Tuesday, July 19, 2011

The Dollar, Gold And The Quality Of Money

...At the center of this political upheaval is the quality of money itself. “Is gold money?” is a show stopper because it raises the questions: “What is money and what power should government have to manipulate its value?

The answers to these questions reveal how our most basic trust in government has been betrayed.

When you or I accept dollars in exchange for providing goods and services, we do so trusting that when we spend those dollars, they will be accepted for an equivalent amount of goods and services. That’s how money frees us from a barter economy.

Trust is always an assessment of some future action. Making a grounded assessment requires us to understand who is making the promise, what action they are promising, and whether they are sincere and competent to fulfill their promise.

When an individual, company or government has a good credit rating, we are saying that we trust they will keep their promise to pay off their debts in the future.

So it is with the value of money. Today Bernanke is making the promise effectively to “do his best” to achieve the Fed’s dual mandate of achieving maximum employment and stable prices.

I do not doubt that Bernanke and his colleagues at the Fed have done their best. Here are the results:
Read the rest here.


The Anti-Gnostic said...

What is important to remember about the gold standard is that there is nothing talismanic about gold or silver or copper. The point is they are 1) more durable, portable and divisible than anything else out there 2) they are comparatively scarce and 3) they can only be inflated ceteris paribus by expenditure of real savings. On paper, fiat money works flawlessly, backed by all the goods and services available for exchange. In practice, governments and banks stand to gain enormously from monetary inflation, so they inflate. There is an actual reason why our coins feel more and more like amusement park tokens.

Visibilium said...

Nice exposition, it packs a punch.

The only clarification that I would make concerns an exception to your point #3. The beauty of the gold standard, or any commodity standard, is that its unit value tends to approximate its long-run average costs (including the going rate of profit, or in Austrian language, the Misesean originary rate) in equilibrium. This doesn't mean, however, that sizable seigniorage can't develop occasionally. Think back to 16th Century Habsburg Spain (for the life of me I can't figure out why anyone would get misty-eyed over the passing of the Habsburg slugs) in which the New World's conquest introduced tremendous supplies of specie into circulation. A price inflation developed from this monetary inflation, and a permanently higher price level resulted. Over time, of course, an equilibrating tendency took care of the margin between price and cost, and a one-time shock is child's play compared to the recurring shocks caused by discretionary central banking. Generally speaking, your point #3 is correct, but I wanted to remind you of the exception before the socialists do.