Monday, November 15, 2010

The problem with hard money

This should be my last post on the topic for a while, BTW; as I’m out of the realm of facts and figures and into the realm of philosophy.

To put it bluntly, I believe any kind of attempt to base money on a “hard” commodity is a little bit immoral. First of all (as the argument I had with Elmo here shows), it’s price fixing. If a $100 coin is 1 oz of gold (for example); the government has essentially decreed that is the price of gold. If that’s not the market price of gold, you run into problems. If the “market” price of gold is, say $200/oz, no-one is going to spend those coins at face value, instead either hoarding them or melting them down (a problem seen today with coins whose intrinsic value exceeds their face value, incidentally). If, instead, the price of gold is $50/oz, we’re essentially in the same situation we are today, where the money isn’t “worth” it’s face value; and the government is making a profit of $50/coin… A basket of commodities has a worse problem, by the way – look up the history of bimetallism in the USA and other places; it’s not pretty and rarely ends well. In either case, the government is perpetuating a fantasy, that they can define the price of gold. This is a bigger problem than it used to be (pre-electronics age) since gold now has uses outside of decoration and money. There is a real market in gold to be used in industrial amounts (as there is for silver, platinum, etc). Gold was desirable for use as money because it’s impossible (effectively) to counterfeit, but there’s not much you need gold for prior to the electronics age other than money or money replacements (jewelry, decorations, and other forms of conspicuous consumption).

My second (and much larger problem) is that a “hard” currency results in an economy that is a zero-sum game; by necessity. In the pre-industrial era where “value” was created by tangible things, this (more or less) works out, in that value = wealth = stuff. To produce value, you have to make, take, or fake stuff (land, minerals, trade goods, etc); this gets you wealth. But as the industrial era gets moving, and especially now in the Information Age, value isn’t (necessarily) rooted in physical stuff. People create large amounts of value without associated physical objects. Take any of the Silicon Valley success stories, for example. At the smaller scale, look at the entire frigging RPG or computer gaming industry. For a microcosmic level, take a look at every blogger who makes beer money from AdSense. Every one, creating real value without an increase in hard “stuff”. How do we measure becoming richer via intangible value with a limited amount of tangible resources?

So – my two problems with “hard” money boil down to hard money requiring the government to set the price of a commodity (by declaring that their money, consisting of an amount of stuff X has a value of Y), and that it unduly limits the economy of ideas.

The floor is open


  1. Just a question-what do you think of the Hayekian private money coinage idea? Seems to avoid the issues with both pure fiat money and commodity money.

  2. About like I think of store credit cards or prepaid gift cards. That is to say, not much. Banks made it work in the hard money era by having hard money to redeem their scrip with, and being the only game in town.

  3. I should note, commodity money doesn't care who it is issued by.

  4. Bombloader: It'd work, technically. But it makes for even worse transaction costs, while not avoiding the "what's gold actually WORTH?" issues in Ian's post.

    (Assuming it's private money coined either physically or as a token for a commodity; if it's private fiat money I don't see a benefit at all (or indeed a reason why anyone would use it), but it's been a long time since I read The Theory Of Money And Credit so I might be neglecting something.)

    You still have the problem of $1Bob perhaps containing the amount of gold that's now owrth $.75Bob or $1.25Bob... but even worse, you have to worry about trying to exchange for $Frank or $Henry.

    This leads to having to weigh (and in the worst cases, with small issues or remote issuers you don't "trust", to assay as well!) your money to do transactions.

    I can't see it working, in practice, with more than a few major coiners in any given nation... and then what's the significant difference between that and a single coiner, assuming no threat of debasement?

    (If we assume a single coiner might debase, we have to worry about one of several also debasing, just openly rather than secretly.)

  5. Gresham's law starts kicking in, as well.

  6. "(If we assume a single coiner might debase, we have to worry about one of several also debasing, just openly rather than secretly.)"

    I think this line misses the point of the private money idea. One single coiner that has a virtual monopoly on the currency in an area can debase for a long period of time until it gets caught. Coiners of multiple currencies cannot do this as easily, as soon as one gets caught debasing many people stop using the currency. You can't easily request payments in something other than US dollars because you think inflation is kicking in.

  7. Single coiner or multiple coiner doesn't change the problem of nominal vs real value. And it introduces exchange rate issues and trust issues. Eventually, you run up against bimetallism. I am issuing silver ArgentThalers and you are issuing gold BomBux. What is the exchange rate between them? And if you say "look up market rate", I have two phrases for you: "asymmetrical information" and "transaction cost". And we still have to assay out a statistically significant number of coins to prove purity.

    I understand the desire to get control of your wealth out of the hands of politicians. But reverting to hard money will destroy the economy, *and* faces challenges that didn't exist prior to the era of soft money (precious metals having a market value not based solely on their rarity). Keep your wealth in non-cash forms if you must (but by all means diversify - sinking your life savings in gold or silver is as bad as putting it in GM stock). This has an advantage as long as the money is not based on a commodity, in that the .gov won't be declaring that X amount of Y material has a value of Z by legal definition. As in, a 1 oz gold coin is $100 on its face, the .gov has declared that it believes gold is $100/oz...

  8. "What is the exchange rate between them? And if you say "look up market rate", I have two phrases for you: "asymmetrical information" and "transaction cost". "

    I think if actually look at the history of private coinage in the 19th century these problems(although real) were not as bad as widely believed. In the 21st, they could be reduced to very little. I'm just considering given that irresponsible growth of the money supply likely was a big part of the housing and bubbles, it might not be a bad idea to trade some increase in transaction cost to keep irresponsible growth of the money supply down. Here's a link to one of Hayek's papers on the subject. Note he also debunks the common myths about the effectiveness of the gold standard.

  9. Irresponsible growth of money is a political problem that is best addressed via the political process.

    Any hard money usage, even the most responsible, comes a cropper on the (relatively) new problem of almost *everything* having an industrial value. Gold has a use outside of wealth equivalents on an industrial scale; as does platinum, silver etc. So do diamonds &c. There is a demand for all these materials entirely separate from their desirability as an uncounterfeitable token of wealth.

    Also, read my first post on the subject of gold; regarding the utter impossibility of returning to the gold standard. Unless you think that 90±% of our recorded national wealth is "bubbled", soft money has been insanely better than hard money, in that it has allowed us to be much wealthier than not.


Please keep it civil