Unless
you are Les Stroud or Chuck Norris, no man is an Island. And because we are not islands it is
necessary to exchange goods and services with other to assemble the provisions
needed to live. On the most basic level
this could be achieved with a barter type method. I’ll give you two chickens for a gallon of
milk. While this may work in a simple
exchange scenario it is less than desirable when used in barters of substantial
value. How many eggs does it take to
trade for a car? Even if I were able to
assemble that many eggs, would the person with the car even want or need that
many? The impracticality of trying to
find common value in uncommon items necessitates the creation of a standardized
method of exchange. This is what money
is.
Rothbard
stated it best in Supply of Money when
he said that “money is the general medium of exchange, the thing that all other
goods or services are traded for, the final payment for such goods and services
on the market.”
The
notion that money is the medium of exchange is what I hinted at earlier. It is the standardized conduit of value. A car may not be worth a million eggs, but a
car may be worth 20,000 dollars and a million eggs might be worth 20,000
dollars. The commonality is the medium
of exchange. Money is the link between
these two items. When compared against
each other they may not be equal in value, but when money is inserted into the
transaction common value may be determined.
How this determination is established is the most important aspect of
money.
Money
is the final payment for the exchange of goods and services. Money has imbued value that is able to act as
a full exchange of value for a good or service.
Money is not simply the facilitator of a transaction, it expunges the
debt wholly. It is the end of the
transaction, not simply the facilitator of exchange. This is why debt (credit cards, IOU’s, traveler’s
checks) is not money. Debt is unable to
be the final payment of exchange.
Because
money is the final method of payment, it must have inherent value. In order to have value it must be both
desirable and finite (or constrained).
Something that is not desired has no value and something that has no
limits has no value. This desire and
restraint is the difference between diamonds and sand, between gold and quartz,
between a Ferrari and a Corolla. It is
because of this we must be wary of fiat currency as it has no characteristics
of true money. Its value comes from
government decree not out of desirability or constraint. It, in the truest sense is not money.
Lastly,
money must be able to be a diversified storage of wealth (wealth = potential
buying power). This harkens back to the
notion that money must be desirable, but expanding on desirable it must be
timeless. Cellular phones, when they
first came out, would have met the criteria for money (desirable and finite),
but they quickly became obsolete and worth less. How many bag phones sit idle on the shelf of
thrift stores? A silo full of bag phones
may have looked like a good investment in 1989, but they lacked the timeless
qualities that make money a storage vessel of wealth.
True
money must be desirable, finite, able to expunge debt wholly, be versatile and have
the ability to be standardized. It is because
of this items like gold and silver act as good money.
I agree with you that fiat currency is something to be wary of. But I have trouble seeing how it has no characteristics of true money. You say true money is "desirable, finite, able to expunge debt wholly, be versatile and have the ability to be standardized." Our fiat currency seems to have many of these qualities. While it is true that QE has called into question the finiteness of our currency, it is desirable within our system. Chips at a casino are mere plastic, but they are desirable within the casino. Within our economy our fiat currency has those qualities. It is also versatile and useful for wholly expunging debt.
ReplyDeleteSo while I agree with you on almost all of your points, the characteristics of good and useful money, the troubling nature of the fiat system, and the usefulness of gold and silver as good money, I wonder if you've gone far enough to sew a whole and convincing argument together.
As I understand your line of thinking you have settled on a definition of good money and then sought something of value that fits into that definition to make it work. Using my awkward phrasing from the comment in the other post, you have defined money's "it-ness" from what works within the system, and then found something that worked within that definition. This line of reasoning seems vulnerable to attacks of being circular. If gold if valuable because it can be used for money, then it is not valuable in and of itself, and paper that can be used for money is just as valuable. Arguments for gold all break down as arbitrary when argued from within the system.
This is where I think it becomes necessary to see money being something that has to have its foundational value apart from economies. In Revelation the vision of the heavenly city shows the city being of pure gold. This is visionary description so we need to be careful how we interpret it, but interestingly, a city of pure gold, by rules of scarcity, would be less valuable the bigger it was. While our "price" of gold fluctuates do to market forces, for some reason humans always consider gold to have value apart from economics. How can this be?
The more I think on this subject more convinced I am that the best foundation for a monetary system must ultimately be upon something that has value beyond economies. There are certain good things, glory, love, kindness, that beget more of the same. Their value does not decrease as the supply increases. They are an economy outside of our economies. Scarcity might compound the issue, but it is not fundamental to its value. As weird as it sounds, what if God created gold as a tangible version of glory for which man could have money?
All that is to say, the things you wrote about all have truth in them, but I think you are still missing the foundation that pulls the arguments together. They still need an anchor to keep the boat from turning over and over.
In order for money to be money it must meet all the traits I listed. Both federal reserve notes and casino chips have the same barrier to being money, they are not finite. If QE1,2,3,4,5 has taught us anything is that a currency with no constraints can be manipulated, if it can be manipulated then it is not a store of wealth (as wealth can be stripped at anytime). Casino chips only have value for their ability to be exchanged for dollars. Neither one of these are money.
ReplyDeleteHistorically, gold and silver have been valued across cultures. It was the apex of wealth in ancient societies and the standard for exchange in trading Empires. For some reason gold has these properties. Probably due to it's scarcity as an element and how it can be worked and shaped. Plus it's shinny.
Yes, I did define money and found something to fit. That goes back to my argument of what money is. Money is anything that meets those criteria. It wasn't until my last sentence I even introduce a medium.
I think the City of Gold is a heavenly image simply for the fact that it is inconceivable in our experience. If you took all the gold ever mined I doubt you could build a single building (minus the fact that the nature of gold would not lend to being a good building material), so a whole city of gold boggles the mind. That is the point of the imagery. Something so grand, so unbelievable.
I would contest that if you had an entire city (and from the description it was a city the size of the eastern half of the U.S.) the gold would be worthless as it would not have the characteristic of limited. To me that imagery is circular and self-defeating.
Actually, if you really look into gold trading the value is relatively flat, the fluctuation comes from the other items going up or down in value. Look at the value of crude oil as a function of it's value in gold. It has been pretty constant over the last 30 years. The cost of gas at the pump is a function of the weakness of the dollar, not the cost of gas going up.
Scarcity is, I would say, the main driver of what is money. Why is a Honus Wagner baseball card 'worth' more than a Fleer 1986 Daryle Strawberry? I would think Strawberry was a better player than Wagner was.
No doubt the issue of what is money is subjective as we all value different things. But I would submit that my definition is much more sound and true than the system we use today.
I mostly agree. But I wonder if gold is valuable because it is gold. Its characteristics are a factor, but its gold-ness might be the foundation.
ReplyDeleteThe last part of your comment fits what I was saying (hence 'price' being in quotes in my 4th paragraph). If gold's value stays the same, even when their are more people that demand it, then it scarcity is not the major factor in its value.
Honus Wagner's T206 card, is scarce (55-75 estimated to exist). But there are plenty of other card issues of equivalent players that are more scarce. I once owned a Mickey Cochrane item that was 1/1 known. I only got $80 for it. Scarcity plays a role, but the T206 has a mythos behind it that makes it exponentially more than other cards (HOFer Eddie Plank has an almost equally scarce card (100 estimated to exist) in the same set and goes for a fraction of the Wagner).