made into fuel. But, by and large, it has no value. You can’t eat it or build stuff out of it. Heck, mostly it’s just digital 1s and 0s on a computer somewhere. Most of mine is. It’s only value is that we’ve basically decided it has value. Similarly, gold is equally useless other than some specialized applications and things. Gold is not used that often in those applications and is usually just made into shiny things or stored in vaults.
This is why I don’t understand calls to return to the gold standard. Does it matter that the means of communication we all agree to trade under is based on bits of data or shiny rocks? Probably not.
That and there’s more money than gold.
February 18th, 2011 at 10:35 am
Actually gold is a very important commodity with many uses. Just like copper, it is used in construction, electronics and many other applications you would never even believe. Thats why, just like any other commodity, it does have intrinsic value. It may not be to the extent that everyone thinks, but it is still a commodity.
February 18th, 2011 at 10:37 am
That last line is the one that matters.
February 18th, 2011 at 10:38 am
Gold standard proponents basically want the money supply to be controlled and reduce or eliminate inflation. They claim it reduces the government’s ability to screw up the economy.
February 18th, 2011 at 10:41 am
A fair point but not viable now since they already have screwed up the economy.
February 18th, 2011 at 10:53 am
Yeah, but the idea is still simple… its just like personal finance and your ability to back up your own dept with tangible assets. It doesnt really have to be a gold standard, it could be anything tangible with intrinsic value to back up the IOU’s that are paper money.
*I submit we get on a “bullet standard” Ha!
February 18th, 2011 at 10:58 am
You can’t build stuff out of money?
Sure you can!
February 18th, 2011 at 11:00 am
You do know that there’s a lady who’s sure all that glitters is gold, don’t you?
February 18th, 2011 at 11:25 am
The gold standard is the best way to put government into a straight jacket. Since you can only grow money supply as fast as you can dig it out of the ground it tends to eliminate inflation. If a government starts living beyond its means, gold will flee the country forcing the government to scale back. It is a way to prevent the massive imbalances that we now have.
February 18th, 2011 at 11:35 am
Uncle-
You do know that there is a cash for gold ad up on your blog right now! 😀
February 18th, 2011 at 11:37 am
This is by far the most important argument in favor of a gold standard. If there is a finite supply of the currency then the gov’t can’t press a button and increase the money supply. This inherently prevents your money from losing value as the rate which it currently does.
Also as stated above, gold is intrinsically very valuable, and has been recognized as such since the beginning of recorded history.
There was an excellent discussion of this topic in the 2+2 Politics forum (or maybe the Economics subform). The discussion also included possible private money market solutions which would eliminate the need for a gov’t run money supply entirely (before you scoff at or dismiss such ideas you may want to at least read them!) Unfortunately the forums seem to be down at the moment so I cannot link to it.
February 18th, 2011 at 11:46 am
Gold didn’t become money because it had some intrinsic value, it became money because it’s rare, durable, and relatively inert. So it’s hard to destroy but also hard to extract – yes, governments could get more gold by encouraging more and better mining and extraction, but by the same token a government enabling better resource extraction also tends to have more goods to buy with it (increased demand for money).
The downside to a gold standard is that we are not nearly as tied to physical goods – many of the most valuable goods currently are intellectual property, software, and the like that take minimal physical resources. Thus, gold doesn’t track nearly as well with money demand as it used to. The upside is that you can’t print gold.
February 18th, 2011 at 11:47 am
This is the thread I was referring to:
http://forumserver.twoplustwo.com/118/economics/gold-standard-267391/
There are several other threads that are good as well.
This article I remember being particularly good:
http://www.auburn.edu/~garriro/g4gold.htm
Hope this helps!
February 18th, 2011 at 11:54 am
I am more in favor of a cattle standard. 😉
Seriously, money is simply another means of contracting or, if you wish, communicating. A promise made and more or less guaranteed to be kept.
February 18th, 2011 at 12:36 pm
The gold standard is a good idea in theory. The problem is how the heck to we keep the government honest about it? If I remember correctly, we officially left the gold standard because we had already had left it in practice. Unless we go back to physically trading coin for debts owed and abandon computerized trading, I don’t see how we can ensure that we’re not just claiming to be on a gold standard while staying in the same mess.
February 18th, 2011 at 12:39 pm
Oh, forgot to mention that the reason why we’re in this mess is that we were riding a mass bubble of debt. Everyone was buying things on credit, using assets they didn’t actually have in hand as collateral. A gold standard wouldn’t have stopped this.
February 18th, 2011 at 12:46 pm
What basing your currency on a tangible item does for you is require that it takes as much effort to produce more currency as it does to produce the goods that can be bought with that currency. It takes effort to mine, extract, and mint gold, platinum, and silver coins. This is why an economy that allows creating money with a mouse click is doomed to failure, because it is easier to own a computer than it is to work to create something.
February 18th, 2011 at 12:51 pm
Have you been reading Wondermark again? Their last four comics have been about this very subject.
I myself have an Italian 50,000 Lira note that I accidentally brought back from Italy just before they changed to the Euro. It is now not just as worthless as a Lira note always was, it is obsolete.
Same for some mid-1980’s Mexican peso notes and coins.
Dickens may have been right when he had one of his characters recommend “portable wealth” such as pocket watches, gemstone rings, and gold jewelry, as the best way to possess things that could buy one’s way out of problems.
February 18th, 2011 at 12:52 pm
Wondermark: for the surreal in all of us!
http://wondermark.com/700/ and the next few after that!
February 18th, 2011 at 1:08 pm
money gets its value in large part from being hard to create more.
Gold is limited by how much you can mine, wearas fiat dollars are limited by how much the fed wants to expand.
February 18th, 2011 at 1:26 pm
Been using a 100 trillion dollar bill as a bookmark. Yes, trillion. From Zimbabwe. They put expiration dates on these things. Bernanke’s got nothin on Mugabe. I think they’re on the dirt standard over there.
February 18th, 2011 at 1:38 pm
You sound like Nico Poulantzsas. Wait, he was a Marxist.
BTW, Italian banks still accept the Lira in exchange for Euros. It’s about 26EUR for the 50000 lire note.
February 18th, 2011 at 2:00 pm
Which is worth more now- an 1820 $20.00 bill or an 1820 $20.00 gold piece?
February 18th, 2011 at 2:03 pm
Yes, Unc.: it matters. And you have all this profoundly wrong.
February 18th, 2011 at 2:05 pm
POTD
February 18th, 2011 at 2:20 pm
BWM — “…possible private money market solutions which would eliminate the need for a gov’t run money supply entirely (before you scoff at or dismiss such ideas you may want to at least read them!)”
Go read this as soon as you possibly can:
http://mises.org/books/denationalisation.pdf
That’s F.A. Hayek’s 1976 paper “The Denationalization of Money”, in a 10mb PDF. This is a seminal article, and a must-read for anyone interested in this subject.
There is simply no good reason for a government monopoly on the money supply — none, ever — and every good reason against it.
February 18th, 2011 at 3:01 pm
Actually, I subscribe to the physical ownership and control of Private Stockpiles of “Beans, Bullets and Band-Aids” with Hard Currency such as Gold and Silver coins a little farther down the list. The way this planet is going, a Full Belly might be the sign one is a member of the Elite Classes. That, and their paid Bodyguards (Knights) guarding them from the Rabble. Think Barry, Pelosi, Reid, the Clintons, the Kerrys will be standing in line to enter the Soup Kitchen, even though they aided and abetted this mess we’re in?
February 18th, 2011 at 3:16 pm
I am already sold on the idea, but I love Hayek and will definitely read it.
February 18th, 2011 at 3:55 pm
Its basically an accident of chemistry that gold has historically been used a store of wealth. Go down the list of other elements and you’ll see what I mean.
All the gases are out because they’re hard for common people to store and trade.
All the reactive rare earths are out, because, well the fizzle away in contact with things like water.
Radioactives are out, because, well, why would you want “money” that disappears with time.
That leaves a bunch of metals. A lot of them like iron will oxidize away, another downer for “money.”
Once you run down the list, that leaves you with Gold, Platinum, Palladium and Silver.
Palladium was only discovered in 1803 so its out for the ancients.
Platinum requires somewhere around 3000 degrees to smelt, another bridge to far for ancients.
That leaves silver and gold, the two historic materials for currency. Silver tarnishes pretty readily so gold gets the nod of being the only element left standing.
February 18th, 2011 at 4:12 pm
Here’s a shout-out for osmium, another rare metal you can trust. It’s almost indestuctible.
February 18th, 2011 at 6:55 pm
I’m with Gunmart. My metallic specie of choice is brass, copper, and lead.
February 18th, 2011 at 7:12 pm
Hie thee to a library and check out “The Creature From Jekyll Island”.
(Then read it.)
February 18th, 2011 at 7:54 pm
A gold (or any other commodity) standard is just another tool in the checks-and-balances toolbox, most useful if the other tools are in use as well. It’s not a panacea.
February 18th, 2011 at 8:06 pm
What Mariner said.
“The Creature from Jekyll Island”
Read it. Not only will it piss you off, but it will make you want to move to the gold standard again. And it will make you realize how hard they are screwing us. And they are upping the ante with “Quantitative Easing.”
February 19th, 2011 at 2:49 am
Extra points if you open carry a rifle or shotgun when you go.
February 19th, 2011 at 8:06 am
This argument is not a good one:
“That and there’s more money than gold.”
There has always been more money than gold… always. Even when we were on the gold standard.
February 19th, 2011 at 12:02 pm
“Also as stated above, gold is intrinsically very valuable, and has been recognized as such since the beginning of recorded history.”
When gold was the monetary standard, it was otherwise worthless. The only thing you could do with gold (broadly speaking) was make money or money equivalents (jewelry, &c) out of it.
@aeronathan has the right of why it, of the other intrinsically worthless.
And, remembering that Gresham penned his famous law in an era of hardy money, what makes you think it will stop inflation?
February 20th, 2011 at 11:28 am
You’ve ALL missed one much more important (from a legal standpoint) fact: Congress is only authorized to COIN money (Article I, Section 8).
The “paper” money we use is NOT legal currency. Printing paper money here in the USA (technically, the colonies) predated the writing of the US Constitution. Hyperinflation was the result (sound familiar?). The founders were aware of this and wanted to ensure that future generations wouldn’t have to suffer the problems caused by an unsound currency, and so specified that congress could COIN money, and deliberately left out printing. It took generations for the government to pull the wool over (most) people’s eyes about it. They started with “silver certificates”. See, it isn’t actually silver, but if you bring it to the bank, we’ll give you silver for it, so it’s OK. After decades of that, once few were left who remembered using $5, $10, $20 COINS, they removed the “silver certificate” part of the “money”, and talked about “the gold standard”, in which the government promised to keep gold in vaults equal to 40% of the amount of money printed. Then, when few could remember silver certificates, they took us off the gold standard, and poof, our money became worthless (it takes $21+ to buy today what $1 would buy 100 years ago). It’s just taking a while for people to realize that our money is worthless. Most still haven’t figured it out.
There are those who say that doesn’t matter, because you have to work less time to buy products today than they did 100 years ago. But that would still have been true if the currency had been sound for the last 100 years. And it might have been even “more true” (if 100 years ago people had to work 1 hour to pay for a loaf of bread, and today it’s 10 minutes with our unsound currency, perhaps if the currency were still sound, it might only take 1 minute).
Printed currency is only one step up from using leaves from trees for money. This is more true than it sounds, since we use cotton and linen for our currency; both are plant products. Does it really make sense to use a renewable resource as the standard for wealth exchange? That’s all money is, an exchange medium used to allow you to easily exchange the wealth you produce for the wealth you want – note that wealth is NOT money, it is goods and services. That’s why money needs to be something which is rare and whose supply is fixed.
Why does the supply need to be fixed? So that between the time you’re paid and the time you spend your pay, the amount of money cannot increase, resulting in what you’ve been paid being worth less than it was when you were paid (during the hyperinflation days of the German Weimar Republic, people were paid twice a day so they could dash out during lunch while their morning’s income would still be worth enough to pay for dinner).
Why does it need to be rare? The more there is of whatever substance we use for money, the less it will be worth, and the more you’ll need. Imagine using granite for money, and needing a few hundred pounds of it to pay for a night out at the movies with the spouse and kidlets. Kind of inconvenient.
Sorry about the length, and for those of you who’ve actually read all of this rant: thanks.
February 20th, 2011 at 1:55 pm
It doesn’t matter for inflationary purposes whether or not the money is coin or paper – inflation happens. Governments will debase the currency – they’ve done it at least since the fall of the Roman Empire.
There is not enough gold and silver available in all the world to make coins to cover the value of the US economy; that tells me that going to fiat money was a GOOD thing. The value of all the stuff and ideas (no matter how you calibrate it) is more than the value of all the precious metals in the world.
Let me make an analogy to explain. Picture a paper strip, whose length represents the money supply of the USA. Measure its length in feet, or meters, or furlongs – it’s still a certain size. Then picture a golden yardstick, whose length represents the sum total of gold in existence. Place them next to one another. The paper strip is MUCH longer than the golden yardstick. No matter what you measure each in, no matter than the units of measure are not fixed, the paper strip is still larger than the golden yardstick.
Monetary units are a way of measuring wealth – As Uncles Says, a way to keep score. We used to have to use gold and silver because they couldn’t be counterfeited; people couldn’t “make up” points on their tally. Governments could still change the measure of money by debasing the currency. Today, we have book-keeping – if someone does try and “make up” points on their tally, other people can call them on it. Sure, governments can still debase the currency, but they will be punished IMMEDIATELY for doing so.
February 21st, 2011 at 10:17 pm
Alchemist:
Originally silver, and then later gold, became money because Sumerian priests would accept set lengths of silver wire in lieu of yearly taxes in the form of grain and livestock.
The priests liked its utility as temple and vestment decoration.
If a very short length of wire was worth a big chunk of someone’s tax bill, that same bit of wire could be used as money, instead of moving goats and grain around.