In Adam Smiths “Wealth of Nations”, he believed a nations wealth was built upon its ability to produce goods. This was contrary to the popular belief of the time that a nations wealth was based on how much gold they could stockpile. A nation can build wealth by increasing their productivity (GDP) through technology, trade, etc.
It seems to work ok. America increases its wealth. The Fed keeps inflation in check by regulating interest rates and adjusting the amount of money in circultion. And we don’t even have to worry about dugging up more pretty yellow rocks. Probably one of the reasons we got rid of the gold standard in the first place.
Why gold? Most nations have no natural supply. By the gold standard, South Africa would be the richest country in the world, and anytime it felt it needed to be a little richer, it could simply order the miners to dig a little deeper.
Why not silicon computer chips? By that reckoning, wouldn’t Singapore or Malaysia or Indonesia suddenly vault to world leadership?
Or oil? Wouldn’t that give those pesky OPEC nations even more clout than they have now?
I’ve got it! Plutonium. The good ol’ USA is a top-rank plutonium producer. We can largely control how much we want to put into the system at any given time, and we can keep making it indefinitely. Best of all, we can bomb anyone who doesn’t agree with us.
Join me in advocating a plutonium standard and let’s keep the USA on top.
Well, it would give the phrase “burning a hole in your pocket” new meaning. Perhaps it could give our lagging economy a much-needed stimulus by encouraging consumer spending…I mean, no one would want to risk accumulating a critical mass in the old mattress.
The idea behind a medium of exchange is to make it as useless as possible. Wheat makes for crappy money. You’re rich, but then you starve! Tobacco gets smoked or goes stale (and then is useless too).
Gold is mutable, divisible, and homogeneous.
Returning to the gold standard would not mean people would carry around gold coins. I’m sure we would stick to the reserve system where legal tender represents a quantity of gold.
Humorous as it may be, oil and plutonium are not quite the same thing.
msmith, so then was I correct in stating that the value of the dollar increases (ie-buy more for the same amount of money; the value of goods decrease)? I see no problem with this, really, except that this is usually not a universal change in an economy. Chairs, for example, aren’t any cheaper due to the advent of semiconductor technology. This was why I felt that we want to stabalize the value of the dollar, merely create more wealth. Obviously tricky business, gold standard or no.
I would have to agree completely. The government can encourage changes in the value of currency through the tools of monetary and fiscal policy, but it cannot decree the value of the currency.
I agree… but only in part. I think there are systems where the ‘government’ (or its equivalent) has little to do with the value of the currency. Cigarettes were used as currency in prison camps in parts of Europe during and immediately after World War II, but their value had little to do with faith in tobacco companies. I guess the use of commodities as currency complicates the example in this case though.
(I tried to think of an example where currency was not produced by a government and also wasn’t a commodity, but I couldn’t… do people in undeveloped areas of New Guinea use a medium of exchange or is that barter?)
But I thought the idea behind using gold as currency was because it had some sort of “intrinsic value”?
But it’s also too heavy and too rare.
They could be if the advance in semiconductor technology makes production or delivery of chairs more efficient. In fact, I’d be surprised if the efficiency of chair-producing plants hadn’t increased over the past few decades, but I don’t know the details of the furniture industry.
Sorry about posting twice; I didn’t see your most recent post at first.
Right. Sorry, of course I was overlooking commodity currency. Hmmm, hard to analyze that since it comes real close to barter in ways.
Hmm, I was going to suggest cowry beads in medieval West Africa but it occured to me that one could make a case for them being a commodity of sorts insofar as I think they were used for decoration as well as currency. On the other hand, that’s no different than gold.
ARL: I’m afraid I’m not following you re value of the dollar. What is you are suggesting more precisely?
(But in re technology effect on chairs, I think Wevets has pointed out a manner in which semi-conducters will effect changes in the price of chairs, in the long run.)
Considering primitive barter, we trade expendable goods. There is no store of value. As well, the value of any one good is extremely relative to the people trading it and the area it is being traded in.
When we have a more advanced society wheat and tobacco and such fail to serve as a strong means of exchange, and barter fails miserably (as the only means). Money itself is created. Money serves no purpose other than to serve as a medium of exchange. At this point the money, made out of some rare metal (@wevets intrinsic value due to rarity, not necessarily application—you’ve heard of stamp collecting, right?), represents a certain value of goods. This is still relatively arbitrary, and depends on who is selling what, but clearly trade is much easier and a more intuitive grasp of value of the goods themselves is achieved. As well, the money supply is relatively stable. Thus, the value of goods decreases as technology increases.
When a precious-metal standard is abandoned, the unit of money doesn’t change much at first. When creation of wealth is allowed (that is, a reserve system where money is lent out without the necessary gold backing) either the value of the dollar drops or the cost of goods rise to balance everything out. When technology increases, thus making things cheaper to produce, costs go down and the value of the dollar rises.
When there is foriegn trade, however, we find a tricky problem. The universal medium of exchange—gold, say–is no longer present. One dollar is how many pounds? Difficult to say now, except in valuation of goods themselves. This is the funny part. We trade country-based monetary denominations for other country-based monetary denominations.
Money itself, no longer based on any store of anything, is a thing of value. Trade takes place for the bills themselves in a bartering fashion, “buying” pounds for dollars and so on.
The play between the going rate for dollar bills and the stuff that a dollar can buy, in my understanding, is what enables us to keep the value of the dollar the same while increasing the total money supply (along with allowing or disallowing a quantity of exports and imports and so on).
That is, you don’t just “go off the gold standard.” The money supply must be strictly controlled all over the facets of trade in order to avoid disaster.
I don’t know about the historical validity of this model per se. Metal coins seem to have arisen out of usable but rare metals, all of which did have some application, if only for jewelry. But no matter.
No, value is always arbitrary, insofar as human demand is arbitrary. Money eases trade because it reduces the transaction costs involved in barter. You don’t have to search for someone who wants your olives if you want to buy some bread but the baker wants figs… An intuitive grasp of the value of goods does not enter into the picture.
Historically I don’t know that this is necessarily the case either. Gold may be rare but large injections into the system can occur --e.g. the visiting Emperor of Mali (gold producing state) is said to have injected so much gold into the Cairene economy when visiting on the hajj that the economy suffered (one assumes from debilitating inflation) for a decade. Ergo, the money supply can vary drastically, and worse, for no good reason.
Ah, no, you’re making a large logical leap here. Are we talking nominal or real value? Any ways, the value of a good may or may not vary according to technology. It’s likely the price will decrease if technology makes it easier to produce --assuming we have a competitive market of some kind-- but it might be for some goods their real and/or nominal price will go up if technology changes cause an increase in demand.
I’d rather say … Wait, you’ve confused the private banking system here with the central bank. Fractional reserve banking, i.e. when a private bank lends out of its reserves which are its deposits from its …well depositors… keeping only a fraction (x out total y) back to satisfy customer demand, you’re creating new money. The government may or may not have control over this. But this does not create new wealth, which you correctly not in re value of dollar. This is not connected to the gold standard.
Err, value of dollar… Well that depends.
Well, you should note that gold is not universal. (Historically its value varied from place to place. E.g. in medieval Mali, sitting on top of huge gold fields in the day, gold was not all that valued compared with in Europe. Cowry shells were used as coinage. Gold’s value has and will vary according to local demand.
So, you’re starting off with a false assumption.
No, there’s a market which tells us how much they are worth. It’s based on demand. This may not work well for small, thinly traded currencies one must admit, but the relative value of dollars and pounds are determined like any other good, by relative demand for each.
Nothing funny about it. A bit complicated sometimes, but given the dollar’s reach, the dollar tends to simplify acting as a benchmark.
The exchanges in monetary units might be considered bartering in a sense, but the units remain stores of value.
You remember when Spiritus and I pointed out the problems with either/or thinking. Well…
I’m not certain what you’re aiming at here. The dollar’s value on the ForEx markets is not a direct function of its buying power in the domestic market.
The question of whether to keep the dollar’s real value the same is not all that important. One does wish to avoid hyper-inflation but at the same time in a modern economy one wants to make sure there is sufficient liquidity, sufficient money in the system so as to facilitate all transactions.
Too little or too much and you have negative effects.
Ah, this is not something one avoids with the gold standard. In fact intelligent management of one’s money supply is harder with the gold standard.
Then I’ve completely misunderstood how the gold standard works at all. Thanks for your comments, c. However, I maintain that jewelry is not functional in the sense of “application.” Jewelry is a status symbol and again, should be (or should imply, in the case of modern Wal-Mart jewelry) that the items are of relative scarcity. I guess that could be debated, too. That’s how I view jewelry, anyway.
As far as using the example of sea-shells vs gold, the point is noted. I do not believe the gold standard is the end-all-be-all of economic policy, however, so I could care less. Myself, I would accept tobacco as money before gold. But that’s because I’m a smoker.
How else would you interpret intuitive grasp? Being an olive producer, it may take many trades to get a hold of a chair for your aching back (coincidentally hurting from all the walking and trading you had to do, but never you mind). With a monetary unit acceptable to most if not all trades, this is not quite the same thing. You know what you can get for your olives. Now what they equal in terms of wheat or clothing, but in terms of all other goods, up to and including itself.
Money sets a baseline valuation. This isn’t done without money. It allows for a higher level of abstraction in the trade process.
Erm, isn’t that what I said? When the dollar is based on some standard, fractional reserve banking does not create new wealth. Wealth can only be created with a “floating” money system through fraction banking and trade control.
At any rate, is Greenspan still a supporter of the gold standard?
(1) To my understanding there is no consensus on the multiplier as (a) it is likely to change over time (b) and place. (I read this quickly so whack me if I misunderstood the reference)
(2) I’m more than a bit disappointed with this rhetoric about “dollars inside the country” and Kimstu’s neo-capital controls implications re investor investing abroad. Really folks, International Trade is not evil. Fraid I have a road trip tomorrow to do a site inspection but I think we need to examine some assumptions here. While ARL’s economics are quite whack, I don’t see it all necessary to adopt neo-isolationism (albeit non-explicit and perhaps unconscious.).
Posted to the wrong thread. Mea culpa. Okay, what I meant to post was the following. No more drinking before posting.
The word you are seeking is productive. Not functional. Jewelry serves a function, whether it is productive is of course another matter.
Well this may be something of a distraction, but I do not see money as providing an intuitive grasp of value. It certainly eases comparision, but I do not get an intuitive grasp of the value of a leather bag per se. But your meaning may be unclear to me.
Of course.
Ah, what? Okay we’re talking economic definition of wealth, correct? I’m frankly having trouble following your logic here. You appear to be mixing indiscriminately several ideas here. By floating money system do you mean foreign exchange? Floating Forex rates does nothing to create wealth per se, nor does trade control. A floating exchange rate is simply a mechanism for establishing the relative value of two different currencies through a market mechanism — good old supply and demand. Insofar as this method is more efficient than an absolute peg — such as the old Bretton Woods system — it will allow for increased efficiencies and thus greater wealth to be generated. But that’s not inherent. I suppose you could have free floats and gold standards if they were not calibrated to each other…
Ha! How interesting that the comment involved me anyway, hahah.
Er, floating as in “not fixed” to, oh, gold. The only way to create wealth, as in to create more money, is to impliment a fractional reserve banking system with a dollar that is itself valuated NOT to a fixed item. If we keep the dollar fixed to an item, fractional lending results in a dollar that has less “value” unless we then increase the gold supply to match. More trouble than its worth, methinks.
When the dollar is not fixed to some standard, to avoid disasterous consequences (such as runaway inflation) the market must be controlled. This involves tariffs on foreign trade, internal regulation, and so on. The exchange rate for one currency to another is also a factor in the internal value of the dollar (since we do have imports).
Oh my yes. “The Gold Standard and Economic Freedom” was the title of the article, I believe. This was in the sixties. I think I posted that here, but it might have been in the GQ thread about the gold standard.
IANAE (I am not an economist), but even on a gold standard, can’t banks create money by loans anyway? There would have to be some standard of what fraction they must loan out (as there is now anyway), but they can still loan money and increase the monetary supply without finding more gold… wasn’t that the situation in the '50s and '60s?
Also, the dollar doesn’t necessarily have less “value” just because there are more dollars out there. It could be that the supply of dollars is increasing, but not fast enough to keep up with the amount of new goods, resulting in more dollars chasing many more goods, which would lead to deflation of prices rather than inflation.
Precisely. And ARL keeps confusing money with wealth.
Yes.
ABsolutely. The value of the dollar, in real terms should be responsive to changes in the “velocity” of money – how much or quickly a unit circulates versus sits in an account/pocket/etc-- Increases in economic activity will drive up the demand for dollars, if the number of dollars does not go up fast enough, then we get precisely what you describe.
ARL, you really need to go back and reexamine your understanding of the bankings system.
(Aside, hmmm, Greenspan’s 1961 article is pretty old. I highly doubt he holds to the same position now: it would be quite strange in fact given his role in the management of the current monetary system.)
This thread is full of ignorance fighting. Mine has been lessened, thank you. If one ( or more ) of you economistas would care to indulge me, I have questions concerning trade between a nation with a free floating currency and a nations on the gold standard. Would there be a disincentive for the gold standard nations to trade with the other?
Would anyone care to speculate on the economic impact if the US had discarded the gold standard shortly after the Revolution?
No. You don’t need to be an economist to know that the “gold standard” took many different forms throughout this time. It changed once, IIRC, in the twenties, again in the 60’s, andd then off in the 70’s. The dates are somewhat irrelevant, anyway. Suffice to say that all gold standards are not the same beast.
I should have said, “all else being equal.” Yes, the situation you pose is true.
On the previous page I stated: “How can we increase the number of dollars significantly without changing their value significantly? This clearly is the goal of a strong economy, and it seems to me impossible under the gold standard.” Taken in combination with what I suggested on this page, about the effect of markets, I thought I implied that markets also change the value of the dollar. And so they must be controlled in a fractional banking system which I also stated was necessary for the creation of money. If I was using “wealth” wrong, I apologize. At any rate, I don’t see how what I said is any different.
I thought what you said, and what he said, is what I said. Now I am even more confused.
ARL, it feels like you’re still confusing the point here. Fractional reserve banking has nothing to do with the gold standard per se.
The whole point of his comment is that you seem to be fundamentally misunderstanding the banking system. I say seem. Looking below it may be that the way you stated this has thrown us off.
Ahhh, ARL, the number of dollars … Damn. A healthy economy requires an appropriate number of dollars in circulation, the number will depend on demand which depends on the velocity of money and the transaction level: more transactions quicker means greater demand. Okay, that’s something like what you said, although its not just a question of increasing… well no matter. Sorry I had to restate that to follow you, my denseness. Perhaps not impossible, but harder.
I’m unclear as to what you mean by change the value of a dollar. The value of the dollar will vary according to demand for it… That is more or less the same as above. A Central Bank, operating on modern industrialized nations’ principals, will try to keep an equilibrium --if the demand goes up, it will try to move dollars out (electronically nowadays). If demand goes down, it will soak up dollars. All in order to try to maintain a relatively stable and liquid monetary base. This is a policy goal bec. its pretty clear that large changes are expensive and destabilizing.
Mmmmm. Right, but something in the way you’re stating this seems funny. Can’t place my finger on it. Maybe I’m just not used to seeing things expressed this way.
Well, it appears we both read your statement in a similar manner. Somehow your wording induced confusion. Or we’re dense. Or both.
Well, it appeared (to me at least) you were confusing the Central Bank with private banks and that you were indicatig fractional reserve banking didn’t exist under the gold standard. Now I begin to see this may have been a misunderstanding.
Well, guys, and especially you, c, its not like I haven’t been wrong about economics before(and am sure to be some time in the future). I appreciate the corrected errors, even if I struggle with it. A lot.
And of course, all understanding I gain from this can only help me be more clear in the things I am right about.
Anyway, gold standard isn’t necessary. That much is certain.
