Objective Money

Metaphysics and Epistemology
1

I know that when one speaks of an ‘Objective money supply’, one is most likely speaking of gold.

There are many reasons why gold could be considered such. Recently in many posts there have been comprehensive essays on the subject. Yet, I have my doubts about the Objective value of gold. If a lot of gold was produced - say mined from an asteroid - and added to the world money supply, inflation would be a problem as much as it is with fiat money. Also, gold doesn’t necessarily represent the ‘real’ economy. Production can increase, but gold supply is fixed. It can decrease, but gold supply is fixed (well, assuming no asteroid…).

In an earlier time, if everyone responsibly saves their gold in a bank, and a famine occurs, the gold itself has little bearing on present food supply. The price of food simply would rise - effectively inflation - the value of your savings drops. No one will give up their lunches for a month because your gold will by them 10 lunches in a year. But economists seem to treat money this way - and are surprised when irresponsibly financed investments run out of money before they’re finished (they call it a liquidity crisis, and cry for a bailout).

In the end, it seems that gold falls under many of the shortcoming of money in general. From what I understand, there isn’t a great enough supply of it in the world to finance the real economy. I’ve wondered if there isn’t a better alternative. What if money was based on real assets - land, factories, buildings?

My woefully inadequate modern undergraduate economics education has taught me that money needs to be: a store of value, and divisible/transferrable. So, the latest stock of Tickle Me Elmos bundled with Windows 7 packs produced in q4 2009 couldn’t be a basis for money - well it could, but as a store of value it would be lousy. Sure, you could trade a ‘bill’ in for 2.5 Elmos, or .34 Windows CD’s, but the value of these things is so transient. Machinery depreciates, so it wouldn’t represent a good source of long-term savings. The Empire State Building isn’t divisble, though maybe its rent payments are. I suppose you could have a very diverse money supply with standard, sort of ‘Visa’ bucks that exchange at floating rates with, say, ‘Elmo’ bucks. You work for Mattel, so you’re paid in ‘Elmo’ bucks, which you exchange for ‘Visa’ bucks, which are generally accepted at most retail centers and financial institutions. If you want to save, you trade Visa bucks for stock in some financial institution that is trusted for being very stable and safe in its investments over time.

In the end, ‘Visa’ bucks might become the market standard - a fiat currency - but one that is in free competition with other currencies. The idea is that all of these potential fiat currencies trade relative to real values. If Visa bucks crashed, institutions would hold rights to real property and could transition to a competing currency.

I could tell why an Objectivist would balk at this idea, in which there is no fixed standard of value. But then again, maybe this idea is good? Any economic-minded thinkers out there who could provide perspective on the issue of money. Specifically on whether gold is a practical basis for money, and whether there are any other objective alternatives?

My idea came out of a discussion over ‘systemic risk’ and the economic concept of externalities. My concern was thinking of a ‘land enclosure’ solution to the commons tragedy embodied in systemic risk in the financial system. My idea was that if currency was related in some tangible consistent way to real assets, people wouldn’t be able to spend more of it than what they had - market incentives be damned. My problem with gold was that I figure there are a lot more real assets in the economy than what can be represented by gold.

2

Just to elaborate:

If you worked for Mattel in this scenario, most likely you would be paid in ‘Visa bucks’ that Mattel would obtain from a financial institution by trading ‘Elmo bucks’ for them. The supply of ‘Elmo bucks’ would be fixed - according to the specific production runs of the products in that bundle (Elmos and Windows 7 CDs). Retailers that wanted to purchase and sell Tickle Me Elmo or Windows would have to trade for the Elmo bucks - at which point they could obtain the Elmos. Okay, this sounds a lot like bartering. The difference between this and sheer bartering is three-fold.

First, there is no need to exchange goods. A currency trader might not be interested in stocking Elmos, but would want to obtain the bills betting that as the popularity of the product rises - he can trade them on. This would give a barter system a means of financing that isn’t traditionally available (the speculation could be used to finance the next order of Elmos).

Second, it is more efficient than bartering (I’m assuming computers would be used, or at least paper). Plus, it has a legal guarantee attached. Certain types of bills, if issued, would have contractual obligations associated with them. The government could establish a legal framework that could be used to attach contractual understandings to certain ‘types’ of bills. If Elmo bucks represent 2.5 Elmos per 1 buck, then the firm can get a special stamp from the government on these bills that increases their credibility, but represents a contractual agreement with anyone possessing them.

Third, broadly used currency - like ‘Visa’ bucks - can have a real, if transient, base. At any given time, ‘Visa’ holds huge reserves of these barter bills. The quantity and composition changes - affecting the value of ‘Visa’ bucks - but there’s always real value there. Essentially, the ‘Visa’ bank becomes the marketplace. There could even be multiple marketplaces. It might be more cost-effective for poorer nations to trade agricultural commodities for cheap industrial goods in one market, than try and trade those goods in the ‘Visa’ bank. This way, you have exchange rates and currency regimes not unlike today - except that rather than representing arbitrary national boundaries, these currencies represent a variety of markets in equilibrium.

As always, real estate, gold, etc. can be freely traded as well.

This is just my idea. I’m throwing it out there. Any others? Comments?

3

Objectivism – qua philosophy – does not really support gold, but freedom and objective value. An Objectivist recommending gold is putting on an economist’s hat at some point. The reasons for selecting a commodity are the typical ones that you’re probably aware of: it’s fungibity, durability, divisibility and so on. This type of analysis is economics rather than philosophy.

Take the idea of “Elmo bucks”. Little Elmo dolls are an objective value, and if people freely want use it as money, then it would meet the major philosophical requirements. However, when looking at all the various things that have objective value, it is unlikely that people would choose Elmo dolls as long-term money. Windows (or any software) would be even less desirable: the ability to duplicate at extremely low cost would imply that the value would soon approach that of a blank disk… and, perhaps, less because one cannot even us it as a blank disk! From an economics and long-term perspective, people would probably be happier using shares of Mattel or Microsoft as money, than using dolls and DVDs.

Some companies could do something like you suggest. The most boringly obvious would be mining companies. They could split into two entities: one that owned rights to the mineral and the other that mined it. If the rights-owning entity was bound by certain terms – e.g. fixed expense ratios, limit on the debt it can take on, rules about the retirement of the rights as the mineral is mined – then commodity-notes they issue could be a pretty decent money. Of course the deposits would have to be based in some relatively rights-respecting country.

Basically, the main requirements from a political viewpoint is for governments to phase themselves out of the money business and allow people to figure out what they would like to use. The system that evolves will probably have a large component of commodities. It is also likely that the system that evolves will surprise us with some great new ideas that we wouldn’t think of today.

4

I guess you’ll end up with the FED again.

I was highly opposed to a scheme like the FED.. but considering the alternatives…

(I live in Argentina, here the fiat money is controlled by congress/executive (politicians)… it’s a disaster)

Look it this way, the FED is a privately owned fiat money comptroller. Better private than gov.

I agree with you that gold as currency means slow production/innovation growth than paper money.

5

I guess you’ll end up with the FED again.

I was highly opposed to a scheme like the FED.. but considering the alternatives…

(I live in Argentina, here the fiat money is controlled by congress/executive (politicians)… it’s a disaster)

Look it this way, the FED is a privately owned fiat money comptroller. Better private than gov.

I agree with you that gold as currency means slow production/innovation growth than paper money.

The crucial aspect of our current monetary system is that it is based on fiat. The system that ZSorenson is proposing is not based on fiat. So, his scheme will not end up with anything that resembles the FED, in its essentials.

Every now and then someone mentions that the U.S. FED is private. This is false, but since it is off-topic… the following thread is one place this has been discussed earlier.

6

There is nothing private about the Fed.

7

There is nothing private about the Fed.

The Federal Reserve System is not “owned” by anyone and is not a private, profit-making institution. Instead, it is an independent entity within the government, having both public purposes and private aspects

The twelve regional Federal Reserve Banks … are organized much like private corporations–possibly leading to some confusion about “ownership.” For example, the Reserve Banks issue shares of stock to member banks. However, owning Reserve Bank stock is quite different from owning stock in a private company. The Reserve Banks are not operated for profit, and ownership of a certain amount of stock is, by law, a condition of membership in the System. The stock may not be sold, traded, or pledged as security for a loan; dividends are, by law, 6 percent per year.

“The Reserve Banks are not operated for profit” … “dividends are, by law, 6 percent per year”

http://www.federalreserve.gov/generalinfo/faq/faqfrs.htm#5

IMHO, they’re an association of private banks. A trust. And that’s a GOOD THING (to me, better than the greenback printing presses being operated by politicians).

Yes, they’ve got legislation enacted to have some cover (“The Federal Reserve was created on December 23…”), but there is a difference between “formal” structure and “real” structure. The decisions are made by the second.

A major component of the System is the Federal Open Market Committee (FOMC), which is made up of the members of the Board of Governors, the president of the Federal Reserve Bank of New York , and presidents of four other Federal Reserve Banks, who serve on a rotating basis. The FOMC oversees open market operations, which is the main tool used by the Federal Reserve to influence money market conditions and the growth of money and credit."

Therefore, the Federal Reserve can be more accurately described as “independent within the government”.

The intent of Congress in shaping the Federal Reserve Act was to keep politics out of monetary policy. The System is independent of other branches and agencies of government

Since the Federal Reserve has considerable discretion in carrying out its responsibilities, to whom is it accountable?

The Federal Reserve’s ultimate accountability is to Congress, which at any time can amend the Federal Reserve Act.

Yes, at any time. Congress in tooootally independent of money. Sure. The Fed is Gov, but “independent”.

8

The crucial aspect of our current monetary system is that it is based on fiat. The system that ZSorenson is proposing is not based on fiat. So, his scheme will not end up with anything that resembles the FED, in its essentials.

To clarify, what’s a ‘Visa’ buck? and how it differentiates from a Federal Reserve Note ?

ZSorenson: “In the end, ‘Visa’ bucks might become the market standard - a fiat currency - but one that is in free competition with other currencies.”

The problem with competing currencies is the costs and uncertainties involved. That’s why the euro is a good idea.

Within ZSorenson system you’ll end up with the best currency as the only one. I guess.

9

To clarify, what’s a ‘Visa’ buck? and how it differentiates from a Federal Reserve Note ?

Nobody is forced to accept a Visa buck as money.

The problem with competing currencies is the costs and uncertainties involved.

Problem to whom? Problem for what goal? Why do you believe we all are working toward that goal for which you consider this a problem?

10

Yesterday, (Wednesday, Dec. 9) Ron Paul introduced a bill to abolish all legal tender laws, eliminate laws that prohibit the operation of private mints, and eliminate capital gains and sales taxes on gold and silver coins.

http://www.lewrockwell.com/paul/paul619.html

11

To clarify, what’s a ‘Visa’ buck?

You’ll have to ask ZSorenson :stuck_out_tongue: . From his examples (Elmo Doll etc.) he was not trying to push the particular example — I mean, would people seriously use rights to Elmos as money? Rather, he’s putting forward the idea that private individuals and firms could create money based on a variety of non-commodites that are still assets.

…and how it differentiates from a Federal Reserve Note ?

The Federal Note is based – at most – on the ability of the government to tax people in the future. Further, as Brian noted, there is no element of force when people use Elmo bucks.

Sure, there are big problems with using Elmos as money. They would make for pretty bad money. Windows DVDs would be even worse. However, the basic underlying idea that one could use money based on different underlying assets is sound, if the choice of those assets is sound. When we look for what type of asset makes sound money, we narrow down to commodities, particularly durable ones like metals.

The problem with competing currencies is the costs and uncertainties involved. That’s why the euro is a good idea.

Within ZSorenson system you’ll end up with the best currency as the only one. I guess.

Yes, having a single standard, and not having to convert is very convenient. One can expect a gravitation to a few standards, not a proliferation on standards. However, it is not so inconvenient that one would only need a single standard. One could even end up with a few standards that are, in turn, comprised of a basket of diverse underlying assets.

(The Euro’s case is not exactly comparable. There, one is comparing a single fiat currency against a slew of fiat currencies. In addition, the attractiveness of the Euro comes more from the rules and conditions under which it is issued. If one compares it to the old DM, it is probably no better; but, compared to the Lira it’s probably quite a step up. The biggest uncertainties for pre-Euro holders of Lira would be: what will the Italian government do?)

12

Yesterday, (Wednesday, Dec. 9) Ron Paul introduced a bill to abolish all legal tender laws, eliminate laws that prohibit the operation of private mints, and eliminate capital gains and sales taxes on gold and silver coins.

http://www.lewrockwell.com/paul/paul619.html

He proposed a bill to end the Fed at least a decade ago. Still waiting on that…

13

I know that when one speaks of an ‘Objective money supply’, one is most likely speaking of gold.

There are many reasons why gold could be considered such. Recently in many posts there have been comprehensive essays on the subject. Yet, I have my doubts about the Objective value of gold. If a lot of gold was produced - say mined from an asteroid - and added to the world money supply, inflation would be a problem as much as it is with fiat money. Also, gold doesn’t necessarily represent the ‘real’ economy. Production can increase, but gold supply is fixed. It can decrease, but gold supply is fixed (well, assuming no asteroid…)…

ZS, the problems that you describe for gold are true of any real, physical thing, especially something like Visa bucks (since there is nothing stopping the multiplication of electronic based stuff). The history of the gold standard shows sudden increases in the supply, e.g., the gold imported from the New World was ultimately harmful to Spain; and then there was the California gold rush. Von Mises discusses this kind of event in The Theory of Money and Credit.

In the long run, gold discoveries do little to cause real problems because big increases are short lived and do not happen very often. Plus, there are other uses and these days those uses are growing. Normal gold production is a very minor part of the gold supply. The total amount of gold available today is nearly all of the gold ever discovered. It stays around.

Let’s say that a supply of gold was discovered that promised to double the amount of gold available every year for a decade. In that case, we, mankind, would have to find another currency, and quickly. Probably, twenty, a hundred years later, we might go back on a gold standard, because it would have stabilized and it would again be our best option.

14

Sorry for posting the topic in the wrong section, I was mixed up between viewing windows in my browser.

Anyway, I will clarify what I mean by Visa bucks. Visa refers to the credit card company, it’s an arbitrary name though as far as my idea is concerned.

The idea is that any asset can be traded (thanks to technology), according to a system of pseudo-bartering. With this as a basis for trade, I am assuming that certain financial institutions would develop a currency that is backed by a combination of these barter-notes and other real commodities (including also land and gold). For the sake of discussion, a bank could issue a currency backed only by gold. My ‘Visa bucks’ are a more broadly traded currency that are based on a basket of assets that fluctuates over time. That means that Visa could purchase ‘Elmo’ bucks and print additional Visa bucks based on them. It would do this if it anticipates Elmos being very popular over the holiday season, and wants to increase the purchasing power of ‘Visa bucks’ temporarily. Why would they do that? Well, it would encourage other companies to sell Visa their notes because they want to pay their employees in Visa bucks because they’re popular. This would allow Visa to purchase more goods by inflating their currency. Is that a good idea? Well, maybe if it helps finance demand. After all, consumption levels and money demand are intimately related. At a store, you could pay for things in a variety of ‘big’ currencies. Naturally, there would be exchange rates between currencies that could be traded at independent institutions. This, of course would make being a consumer very complicated. But, so many things are and that’s modern life right? If it means a more efficient economy (ie, price levels affected driectly by those trading for specific goods and their preferences), great. Also, you could make money off of services. You could have short-term barter notes that expire. These could apply to non-durables, and services. The idea, in the end, is to provide the economy with a liquid means of managing barter that is derived directly from production. It would require speculation, but that speculation would help predict money demand over time. Does this make any sense as a real idea? I don’t know, there are all kinds of economic forces here that I’m not even considering. I’m just discussing a way money could work that is unconventional and possibly innovative.

I have read little of Austrian economics, but I’m familiar with the idea that a market would eventually settle on one single currency. The more I learn about the recent financial crisis, the more and more I see Mr. Paul’s solution as the only really appropriate one.

By the way - isn’t the idea of fiat money that because the government mandates its use, that it therefore has credibility. If I’m not mistaken, a legal US business must express its prices in dollars, and must accept dollars in exchange for its products. This legal requirement is what gives power to the dollar. Am I wrong?

Also, money is so important that repealing all the currency laws might be negatively disruptive. Any ideas on the extent of disruption, or not?

15

I have read little of Austrian economics, but I’m familiar with the idea that a market would eventually settle on one single currency. The more I learn about the recent financial crisis, the more and more I see Mr. Paul’s solution as the only really appropriate one.

By the way - isn’t the idea of fiat money that because the government mandates its use, that it therefore has credibility. If I’m not mistaken, a legal US business must express its prices in dollars, and must accept dollars in exchange for its products. This legal requirement is what gives power to the dollar. Am I wrong?

Also, money is so important that repealing all the currency laws might be negatively disruptive. Any ideas on the extent of disruption, or not?

Austrian economics, as a science, does not suggest either what metal would be best as a currency or if there should be only one. It describes what money is and how it functions within an economy, first a free economy and then the consequences of government interference.

Still speaking from an Austrian viewpoint, the government may try to force people to regard the currency it has produced as money, but what people actually do may be different. Von Mises argues that what becomes a money will depend entirely upon what people are willing to accept. Even now there are stores in the U.S. that will accept foreign currency.

I think that what gives power to the dollar has a lot to do with the manner in which it moved from a gold backed currency to fiat. The story includes the depression, the creation of the Fed, the fact that legally it was a gold backed currency when de facto, in terms of actually functioning, it was manipulated as a fiat currency, the fact that it became the international reserve currency, and that people all over the world accept dollars as a currency. There is a lot supporting its continued existence as an important and real money. Maybe someday some real historian will do a good history of the dollar.

All that needs to happen in converting the dollar to a real currency is for it to become gold backed. If by legislation it is announced that dollars are henceforth worth, say, $1400 to an Troy oz. of gold (selecting the right level of gold convertibility would be intricate), and the Fed is stripped of its ability to create funds in reserve accounts, the dollar would settle at a reasonable level, inflation would end, and business would proceed. I don’t think that part of establishing a free economy would be difficult.

16

Interestingly enough, in the 18 pages of threads returned on ‘Dollar Definition’ - and I admit, I have not waded thru the volume of posts here, surprisingly enough in an Objectivist community I have yet to run across the definition of a dollar. It appears to be a ‘floating abstraction’ having it ties back to reality severed back in 1913, and once set adrift, has been floating off higher up into the ether.

Section 8 and Section 10 of the constitution refer to coining money.

The 10th amendment suggests that congress outstepped its bounds in the creation of the Federal Reserve, and abdicated their responsability for regulating the value.

Philosophic versus Economic issue - does the dollar definition fall on the line bordering the two sciences much like Dr. Harriman suggest that the definition of space is a philosophic point in the science of Physics?

17

Interestingly enough, in the 18 pages of threads returned on ‘Dollar Definition’ - and I admit, I have not waded thru the volume of posts here, surprisingly enough in an Objectivist community I have yet to run across the definition of a dollar. It appears to be a ‘floating abstraction’ having it ties back to reality severed back in 1913, and once set adrift, has been floating off higher up into the ether.

Philosophic versus Economic issue - does the dollar definition fall on the line bordering the two sciences much like Dr. Harriman suggest that the definition of space is a philosophic point in the science of Physics?

Good point, Dream Weaver. I hate it when someone doesn’t offer definitions, especially an Obj. writer.

There are two ways that your question can be considered, I will talk about the one I don’t think you meant first.

A currency (real or fiat) is specifically the promise to redeam the money for goods. A currency has no meaning without the ability to buy stuff (which is a technical term, really, I think). So, a definition of a specific currency like the dollar would be the amount of stuff it can buy. But for any specific currency that is a fiat currency, that meaning is going to change, decline, continuously, and thus has no real identity. When I used to give seminars I told people that when they think of their finances overtime they needed to think in terms of stuff, like bread or tires or something that they were familiar with or interested in.

The second, more fundemental meaning, which I mixed in above, has to do with money as a meduim of exchange. Whatever the medium of exchange is, and whatever the ratios between it and the goods in the economy are, it functions the same way in all circumstances. So it isn’t the “dollar” per se that you want to think about, it is currency in general. The definition is then that substance which participants in an economy are willing to accept as a medium to be used for exchange, indirectly, instead of the immediate, direct exchange of goods (barter).

Since economics does need to consider barter as part of its domain, currency, that is, money, is not a starting point, unlike the concept “space” that you referenced. Economics doesn’t start with money, but with human needs and the process in which people organize to meet those needs, e.g., through production, etc. Money, once it is introduced into an economy, then becomes central to the science.

18

I hope this isn’t to much of a tangent but while I think objective money should be backed by some commodity such as gold I don’t think the actual money that is in circulation should be gold for reasons of ease of real world use. IOW, would you want to carry around pounds of some heavy coins around in your pocket? I wouldn’t. I hate having a pocket full of change as it is. Imagine carrying around a bunch of golden dollars; it wouldn’t be much fun.

19

I hope this isn’t to much of a tangent but while I think objective money should be backed by some commodity such as gold I don’t think the actual money that is in circulation should be gold for reasons of ease of real world use.

Sure. Day to day you transfer the right to your money, rather than transferring the money itself. In the background, the banks’ clearing-houses can transfer net amounts.

20

Good point, Dream Weaver. I hate it when someone doesn’t offer definitions, especially an Obj. writer.

There are two ways that your question can be considered, I will talk about the one I don’t think you meant first.

A currency (real or fiat) is specifically the promise to redeam the money for goods. A currency has no meaning without the ability to buy stuff (which is a technical term, really, I think). So, a definition of a specific currency like the dollar would be the amount of stuff it can buy. But for any specific currency that is a fiat currency, that meaning is going to change, decline, continuously, and thus has no real identity. When I used to give seminars I told people that when they think of their finances overtime they needed to think in terms of stuff, like bread or tires or something that they were familiar with or interested in.

Let’s see. In 1916, $1=10+ loaves of bread, just under 3 gallons of milk, just less than 3 dozen eggs, 4+ gallons of gasoline, or 50 first class postage stamps.

Fast forward to 2010 and $1=1/3 loaf of bread, 1/3 gallon of milk, 8 eggs, 1/3 gallon of gas, or 2 first class postage stamps.

Sounds like a pretty complicated, not to mention not rigidly defined objective definition. Thus, you are quite accurate in stating that the meaning changes, thus has no real identity (floating abstraction?)

The second, more fundemental meaning, which I mixed in above, has to do with money as a meduim of exchange. Whatever the medium of exchange is, and whatever the ratios between it and the goods in the economy are, it functions the same way in all circumstances. So it isn’t the “dollar” per se that you want to think about, it is currency in general. The definition is then that substance which participants in an economy are willing to accept as a medium to be used for exchange, indirectly, instead of the immediate, direct exchange of goods (barter).

Huh? I only ask to identify objectively what a dollar is, and that is not what I want to know?

Since economics does need to consider barter as part of its domain, currency, that is, money, is not a starting point, unlike the concept “space” that you referenced. Economics doesn’t start with money, but with human needs and the process in which people organize to meet those needs, e.g., through production, etc. Money, once it is introduced into an economy, then becomes central to the science.

I did not think I was implying dollar or space as a starting point, only as a concept that does not fall neatly into one specialty field or the other (economics/philosophy:physics/philosophy).

Dr. Harriman points out that the invalid use of ‘space’ in the field of physics leads to many incorrect conclusions, and that philosophy should object to the non-objective use of the concept ‘space’ in that regard. In this case, he points out the reifying of the abstraction ‘space’.

Is the ‘dollar’ being reified?