Thu 28 Jun 2007
I’ve started watching some of the YouTube videos featuring Ron Paul, a presidential candidate for the 2008 elections. He is, amazingly, very much in the image of what I’d like for a President - or any politician for that matter - to be: straight-talking, honest, and intelligent. That he and I agree on several issues is a nice bonus.
One thing that he seems to discuss frequently is money, our monetary system, the Federal Reserve, etc. He, like Ayn Rand, claims that “if you study monetary history throughout thousands of years, you will find out that paper money has been tried many, many times and it never succeeds - it always ends badly” (source, 8:50). He advocates a gold-backed monetary system, or what Ayn Rand calls a system based on an “objective value”.
Here’s the part I don’t get: why gold? Gold is not an end in itself any more than paper (or even digital) money is and requires the same faith that there exists a person who will exchange it for the good or service that you wish to obtain. Rand’s description of the ideal currency sheds some light on this. I believe she calls it an objective value because gold has intrinsic usefulness, but still only for one who can use it. Therefore a hunk of gold is useful for a) making various instruments and scientific equipment and b) making jewelry. You cannot eat it, it cannot build you a house, and you cannot sleep on it.
And so I must ask: How is it better than paper (or bits) for the average person? How does it safeguard my wealth in a way that paper money cannot? This brings me to another quality of gold which might play an even larger role than any inherent utility: its scarcity. If we allow gold to become a claim on the product of another man’s effort, it is possible that I could produce more of this claim by mining gold - this is exactly why a seashell currency on the coast doesn’t work: they’re relatively plentiful and require little effort to obtain - but gold is hard to find and hard to obtain once found. I think that what Ron Paul and others are saying is that our paper money system is just like the seashell-based economy, only worse because we actually print the money at will.
Nevertheless, I don’t understand how such an economy can move rapidly. If there is a finite amount of gold, there is a finite amount of wealth, right? Not according to Rand, who was nonetheless in favor of completely abolishing paper currency. How do I reconcile this apparent contradiction? Which premise have I left unchecked?
UPDATE: I’ve been listening to What Has Government Done to Our Money?, and in the first few chapters the major takeaway for me is that money must have been a commodity. This is an interesting assertion and makes sense when one thinks about the development of a society from a barter society to a monetary society, but it begs the question: what commodity backs our money now? It’s not gold, at least not completely. It’s not silver. One suggestion is that it is the ability of the government to tax the population, and that sounds scary.
June 28th, 2007 at 08.39
I think i’m understanding you as implying that, once gold supply has been gobbled up, everyone without it are forever locked out.
which makes sense to a degree. you’d either have to be innovative or artistic and or athletically inclined, otherwise the rest of us basic working class will have a hell of a time. right?
June 28th, 2007 at 09.28
@greg: let’s assume that all the gold in the world has been mined. What does that mean? With an ever-expanding population either other media of exchange would have to be used or the value of gold would have to increase, allowing the use of smaller and smaller quantities.
Our current monetary system simply prints more money, theoretically in step with whatever it is our government considers the backing for the currency. But if that backing is not a commodity or even a medium of exchange among average citizens, what does such a system lead to? I don’t know.
June 28th, 2007 at 10.05
I think there’s some scholarship suggesting that other commodities (e.g., silver?) may make a better paper-money backer, but the entire point is that it must be a fixed supply. That is the only thing that restricts explosive booms and the HORRIFIC BUSTS that inevitably follow.
One thing to note is that it is ludicrous to speak of all the gold in the world having been mined. There’s tons of it out there, it may not be economically important to get it just yet, but it could be in the end. And if a car costs you one $5 gold coin, and your wages per year are $25 gold, why is that a problem? Everything will be proportionally cheaper, once the market shakes out (may take a month, but no more I’d wager).
In addition to more gold on Earth, there’s lots of it potentially in space rocks. Just floating around waiting to get gobbled up. That would of course come into the system at a fixed rate decided by the MARKET, which is the important point.
June 28th, 2007 at 10.52
If the money is backed by gold, the gold just backs the real exchangeable value — the productive capacity of the economy. All the gold in the US wouldn’t mean much if all our capital and labor suddenly disappeared. We could trade the gold for foreign goods, but then what?
Milton Friedman talks about this in “Money Mischief”. Paul Krugman talks about it as well in “The Accidental Theorist”. Gold was considered valuable because it was shiny. From a monetary point of view, the theoretical advantage of gold is that it seems harder for the government to print more of it when they want to cause inflation In practice they just devalue the currency. There are a ton of disadvantages — for example, what happens to the economy when gold becomes more valuable as a component in electronics than its nominal value as currency? Locking to gold also locks your currency to the currencies of all the other countries that are locked to the gold standard.
June 28th, 2007 at 13.03
@Faisal: Yes, the productive capacity of the economy is what creates the wealth, but I don’t know that I’d call it an exchangeable value in the same way that gold, or butter, or any other commodity is. I can exchange my production for some good or service, but I can’t bottle up the production itself, only the fruits of it (unless we take another look at slavery as an option, but that’s just plain silly).
@bret: clearly not all the gold is mined - it was just a thought experiment. I’m just feeling my way through this.
January 3rd, 2008 at 07.58
You analyze economics about as well as economics professors code Ruby.
Read Brad DeLongs blogs everyday for a couple of years: http://delong.typepad.com/